Asset Tokenization in Financial Markets 2025

Contents16 Shared system of record The introduction of a shared system of record, underpinned by programmable ledgers and their consensus mechanisms, can drive efficiencies corresponding to the reduction ofinformation asymmetry, an aspect crucial to investor awareness. Tokenization can facilitate placing relevant data from financial transactions on-chain. In addition, this allows for additional data to be tracked and enables greater transparency of all information linked to any transaction, including the provenance of the asset. However, a shared system of record, or a so- called golden record, may yield unexpected challenges for financial institutions that already manage and synchronize with several systems of books and records, internal and external with counterparties. While there are examples of parallel, programmable ledgers and conventional systems operating, there needs to be clarity on the legally enforceable system of record to determine the correct claim status of an asset on-chain. This ambiguity has of led to “shadow records” being put in to record and manage asset ownership. Flexible custodial arrangements Tokenization enables flexible custodial arrangements, ranging from full custody to collaborative/shared custody to hosted/embedded custody, all building upon the user- centric self/non-custodial model. This enables user-centricity by providing direct control over assets, identity and data through private keys, in many cases removing the reliance on intermediaries such as custodians.6 However, if private keys are lost or compromised, then the security of these models is undermined, which is why industry efforts such as the DeRec Alliance are driving adoption of private key recoverability. Should keys or users be compromised through phishing or other cyberattacks, on-chain financial products could have freezing functions built into their governing smart contracts to mitigate and deter loss. Programmability Programmability is the enabling of smart contract-driven code to govern how tokens are transferred and stored – allows going beyond discrete automation by extending the scope of automation with event-based triggers, conditions and actions on an immutable ledger with embedded data and instructions in the token.7 Programmable ledgers deliver concurrent, real-time communication to multiple parties, reducing time pressures and aiding deadline compliance. Putting more of the asset life cycle on-chain facilitates operational efficiencies that can be derived using programmable functions to automate actions. Smart contract execution can streamline asset servicing, enable liquidity- saving mechanisms, enhance price discovery and improve settlement.8 Programmability prevents unilateral changes due to immutability, bolstering trust through standardized operations and ensuring transaction data is integrated within the token rather than relying on external integrations. However, programmatic structuring could have unintended consequences, including the paradox of programmability – the idea that a smart contract is constrained in its ability to adapt to market events, such as contagion effects, thus introducing systemic risk.9 Asset fractionalization Conventional financial markets offer asset fractionalization, yet this feature is novel under the paradigm of the flexible custodial arrangements. Tokenization also reduces the administrative burden of offering smaller denominations of assets, a key limitation in lowering investment thresholds. This expands accessibility because financial institutions can offer smaller denominations to investors while minimizing the operational burden of processing a higher volume of activities, such as disclosures, asset servicing and compliance checks. Fractional ownership, however, can result in challenges when enforcing ownership of off-chain assets, such as real estate or commodities. Composability Tokenization introduces composability, or the ability to package and repackage system components and portability, which is the ability to transfer digital assets between different platforms. These features promote multichain and multi-asset operations, which allow for improved collateral mobility and a potential increase in liquidity due to the fungibility of assets. While composability contributes to financial innovation, it presents a unique risk in limitless composability where developers could create and recreate a limitless number of derivatives of on-chain products, resulting in potential misuse or non-compliant holding.Value proposition