Getting real – exploring real-world asset tokenisation in practice

Real-world asset (RWA) tokenisation is being hailed as the “third revolution in asset management,” with Boston Consulting Group (BCG) predicting that tokenised assets could reach $16 trillion in market value by 2030. Tokenisation promises to transform the financial landscape, offering greater accessibility, liquidity and operational efficiency.

However, the journey from concept to execution requires traditional financial institutions to navigate complex regulatory, operational, and technological challenges. Success lies in leveraging existing frameworks, embracing innovative technologies, and building collaborative ecosystems. Let’s examine where traditional finance (TradFi) firms can leverage existing experience to catapult their position in the market. .

Asset identification and structuring

TradFi organisations already possess robust systems for managing traditional assets, such as loans, bonds and real estate. These systems also serve as a foundation for identifying which RWAs are suitable for tokenisation. Regulators are now providing additional clarity to ensure that tokenised assets adhere to existing compliance frameworks and alignment of classification between country frameworks.

Financial institutions entering the market typically start with less complex assets, such as fixed-income products, before expanding into more intricate areas like real estate or private equity. For instance, UBS recently launched a tokenised fixed-income product, demonstrating how institutions can start with familiar, regulated asset classes and gradually scale into more complex applications.

Tokenisation also enables fractional ownership, potentially democratising access to high-value assets.

Legal and regulatory compliance

Navigating regulatory frameworks is one of the most critical aspects of RWA tokenisation. Issuers must ensure that tokenised assets are legally recognised, token holders’ rights are enforceable and compliance is maintained across jurisdictions.

Collaboration with global regulatory bodies such as the Bank for International Settlements (BIS) and Financial Stability Board (FSB) is crucial for establishing unified standards for tokenised assets. By aligning with global standards and leveraging existing processes, traditional finance can streamline entry into tokenised markets while building investor confidence.

Custody and safekeeping

Digital assets’ custody is fundamentally different from custody in TradFi. While TradFi custody involves safeguarding physical or dematerialised assets, digital asset custody focuses on safekeeping and managing cryptographic keys that grant access to tokenised assets on a blockchain.

Secure key management requires advanced solutions such as hardware security modules (HSMs) to store cryptographic keys securely. Some regulators notably mandate using cold wallets (offline storage) to minimise cybersecurity risks, though this introduces operational complexity, including strict access controls and multi-signature approvals.

Example: Zodia Custody combines advanced HSMs and multi-signature protocols to manage and secure digital assets in compliance with global regulatory standards. Through participation in the HKMA sandbox initiative, Zodia is refining custody solutions to meet Hong Kong’s evolving digital asset regulations.

By combining TradFi principles like segregation of duties with cutting-edge digital asset technologies, custodians can create secure, compliant custody frameworks that build trust with institutional investors.

Issuance, trading, liquidity, and payments

Issuance and fractional ownership

Currently, banks issue large-denomination financial products primarily for institutional investors. By integrating blockchain technology, they can tokenise high-value assets into smaller, more accessible units, enabling fractional ownership. Tokenisation builds on traditional issuance practices but adds greater flexibility and accessibility for a broader range of investors.

Example: A bank that already manages real estate-backed securities can tokenise the asset into digital tokens, each representing fractional ownership. This allows retail investors to access high-value markets previously limited to institutions.

Trading and liquidity

Banks operate trading desks and market-making functions that ensure liquidity in traditional markets. Blockchain enhances these operations by enabling 24/7 trading on digital platforms, improving accessibility and efficiency. By adopting blockchain technology, banks can expand their trading services to include tokenised assets while maintaining their role as trusted intermediaries.

Example: UBS has launched a tokenised fixed-income product that operates within traditional systems like SWIFT, providing a bridge between blockchain innovation and existing financial infrastructure. This approach demonstrates how banks can embrace blockchain technology without abandoning their established platforms, ensuring a seamless and organic transition for clients.

UBS’s use of SWIFT as part of its tokenised product underscores a gradual, integrated transformation, allowing banks to evolve their offerings while leveraging trusted systems. This approach ensures continuity and stability for clients while introducing the benefits of tokenisation.

Compliance and operational efficiency

Banks already have robust compliance systems for anti-money laundering (AML), know-your-customer (KYC), and risk management. Advanced token standards, such as ERC-3643, allow these compliance controls to be embedded directly into tokens. By leveraging blockchain, banks can automate compliance checks and control transfers, improving the efficiency of their operations.

Example: A bank can issue ERC-3643-compliant tokens that automatically verify the eligibility of participants before completing a trade, reducing manual oversight while maintaining regulatory standards.

Payments and settlements

Traditional payment systems are time-consuming and costly, often requiring several days to settle transactions. Blockchain enables near-instant payments and settlements using stablecoins or Central Bank Digital Currencies (CBDCs). By integrating these technologies, banks can build on their existing payment infrastructure to offer faster, more efficient solutions.

Example: A bank facilitating international payments can use blockchain to settle tokenised bond trades instantly, whilst also leveraging payment systems for reconciliation and record-keeping, ensuring that clients benefit from both traditional and innovative systems.

Risk management

Effective risk and collateral management are crucial in the tokenisation of RWAs. Traditional financial institutions can leverage advanced tools such as blockchain analytics platforms like TRM Labs or automated collateral management systems and smart contract auditing to address the unique risks associated with digital assets, such cybersecurity threats, smart contract vulnerabilities, and market volatility.

Comparative risk analysis:

Contrary to common perceptions, decentralised finance (DeFi) is not inherently more risky than TradFi. Data from TRM Labs indicates that the percentage of illicit activity in the DeFi ecosystem is approximately 0.1% to 0.2%, which compares favourably to traditional financial systems.

Furthermore, seizure rates of illicit funds in DeFi are around 26-27%, significantly higher than the less than 1% seizure rates in traditional finance, suggesting that illicit activities are more effectively identified and addressed in the DeFi space.

Example: A bank tokenises a real estate mortgage and uses it as collateral for a loan. By employing blockchain analytics and automated collateral management systems, the bank can continuously monitor the value and risk profile of the collateral, ensuring compliance and mitigating potential risks.

By integrating these advanced tools and leveraging data-driven insights, financial institutions can effectively manage risks associated with tokenised RWAs, aligning with regulatory standards and maintaining the trust of stakeholders.

Client services and reporting

Tokenisation enhances client services by providing transparency and automation through blockchain’s immutable ledger. Clients gain real-time access to their holdings, while smart contracts automate processes like dividend distributions and reporting.

Example: A client owning tokenised real estate receives rental income distributions directly via a smart contract, with all transactions transparently recorded on the blockchain.

Interoperability: Solving fragmentation in tokenised ecosystems

Interoperability—the ability for tokenised assets to move seamlessly across platforms and networks—is a critical challenge for scaling tokenisation. Without interoperability, the benefits of liquidity and efficiency are diminished, as assets are locked within siloed systems.

Protocol solutions like Chainlink address this challenge by providing decentralised oracle networks that enable interoperability between blockchains. Chainlink’s cross-chain protocols allow tokenised assets to move between platforms securely, enabling greater liquidity and accessibility.

Ownera, a digital securities network, is also tackling interoperability by creating an open-source protocol that connects multiple tokenisation platforms and custodians.

It should be noted that while DeFi players are specialising in this area, TradFi firms such as State Street and HSBC are also ramping up their blockchain and tokenisation teams, making strategic hires and implementing new strategies.

The path forward

Tokenising real-world assets offers transformative potential for asset management, unlocking new opportunities for liquidity, accessibility, and operational efficiency. However, success requires financial institutions to navigate a complex landscape of regulatory compliance, technological innovation, and operational restructuring.

By leveraging existing frameworks, engaging with global regulators, and collaborating with partners such as Zodia Custody, traditional finance can build scalable, secure, and compliant tokenisation solutions.

In the next article in this series, we will explore the legal and regulatory intricacies of RWA tokenisation, featuring insights from Hannah Glass, Special Counsel at Ashurst.