Recent developments in the financial sector reveal a significant challenge for the tokenization of real-world assets (RWAs) as liquidity issues persist. Despite increasing institutional interest in stablecoins and the promise of tokenization, the reality is proving more complex. While the concept of placing assets on the blockchain aims to enhance trading and settlement processes, the current market dynamics suggest that liquidity remains a critical barrier.
Tokenization offers a straightforward proposition: by placing an asset on-chain, trading can become continuous, settlements can occur in real time, and ownership can be programmed, minimizing the need for intermediaries. For example, blockchain-based lender Figure announced on February 4, 2023, its plan to broaden investor access to its On-Chain Public Equity Network (OPEN), which facilitates the distribution of blockchain-native public equities.
In a similar stride, the New York Stock Exchange (NYSE), under the auspices of the Intercontinental Exchange (ICE), revealed on January 19, 2023, its initiative to create a platform for trading and on-chain settlements of tokenized securities, pending regulatory approvals. Despite these advancements, the marketplace for tokenized RWAs reveals a complicated reality where liquidity is still lacking.
Understanding Liquidity in Tokenized Markets
The technology behind asset tokenization functions effectively, with public blockchains operating continuously and offering rapid settlement finality. Nevertheless, many tokenized RWAs struggle with liquidity issues. Trading volumes are low, bid-ask spreads are wide, and exits often depend on issuer discretion rather than market conditions.
Many of the leading tokenized RWAs, in fact, resemble commodity-backed stablecoin instruments, which do not provide the robust trading environment necessary for true liquidity. For Chief Financial Officers (CFOs) and treasury teams considering tokenized RWAs as part of their liquidity and investment strategy, it is crucial to understand that an “on-chain” designation does not guarantee liquidity. In many cases, these assets may behave more like private instruments rather than public securities.
Liquidity in financial markets refers to the ability to exit a position at or near fair value within a predictable timeframe. In traditional markets, this is achieved through participation, standardization, and trust in enforceable rights. Tokenization addresses other challenges, such as improving recordkeeping, enabling fractional ownership, and reducing settlement risks. However, these benefits do not automatically create active buyers for the assets.
The trading venues for many tokenized RWAs are often fragmented, and incentives for market makers to facilitate trades can be limited. As a result, the theoretical liquidity of a token may not translate into practical trading opportunities. For treasury teams accustomed to traditional liquidity assessments, the distinction is significant: a token that settles quickly but requires extensive negotiation for redemption is not practically liquid.
Market Dynamics and Future Outlook
At present adoption levels, the market for tokenized RWAs remains relatively small. Even optimistic estimates suggest that the total outstanding value of these assets falls short of what is needed for substantial secondary market trading across various asset classes. This lack of scale hampers market makers’ ability to justify balance-sheet allocation, which in turn leads to wider spreads and hesitancy from institutional investors.
Importantly, the scalability of tokenized RWAs is not hindered by technology. While blockchains have successfully addressed settlement and transparency issues, these challenges exist downstream of liquidity. True liquidity stems from legal certainty, standardized rights, and a broad base of participants with aligned incentives.
A significant concern in the tokenized RWA landscape is that many tokens do not confer direct, enforceable claims on the underlying assets. Instead, they often represent contractual promises made by entities controlling the assets, which can lead to a resemblance to private placements rather than public instruments.
For CFOs and treasury teams, the focus should not be solely on whether to engage with tokenized RWAs but rather on how to do so while managing unquantified risks. In an interview with Brett McLain, head of payments and blockchain at cryptocurrency exchange Kraken, he emphasized that the tokenization of real-world assets has long been viewed as a transformative potential for the crypto space. “We want to see that grow into other things like real estate and other tangible assets,” McLain stated.
According to the PYMNTS Intelligence and Citi report titled “Chain Reaction: Regulatory Clarity as the Catalyst for Blockchain Adoption,” the next significant advancement in blockchain will be heavily influenced by regulatory clarity. As regulatory frameworks evolve, they may provide the necessary foundation for safe and scalable blockchain adoption, although implementation challenges continue to pose obstacles.
As the tokenization landscape evolves, addressing liquidity challenges will be crucial for its future viability and acceptance within institutional finance.
