Tokenization Gets a Boost, but Questions Remain

Art by Cara Wang

Asset managers and investors are taking a closer look at asset tokenization as regulators indicate they are more open to digital assets. Alongside cryptocurrency, and native digital tokens like Solana, asset tokenization allows for other asset classes like equities or real estate investments to be managed on a blockchain.

Advocates of asset tokenization say that by bringing more assets onto the blockchain, investors will be able to have greater visibility into their transaction records and ownership and also will be able to trade 24/7 the way other digital assets already do.

However, widespread adoption of asset tokenization has been slow. Bringing asset classes “on chain” is not necessarily difficult, but the market infrastructure to support digitization is not fully built yet and fiduciaries have raised concerns about how to manage issues like custody arrangements.

Digital assets get a boost

The Trump administration and the SEC under Chair Paul Atkins have indicated that they are broadly supportive of digital assets. That stance is already playing out in tangible ways. The SEC’s decision to rescind SAB 121, which previously required companies to record client crypto assets held in custody as liabilities on their balance sheets, has made it easier for traditional banks to offer digital asset custody platforms and a number of them including BNY Mellon, Standard Chartered and State Street have announced offerings.

There are also a trio of pending bills—the GENIUS, STABLE and CLARITY acts — that would open doors for digital assets and make it easier to set up the market structure necessary to support trading non-native tokens on chain.

Lewis Cohen, partner at law firm Cahill, who co-leads the digital assets and emerging technologies practice, says we’re in a new “catalyst phase” when it comes to digital assets from a regulatory standpoint. “Both Commissioner Peirce and Chair Atkins have given speeches talking about digital assets and saying they are looking for solutions. I think there’s a lot of interest in moving quickly,” he says.

Miguel Kudry, CEO of L1 Advisors, an on-chain asset and wealth management company, agrees. He says there has been a tenfold increase in asset managers and RIAs reaching out to L1 to learn more about their solutions for bringing assets on chain and being able to offer tokenized products for non-native asset classes in recent months. “We really shifted from an environment where it was very hard for advisers and asset managers to talk about digital assets because of the regulatory concerns to them now being able to have those conversations,” he says.

Kudry adds that on the product side, efforts so far have been mostly experimental. However, more products are starting to come to market. BlackRock, for example, offers a tokenized money market fund—ticker BUIDL— that launched last year. Investor interest in BUIDL has been significant with more than $2 billion flowing into the fund so far. Kudry says the response to BUIDL is likely providing proof of demand to other asset managers. That could be supportive for continuing to build out the digital assets ecosystem.

“When you think about funds today —if you’re launching an ETF, for example, you’re doing the work on that fund and then you have to identify your distribution channels and there are other tools like managed accounts, model portfolios and so on that can use that fund,” explains Kudry. “With tokenization, what we’ve had so far is a single fund or a single product, but seasoned investors are going to want more options. They’re already used to having an SMA or these other structures and they’ll expect at least something similar within their digital assets portfolio as the market matures.”

Building the Infrastructure

While there is much focus on product, industry analysts say there is still quite a bit of work to be done on the infrastructure that is needed to support tokenization, as well as other types of digital assets. Bringing an asset on chain only solves part of the problem.

Right now, digital assets trade 24/7, so there isn’t a closing price for something like Bitcoin. However, tokenizing non-native asset classes means that banks, brokers, and investors have to figure out how to handle issues like reconciliation, settlements, and custody.

The nature of digital assets means that custody can be handled in a variety of ways, experts explain. There is full custody, which as the name implies, means handing over the custodial relationship to a qualified third-party custodian. This option is closest to a traditional finance understanding of custody. There is also collaborative or shared custody; hosted custody, and self-custody. These options are a bit more nuanced and essentially work based on a pipeline of approvals for transactions. With self-custody, the investor holds and maintains their investment wallet on his own however he sees fit. Self-custody already has a strong foothold with individual investors. However, fiduciary investors are often required to have a qualified third-party custodian.

“I think this is an area where we are going to see a lot of evolution,” explains Prashant Kher, a senior director in EY-Parthenon’s Strategy group focused on emerging technologies. “If you are an investor managing a public fund, for example, you’re going to think through how best to manage a digital assets exposure. Since the SEC rescinded SAB 121, traditional custodians have obviously responded. But it takes time to stand up those capabilities and there are digital native custodians that can handle more types of tokens already. If an institutional investor wants to engage in more sophisticated strategies like staking and not just holding on to assets, they may consider expanding their custodial relationships to firms that can support that.”

Kher adds that some crypto-native firms already have relationships with family offices and RIAs so the infrastructure is there to be able to offer solutions to institutions. EY-Parthenon’s data shows that institutional investors are already creating custodial accounts with these firms. Kher adds that he could envision institutions solidifying internal teams that understand issues like digital key management and have the technical understanding necessary to engage with custodians or potentially do self-custody, if that is an option.

Getting these issues ironed out is important not only for investors with certain regulatory requirements, but also to enable the maturation of the digital assets market. “What we’re looking at right now is participants trying to figure out the minimally viable ecosystem,” Kher says. “There are a lot of pieces. You need investor demand and product, but you also have to account for asset servicing, transfer, agency, record keeping [and] data distribution. Figuring those issues out is supportive for scaling tokenization. That’s going to take time.”

Cahill’s Cohen agrees. Recent efforts to pass the GENIUS Act, which is in part focused on stablecoins, a type of cryptocurrency designed to maintain a stable value relative to a reference asset, are also a piece of the puzzle, he says. The bill passed the Senate in June and has the support of the U.S. Treasury Department as it moves to the House for consideration. Stablecoins are used as a means of settlement and payment and could help with some of the issues that arise when bringing on chain non-native assets that have a closing price/settlement timeline.

“Stablecoins are really critical; a lot of this doesn’t happen without that,” Cohen says. “You can have all of the tokenized securities in the world but if you want to trade at 7pm on a Friday and you have to wait until Monday at 9am,that’s not going to work. You’ve got to have some way to do repos or take short positions in markets that are always on. There are a lot of market structure implications there.”

Tags: asset tokenization, Cryptocurrency, custody, Digital Assets, digital market infrastructure, Regulations, stablecoin