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What Is Real-World Asset Tokenization?

Features writer

Connor Sephton

Features writer

Connor Sephton

About Author

Connor Sephton is a journalist based in London, who also works for Sky News and the BBC as a radio newsreader and online reporter. He has covered crypto since 2018 — reporting from major conferences...

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Last updated:

September 9, 2024

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Key takeaways:

Tokenization allows real-world assets to be represented on the blockchain
This technology can open up new opportunities for everyday investors
It also has the potential to speed up transactions and cut costs for financial institutions
BlackRock believes all stocks and bonds will be tokenized in the years to come, replacing antiquated systems

Every couple of years, a new application for blockchain technology comes along that ends up generating a lot of buzz.

And the latest one is the tokenization of real-world assets — giving tangible items like real estate and rare bottles of wine a digital presence.

Estimates from Standard Chartered suggest this could transform into a bustling market that’s worth $30.1 trillion by 2034 — modernizing the global financial system in the process.

In this deep dive, we’ll explain the key advantages of tokenization, explore potential use cases, and the challenges that lie ahead on the road to mass adoption.

Tokenization in Practice

It’s weird to think that the concept of tokenizing assets actually dates back to the 1990s, many years before the Bitcoin blockchain made its debut.Why? Because exchange-traded funds began offering investors fractional ownership of real-world assets. Until that point, owning a small chunk of an office block or a big bar of gold wasn’t possible.Tokenization allows a greater cross-section of consumers to gain exposure to expensive goods that have the value to appreciate in future, with ownership of tokens immutably recorded on the blockchain. Here are just some potential applications:

Commercial property: A $100 million office block can be tokenized and split into 100,000 shares worth $1,000 each. These tokens represent partial ownership of the project — and can later be sold on a secondary marketplace. This helps tackle the issue of illiquidity.
Fine art: Spending $2.5 million on a masterpiece would be pretty out of reach for most of us — but passionate collectors may be more willing to pool their funds together. Tokenizing artwork is now a proven concept after the Swiss bank Sygnum snapped up Fillette au béret, a Picasso painting from 1964. Tokens representing ownership were distributed to investors, who were then able to vote when purchase offers arose. They later decided to sell at a 20% profit, with returns distributed through smart contracts.
Rare collectibles: Exclusive yachts, high-end cars, and coveted bottles of whisky can also be given the tokenization treatment. A particularly novel project here was called ConstitutionDAO, with a group of like-minded individuals coming together to raise $47 million in ETH — all with an ambition to buy an original copy of the U.S. Constitution. Unfortunately, their bid ended up being unsuccessful. Nonetheless, this shows how tokenization can supercharge the fundraising process.

The Benefits of Tokenization

Beyond boosting financial inclusion, and broadening the horizons of retail investors, tokenization delivers crucial advantages that aren’t achievable in the current landscape. They include:

Heightened security: Credit card fraud has become an increasingly serious issue in recent years — driven by growing demand for online transactions — with billions of dollars lost every year. And according to Mastercard, stolen card numbers are now available on darknet markets for just $5. That’s why this payment processor has started using tokenization to encrypt 16-digit card numbers, meaning they never enter the public domain.
Faster transaction times: It’s surreal to think that, in the traditional finance space, it can sometimes take several business days for transactions to be finalized. When it comes to real estate, paper-based processes can extend this into years. KPMG recently estimated that tokenization can deliver time savings of six months to a year for property transfers. And when it comes to shares, bonds, and securities, settlement on the blockchain can be close to instantaneous.
Lower costs: Right now, the financial markets are heavily reliant on middlemen that handle complicated transactions throughout the process. HSBC has estimated that tokenization reduces the cost associated with issuing bonds by up to 90%. Recordkeeping on the blockchain also reduces the risk of mistakes and disputes, and this could save a substantial amount of the $181 billion a year spent on compliance. This substantial reduction in fees can then be passed on to consumers.

How Does It All Work?

The process associated with tokenization can vary depending on the type of blockchain being used, and the real-world asset in question.In the case of property, it’s likely that a legal entity would be established that actually owns the real estate being tokenized. From here, tokens would represent shares in this asset — potentially entitling the owner to additional payments such as rental income. These transactions would be executed automatically through decentralized programs called smart contracts.

What Are the Most Popular Blockchains for Tokenization?

You’ll be unsurprised to hear that the Ethereum network has been widely embraced by tokenization projects.

The world’s second-largest blockchain has long been established as the home of smart contracts, and continues to benefit from a first-mover advantage.

Meanwhile, the ERC-20 token standard is ideal for creating the tokens that underpin real-world assets, and developers are deeply familiar with the Solidity programming language.

Who Are the Biggest Players in the Tokenization Space?

Larry Fink, the CEO of BlackRock, has wasted little time in declaring that he’s exceedingly bullish about the tokenization space.In interviews, he’s predicted that practically all financial assets will be tokenized — from stocks and bonds to exchange-traded funds.

BlackRock, $BLK, CEO Larry Fink has said: ‘…the next step is the tokenisation of financial assets, and that means every stock, every bond…’ pic.twitter.com/zVrvFCoC3S

— unusual_whales (@unusual_whales) March 31, 2024

Not only would this streamline the settlement process, but the transparency and traceability provided by the blockchain would help clamp down on illicit activity.

BlackRock has also put its money where its mouth is. Back in March 2024, it launched BUIDL, which stands for the BlackRock USD Institutional Digital Liquidity Fund.

Only available to institutional investors at first, BUIDL has been launched in conjunction with Securitize and primarily invests in things like U.S. Treasury bills and cash. In return, dividends are paid to investors on a monthly basis.

The fact that BlackRock, the world’s largest asset manager, is championing this technology is especially bullish. Deutsche Bank, Goldman Sachs, and a slew of other major financial institutions are also throwing their hat into the ring.

At this early stage, a number of startups are managing to raise staggering amounts of money as they build tokenization infrastructure. But it might be a little too early to tell which platforms are market leaders — newer platforms with better technology might get an all-important edge.

The Challenges That Lie Ahead

While there’s a lot of promise and opportunity surrounding tokenization, there will be hurdles that need to be overcome. And although breathless predictions repeatedly indicate that this will be a multitrillion-dollar market within years, progress might end up being a little slower.

For one, there will need to be uniformity and universally agreed standards across the infrastructure powering tokenization — and seamless integration with existing financial systems. A lack of awareness surrounding how blockchains work, and the steep learning curve associated with using crypto wallets, may also slow down uptake among investors. The last thing anyone wants is to make a fat-fingered mistake that means tokens are lost forever.

Given how Ethereum can only handle about 15 transactions per second, searing questions also need to be asked about the scalability of blockchain platforms. A slew of improvements are in the pipeline over the coming years to help, and the arrival of Layer 2 platforms is alleviating congestion on the mainnet.

Finally — as we’ve seen more generally with cryptocurrencies and artificial intelligence — regulators can be a little bit behind the curve when it comes to rolling out literate legislation that promotes innovation while protecting investors. That being said, governments around the world, including the United Kingdom, have expressed a desire to create global hubs for tokenization.

No matter which way you look at it, the 2020s are shaping up to be the decade of tokenization.