Tokenization is the next big step in how financial assets are housed and offers advantages over existing traditional structures, Wall Street firm Bank of America (BAC) said in a report Friday, poses risks as well.
At its core is the process of converting ownership of real-world assets from stocks and bonds to real estate, private equity, even art, and even digital tokens recorded on blockchain.
Tokenization begins with mutual funds and continues to expand through individually managed accounts, collective mutual funds, and exchange trade funds (ETFs), and bank analysts say the model can restructure the way assets are accessed and managed by offering more advantages than traditional structures.
Among the most important benefits is increased liquidity, an analyst led by Craig Siegengraller added that 24/7 trading could open a secondary market for previous illiquid private assets.
Tokenization also allows ownership of fractions, analysts say it reduces investment minimums and increases portfolio access. Transparency is another advantage, as blockchain ledgers provide an immutable, publicly available record of ownership and transactions.
Reducing intermediaries allows for lower fees, and smart contracts can automate key processes such as dividend payments, coupon distributions, and voting rights, while also helping to navigate regulatory requirements and even the complexity of private equity capital.
According to data provider RWA.xyz, the on-chain real-world assets valued at over $28 billion.
Tokenization risk
Still, Bank of America warned that tokenization will face major hurdles before achieving widespread adoption.
Regulatory uncertainty remains the biggest challenge. While US policymakers signal support, future administrations could reverse courses, and many jurisdictions are still in the process of writing rules.
The bank said custody is another concern as investors risk losing access to assets if private keys are left behind, and facility-grade custody solutions are still being developed.
On the technology side, vulnerabilities in smart contracts or blockchain platforms leave room for exploitation and, given that most institutions rely on traditional systems, integration with legacy financial infrastructure presents an additional obstacle.
Regarding public assets, the existing US market already offers deep liquidity, low fees and strong investor protection, making the tokenized versions of the claims unattractive, the report added.
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