Tokenization Offers ‘Enhanced Liquidity,’ but Faces Major Hurdles, BofA Says

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 Friday report, noting that it also brings risks.

At its core, tokenization is the process of converting ownership of real-world assets, from stocks and bonds to real estate, private equity, and even art, into digital tokens recorded on a blockchain.

Tokenization follows a lineage that began with mutual funds and expanded through separately managed accounts, collective investment trusts, and exchange-traded funds (ETFs), and according to the bank's analysts, this model could reshape the way investors access and manage assets by offering a number of advantages over traditional structures.

Among the most important benefits are enhanced liquidity, analysts led by Craig Siegenthaler wrote, adding that 24/7 trading could open up secondary markets for previously illiquid private assets, and faster, frictionless settlements that eliminate the multi-day delays common in today’s financial markets.

Tokenization also allows for fractional ownership, the analysts said, reducing investment minimums and broadening access to portfolios. Transparency is another advantage, as blockchain ledgers provide immutable and publicly accessible records of ownership and transactions.

Lower fees are possible by cutting out intermediaries, 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 complexities of private equity capital calls, the report noted.

According to data provider RWA.xyz the value of real-world assets represented on-chain exceeds $28 billion.

Tokenization risks

Still, Bank of America cautioned that tokenization faces significant hurdles before it can achieve widespread adoption.

Regulatory uncertainty remains the biggest challenge. While U.S. policymakers have signaled support, future administrations could reverse course, 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 misplaced, and institutional-grade custody solutions are still developing.

On the technology side, vulnerabilities in smart contracts or blockchain platforms leave room for exploitation, and integration with legacy financial infrastructure presents additional obstacles, given the reliance of most institutions on traditional systems.

And when it comes to publicly traded assets, existing U.S. markets already offer deep liquidity, low fees, and strong investor protections, making the case for tokenized versions less compelling, the report added.

Read more: Ondo Finance Rolls Out Tokenized U.S. Stocks, ETFs as Equity Tokenization Ramps Up