Key Insights
- The process of tokenization can also raise some confusion among investors because ownership rights are not always attached to possession of a token.
- The tokenized asset markets continue to face legal, technical and liquidity risks that are usually dependent on the conventional infrastructure.
- Attaching tokenized assets to crypto markets may create more systemic risks and put investors more at risk to the wider market.
The emergence of tokenization is transforming financial markets as the majority of assets are transferred to blockchain. Real-world assets will be traded as digital tokens, new risks may arise to investors. International regulators are calling on caution and clear guidelines that should control these risks.
Understanding Tokenization and Its Uses
Tokenization is the process of converting real-world assets like stocks, bonds, or property into blockchain-based digital tokens. These tokens represent ownership or exposure to the underlying assets. Advocates say tokenization can reduce costs, improve settlement speed, and allow fractional ownership.
The International Organization of Securities Commissions, or IOSCO, reported that tokenization adoption remains limited. Financial institutions and crypto platforms are experimenting, but few tokens offer direct shareholder rights or full legal ownership. Tuang Lee Lim, chair of IOSCO’s fintech taskforce, said tokenization could reshape how assets are issued, traded, and serviced.
Investor Risks and Market Concerns
IOSCO warned that tokenization may confuse investors about what they truly own. Some tokens only provide exposure rather than full rights to assets like dividends or voting. The report also noted counterparty risks from third-party issuers and technical challenges from blockchain technology.
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The watchdog also claimed that tokenization may expose spillover risks by connecting the major financial markets with crypto markets. These new structures might not be fully covered by the regulatory frameworks and as such, there may be loopholes that may compromise market integrity. In tokenized asset markets, there is a low level of liquidity exposing it to more vulnerability during stress periods.
Jamie Alcock, a finance professor at the University of Birmingham, said that tokenization platforms could tend to decentralize responsibility and legal obligations in a number of different countries. According to him, decentralization never ensures equitable control and can bring accountability hard in cases where the platforms fail or the custodians go bankrupt.
Regulatory Recommendations and Future Outlook
IOSCO recommends regulators review policy for tokenized assets using lessons from crypto and decentralized finance. Most tokenization projects still rely on traditional trading infrastructure, which limits efficiency gains. The watchdog noted that promoters often do not publicly disclose measurable improvements in cost or settlement speed.
Regulators can drive to transparent structures to safeguard investors and demarcate ownership. The tokenization can further increase to real estate, personal credit, and other non-stock assets. The stock research and growth industries investors ought to be aware of the risks and structural disparities between the tokenized assets and traditional securities.
These developments on tokenization should be monitored by market participants. The main areas that require control include transparency, liquidity, and legal clarity. With the ongoing tokenization, platforms might change, and investors ought to exercise caution in these new markets.
