On May 12, the Securities and Exchange Commission Crypto Task Force held a roundtable called “Tokenization: Moving Assets Onchain: Where TradFi and DeFi Meet” at which panelists discussed topics such as how to define tokenization, potential uses for tokenization, the need for regulatory changes to facilitate tokenization, and interoperability among different platforms. The consensus among participants, as well as from SEC commissioners’ remarks, is that for tokenization to reach its full potential, the SEC needs to address several areas of regulatory uncertainty, including transfer agency regulation and custody. The existing regulatory uncertainty has not prevented tokenization from advancing beyond cryptocurrency, however, to encompass what many call real-world assets (RWA), such as securities, real estate, artwork, and collectibles.

It has been reported that the tokenized real-world asset market has increased over 260% in the first half of 2025, reaching a total valuation of $23 billion.[1] If securities and other real-world assets are already being tokenized, it can be anticipated that portfolio managers will contemplate purchasing these tokens for their funds. And while many may urge regulators to adopt a technology-agnostic approach in regulating tokenized versus traditional securities, the differences between tokens and traditional assets nonetheless will require registered investment company boards to confront new and challenging issues—possibly even if a fund adviser elects to avoid tokenized assets entirely.

We will explore in a series of three articles what tokenization is, how real-world assets are tokenized, advantages and disadvantages of tokenization, and various issues for fund boards to consider as tokenization becomes more prevalent.

Tokenization: What is it, Anyway?

While there is no single definition, a commonly used definition of tokenization—and one that suits our purposes—is “the process of converting ownership rights in a particular asset into a digital token on a blockchain.”[2] Broadly speaking, tokenization can occur in two ways:

• Tokens representing an existing tangible or financial asset. The token is a digital representation of an existing security on a blockchain. The token mirrors the value and ownership rights that are associated with the asset and acts as a link between the blockchain and the existing asset, allowing the token to be tradable and transferable within the blockchain ecosystem.[3]
• Tokens native to a blockchain, or digital assets directly issued on a blockchain. While most of these tokens are not backed by an RWA, it is possible for assets such as securities to be issued directly on the blockchain.[4]

The remainder of this discussion will focus on tokenizing an existing financial asset because: (a) in the near term, funds are more likely to invest in tokenized real-world financial assets than in tokenized securities issued directly on a blockchain; and (b) the existence of a tokenized financial asset side by side with its non-tokenized counterpart arguably creates more issues for fund boards than does the existence of a native token.

Getting into the Mechanics

In order to tokenize an asset, the first decision that must be made is to choose a distributed ledger, such as blockchain.[5] A blockchain is a form of distributed ledger or peer-to-peer database that is spread across a network and records all transactions in the network in theoretically unchangeable, digitally recorded data packages called “blocks.”[6] Each block contains a batch of records of transactions, including a timestamp and a reference to the previous block, so that the blocks together form a chain.[7] The system relies on cryptographic techniques for securely recording transactions, and the blockchain can be shared and accessed by anyone with appropriate permissions.

Certain blockchains are public, which means that any node (computer running the blockchain software and maintaining the state of the distributed ledger) can read and initiate transactions on the ledger.[8] Other blockchains are private, which means that only certain selected groups of nodes can read and initiate transactions.[9] Certain blockchains can also record what are called “smart contracts,” which are, essentially, computer programs designed to trigger an action if certain pre-specified conditions are met.[10]

To create a token, a person deploys a smart contract that is recorded on the relevant blockchain. Certain smart contracts may define a set of standard terms such as the name of the token, the total supply of the token, and the blockchain address(es) into which that supply will be initially distributed.[11] Once a smart contract is deployed on the relevant blockchain, the token supply is generated and deposited into the designated address.[12] The owner of that blockchain address can then transfer the tokens to other addresses using the smart contract. These transfers are recorded as transactions on the relevant blockchain.

To tokenize an RWA, a party will create a special-purpose vehicle such as a limited partnership or a limited liability company to secure the asset to be tokenized. In the case of a security or other financial asset, the party could be the initial issuer of the security or a subsequent purchaser the security. The asset will be transferred into the SPV (alternatively, the asset owner may enter into a security agreement with the SPV with respect to the asset). The SPV will issue tokens that represent ownership interests and provide economic exposure to the asset. The token creator is responsible for, among other things, coding conditions such as governance rights, dividend distribution protocols, and transfer restrictions into the smart contract. The tokens will be held on the blockchain selected by the creator and can be traded on that blockchain.

Advantages of Tokenization

Investment managers may find it advantageous to invest in a tokenized security instead of the underlying RWA for several reasons. First, tokenization could minimize or eliminate the need for clearing and settlement intermediaries such as transfer agents and custodians. The very nature of distributed ledger technology enables transactions in tokenized assets to occur directly between issuers and investors and between investors.[13] Such infrastructure may lead to faster transaction validation, reduce settlement times, and enable instantaneous subscription or redemption orders, which have traditionally taken two to three days to complete.[14]

In addition, smart contracts can provide for enhanced transparency and compliance in the markets of tokenized assets. Smart contracts can incorporate and automatically enforce investment parameters, portfolio rebalancing rules, dividend distributions, and regulatory compliance measures. Automating these processes reduces manual intervention, minimizes operational and human errors, and ensures real-time adherence to predefined criteria, even as market conditions shift.

Moreover, fractionalization of assets—the process of “dividing an asset into smaller, tradable units that represent an ownership stake in the asset, allowing an investor to buy a part of an asset rather than the whole asset”[15]—can grant market access to new or smaller investors, such as those investors not currently eligible to invest in private markets due to minimum capital requirements. The ability to trade tokenized units on secondary markets further enhances liquidity and broadens market participation.

Disadvantages and Risks of Tokenization

Because tokenization involves the process of converting ownership rights in a particular asset into a digital token on a blockchain, all the disadvantages and risks associated with blockchain technology are also present with tokenization. Primary among these are security risks, as bad actors can target a blockchain via various methods. Similarly, the use of private keys enhances the risk of inaccessibility to the token, meaning both the blockchain itself and users of the blockchain are vulnerable to attack. Earning trust in the security of a blockchain entails costs, including regular security assessments. Private blockchains are centralized (because the nodes are either owned by a single entity or restricted to certain approved individuals or firms) and thus create a single point of failure.[16]

A second common risk of distributed ledger technology, and therefore tokenization, is the frequency with which blockchain technology is used for money laundering and other abusive practices. Since tokenization helps to further separate assets from owners, it facilitates the ability of bad actors to launder funds derived from a criminal enterprise. The risk is magnified because front-running and sandwich attacks can occur in decentralized environments, where traditional surveillance mechanisms and regulatory enforcement are limited, making detection and prevention of market abuse and illicit finance more challenging. The lack of consistent regulatory treatment of digital assets across regions and the significant number of open regulatory issues, some of which are discussed in future articles, can facilitate the activities of bad actors.

A further challenge facing tokenization is that it is fragmented among many public and private blockchains, which can prevent a seamless experience in navigating from one tokenized asset to another. While in some instances digital tokens may be transferred between different blockchains, this is not always possible. Having disconnected blockchains means assets may be isolated within a particular blockchain, resulting in little liquidity for the assets. Market volatility, speculation, and poor demand could cause wild price swings.

And finally, there is concern that tokenization could cause volatility to be transmitted from the crypto markets to the underlying assets’ markets.[17] The concern is that digital assets and their increased interconnection with the wider capital market infrastructure may propagate risk and cause disruption across the system.

One frequent observation, particularly over the past decade, is that regulation and legislation lag technological developments. However, that does not mean that existing legal and regulatory structures do not apply to those developments. As tokenization of real-world assets continues to gallop ahead of any regulatory scheme that is tailored to address its unique nuances, benefits and risks, board members are well served to educate themselves about this development. While the developments may be novel, board members’ fiduciary duties remain timeless.

Ethan Corey (pictured, left) is a senior counsel at Eversheds Sutherland in Washington, D.C. With more than 20 years of experience in the financial services industry, Corey has deep knowledge in distribution issues (including FINRA rules), as well as those related to the Investment Company Act of 1940 and the Investment Advisers Act of 1940. He has counseled clients on matters related to Municipal Securities Rulemaking Board rules and regulations set forth by the Commodity Futures Trading Commission, as well as the U.K. Financial Conduct Authority’s Conduct of Business Rules and European legislative frameworks such as MiFID II.

Michael Koffler (pictured, middle) is a partner at Eversheds in New York who works with investment advisers, broker-dealers, and investment funds in their compliance with federal and state securities laws and regulations and SRO rules. Koffler advises clients on the full spectrum of business operations, including advertising, portfolio management, trading, internal controls, compliance programs, mergers and acquisitions, and other management issues. He also counsels banks and insurance companies on securities issues associated with the management and distribution of investment products.

Carolyn Garcia (pictured, right) is an associate in Eversheds Sutherland’s Investment Services and Products Practice Group in Washington, D.C. Her experience includes advising broker-dealers and investment advisers on compliance with federal and state securities laws, including Securities and Exchange Commission and Financial Industry Regulatory Authority rules and regulations.