Tokenization in finance is reshaping how many assets are owned, traded, and managed. Now, the pace of adoption and the breadth of applications have surpassed many predictions. Once a niche segment, the tokenization market may reach anywhere from $2 trillion to $30 trillion over the next five years, Markets Media Group reports.
These figures reflect the rapid maturation and acceptance of tokenization; however, the wide prediction range also reflects the uncertainty of the sector. Although major financial players like BlackRock, Morgan Stanley, and UBS are focusing resources on alternative investments—where all these groups “already have significant blockchain-related initiatives,” as Forbes reported in July 2023—small and traditional firms may struggle with questions about potential risks versus rewards.
In 2023, “the industry became engulfed in excessive hype and speculative fervor, leading to several market failures and bankruptcies, casting doubts about the industry’s future prospects,” also according to Forbes in July 2023.
In this article, we explore the opportunities and risks associated with asset tokenization in finance. We discuss emerging trends around technologies, efficiencies, regulations, and other elements so you can prepare your firm for success in this new market environment—no matter the path you choose.
Understanding Tokenization in Finance
At its core, tokenization in finance involves converting rights to an asset into a digital token on a blockchain. This process, while conceptually straightforward, has far-reaching implications for how financial institutions operate, manage risk, and create value for their clients.
By digitizing assets, tokenization creates new possibilities for fractional ownership, increased liquidity, and streamlined transactions that were previously unattainable in traditional financial systems. “Next year, the industry will likely see a… rise in institutional investments driven by improved infrastructure, custody solutions, and risk management tools,” a 2025 CryptoSlate article predicts. “As more big players enter the market, it fundamentally strengthens the ecosystem.”
Market Growth and Institutional Adoption
Indeed, major financial institutions are actively exploring on-chain asset tokenization, recognizing its potential to enhance accessibility and drive growth in the financial sector. Given its foundational differences, the growth of tokenization in finance is not just a matter of increased volume; it represents a fundamental shift in how financial assets are perceived and handled. Their institutional buy-in is a clear indicator of tokenization’s move to the mainstream of finance.
Benefits of Tokenization for Financial Institutions
Virtually all of tokenization’s perceived benefits stem from the blockchain technologies that support it, where blockchain has the potential to drive unprecedented efficiency, accuracy, and security in a variety of contexts—in finance and in other industries. Here, we highlight some of the benefits specific to finance that go beyond what’s possible in traditional models.
Enhanced Liquidity
Tokenization enables fractional ownership and 24/7 trading on blockchain platforms, opening up new avenues for investors to simplify how they buy and sell assets. Increasing liquidity is therefore one of asset tokenization’s greatest potential advantages, particularly for traditionally illiquid assets.
For example, it can drive more efficient price discovery and potentially lower transaction costs for financial institutions and their clients. “System automation via smart contracts also can lower the cost of services such as securities lending and repos,” as McKinsey & Company describes.
Democratized Access
Tokenization can break down barriers to entry in investment markets, allowing financial institutions to offer their clients access to opportunities that were once the exclusive domain of large capital holders: institutional or high-net-worth individuals such as private equity, real estate, and high-yield bonds. “By separating [expensive] assets into smaller pieces, tokenization could introduce price movements we’ve never seen before, either positive or negative, for mega assets,” Yahoo Finance reports.
Operational Efficiency
Smart contracts can automate key processes in asset management—streamlining tasks such as compliance checks, dividend payments, and corporate actions. “Examples of such assets include corporate bonds and other fixed-income products, which often involve a bespoke structure, imprecise interest calculations, and coupon payment disbursements,” says McKinsey & Company. “Embedding operations such as interest calculation and coupon payments into the smart contract of the token would automate these functions, lowering their costs.”
Challenges and Considerations for Tokenization in Finance
Despite the potential benefits and notable growth of tokenization in finance, the ratio of tokenization versus traditional assets in the market remains small. The global financial market is hundreds of trillions of dollars in value—vastly exceeding the projected $2-trillion to $30-trillion value of tokenization over the next five years.
Tokenization remains largely untested and underregulated as a result. Here we review some of the challenges and risks associated with tokenization as you consider what tokenization in finance could mean for your firm.
Regulatory Uncertainty
Regulatory uncertainty remains a significant hurdle, with different jurisdictions adopting varying approaches to tokenized assets. For example, the Swiss Financial Market Supervisory Authority (FINMA) has published robust guidelines to help firms as they explore tokenization opportunities. Meanwhile, some experts believe the SEC and CFTC in the U.S. are ill-equipped to regulate tokenization in finance at present, painting an uncertain regulatory future in U.S. markets.
Technological Risks
Tokenization brings clear challenges to firms’ internal technology infrastructure. “Tokenized funds require smooth integration with traditional financial infrastructure, which is often incompatible with blockchain systems,” Forbes reported in November 2024. “To function seamlessly, tokenized assets need interoperable standards and systems, which are still in development.”
Firms also must carefully manage dedicated network security functions designed to address environments for tokenization—firms without the right provider capabilities may lack the internal resources and skillsets to bring this about.
Market Confidence and Liquidity
The operational value of tokenization, and even the potential benefits of broad industry adoption, are only as substantial as clients’ willingness to trust firms who utilize tokenization in the first place. Market trust in the issuing of platforms and the development of robust secondary markets is critical, as are financial firms’ abilities to communicate their security and value to customers. The transparency, genuine security, and reliability of tokenization in finance will be critical to these ends.
The Future Landscape of Tokenized Finance
Tokenization does not stand alone in terms of how technology in the industry is advancing. Inevitably, tokenization will converge with other emerging technologies, such as artificial intelligence (AI), further redefining the financial landscape. Fortunately, integrations in these areas may drive additional value and help firms overcome barriers to tokenization adoption and success.
- AI-enhanced asset management: The integration of AI with tokenized assets could revolutionize asset management. AI algorithms could analyze vast amounts of data in real time, optimizing portfolio allocations and identifying investment opportunities with greater precision than in traditional markets.
- Blockchain interoperability: As tokenization matures, we’re likely to see increased focus on interoperability between different blockchain networks. This could lead to a more interconnected financial ecosystem, where assets can be seamlessly traded across various platforms, enhancing liquidity and market efficiency.
- Regulatory technology (RegTech): The complexity of managing compliance for tokenized assets across multiple jurisdictions will likely spur innovation in regulatory technology. RegTech solutions tailored for tokenized assets could help financial institutions navigate the complex regulatory landscape more effectively.
Preparing for the Future of Tokenization in Finance
Financial leaders interested in adopting tokenization can take proactive steps now to position themselves for success. The following strategies can help FIs navigate the challenges and capitalize on the opportunities described above, assuming they choose to move forward with a tokenization strategy.
- Invest in blockchain expertise and infrastructure to support tokenization initiatives. In doing so, firms can create innovative products and services while ensuring the security and efficiency of all tokenized transactions.
- Develop clear strategies for integrating tokenized assets into existing product offerings. Seamless integration of tokenized assets can enhance the value proposition of current products and attract new clients. This approach allows firms to leverage their existing client base while exploring new market opportunities.
- Engage with regulators to help shape the regulatory framework for tokenized assets. Proactive engagement with regulators can help create a more favorable regulatory environment for tokenization. By sharing insights and concerns, firms can remain agile as regulations change, fostering innovation while protecting investors. Firms should also consider future regtech solutions to help in these areas.
- Educate clients on the benefits and risks of tokenized investments. Informed clients are more likely to embrace tokenized assets and make investment decisions that involve tokenization. Providing comprehensive education can help build trust and position the firm as a leader in the tokenization space.
- Collaborate with fintech companies and other institutions to develop industry standards for tokenization. The right partnerships can accelerate innovation and help establish best practices for tokenization. Collaboration also enables firms to share resources and expertise, potentially reducing costs and risks associated with tokenization initiatives.
Choose Your Own Path Forward
The industry has yet to realize the full potential of tokenization in finance. There is still uncertainty as to how tokenization will fit in to the broader global financial ecosystem as well. But as regulations evolve and technology advances, it’s clear tokenization will play a central role in shaping finance’s future.
Financial institutions that embrace this technology now may lead the industry in some respects as a result, offering innovative products and enhanced value for clients. Whatever your stance today, it’s critical you continue to monitor future developments of tokenization in finance.
Option One Technologies Puts Your Future First
Option One Technologies can help ensure your IT infrastructure is effective, scalable, manageable, and secure, no matter how you guide your firm forward. Email us directly to start a conversation about your firm’s technology future, including tokenization’s potential.
