Despite widespread hype, the adoption of tokenization in capital markets remains at a very nascent phase.

Most stakeholders are only experimenting with the technology and applications are largely focused on fixed-income products including bonds and money market funds (MFFs), according to a new report by the International Organization of Securities Commission (IOSCO), the global entity representing securities and futures regulators from around the world.

The report, produced by IOSCO through its Fintech Task Force’s Financial Asset Tokenization Working Group (TWG), provides an overview of the current state of development and adoption of tokenization and distributed ledger technology (DLT) in capital markets products and services, drawing on literature review, regulatory surveys, and stakeholder outreach.

According to the report, tokenization is gaining interest and initiatives are emerging across lifecycle activities. However, progress remains uneven across asset classes, and overall still at a very nascent stage.

The study found that while interest in tokenizing capital-markets products is split equally across the jurisdictions studied, actual adoption, reflected in commercialized use cases, is actually really low with the vast majority of respondents (91%) indicating no or very limited tokenization use cases.

Further highlighting the nascent stage of the sector, the study found that most jurisdictions are reporting more experimentation of tokenization (57%) than actual use cases (43%).

Fixed-income products among top applications

Despite limited adoption overall, interest is growing in specific products and activities. In particular, fixed-income products, including bonds and MMFs, are leading in both the size and number of tokenized issuances.

Since 2021, more than US$5 billion in tokenized fixed-income instruments has been issued, including US$3 billion being issued in 2024 alone. That amount represents a 3.5 times increase between 2023 and 2024.

McKinsey estimates that roughly US$10 billion worth of tokenized bonds have been issued in the past decade. Despite growth, tokenized issuance remains small compared to the US$140 trillion outstanding amount globally.

Tokenized bonds are typically issued directly on the blockchain, with the tokens representing ownership of the assets. Some operators may take steps to provide greater assurance of settlement finality, often involving regulated central securities depositories (CSDs).

The trading and post-trade activities of tokenized bonds are often integrated with traditional exchanges and clearing houses to provide investors with the option to use traditional financial infrastructure.

Examples include UBS’s CHF 375 million bond issued on the SIX Digital Exchange in 2022, digital bonds issued by the city of Lugano in Switzerland, as well as DBS’s first tokenized bond of SGD 15 million (US$11.5 million) in 2021.

MMFs, meanwhile, are typically tokenized at the fund level. Tokens are issued on a blockchain, representing ownership of fund shares or units, while the fund’s assets are managed in the same manner as conventional funds. Blockchain records may serve as proof of ownership or merely as a back-up record, and issuers and transfer agents typically have the ability to correct them when necessary, such as in the case of fraud.

Examples include the BlackRock USD Institutional Digital Liquidity Fund (BUIDL), which invests in very short-term, safe assets such as US Treasuries, and repos, and is built on Ethereum; the Franklin Templeton OnChain US Government Money Fund (FOBXX), which is deployed on several blockchain including Stellar, Polygon, and Arbitrum; as well as sgBENJI, a US dollar MMF token issued on the XRP Ledger and launched by DBS, Franklin Templeton and Ripple.

Risks and opportunities

The IOSCO study found that overall, stakeholders in the capital markets are recognizing the potential of tokenization to address various market inefficiencies present in the lifecycle of financial assets, such as information asymmetries, search frictions, transaction costs, and counterparty risks.

Shared and programmable ledgers can reduce frictions in issuance, trading, servicing, and redemption by linking assets directly to ledger-based ownership records. Tokenization can also reduce counterparty risk, thanks to atomic settlement, and faster distribution of dividends and interest.

Tokenization also allows for fractionalization, broadening access to traditionally illiquid assets by lowering minimum investment sizes, and helping to improve liquidity and diversify risk. Finally, tokenization supports product innovation, enabling bespoke instruments, automated income flows, streamlined asset servicing, and improved environmental, social and governance (ESG) standard tracking.

Despite the opportunities, the report emphasizes that tokenization also introduces new risks. Greater sharability and programmability may facilitate wider and faster spread of shocks across the markets and thereby increase the cost of operational risk events. Furthermore, new process flows or intermediaries with roles such as token minters, and DLT platform developers, can reshape traditional activities, causing disruption.

Tokenization also introduces new complexities due to its reliance on DLT, which existing laws are not designed to accommodate, and ownership and investor rights can be unclear.

But more importantly, DLT networks themselves pose risks. Because blockchains rely on consensus across nodes, they can experience forks, resulting in a split into two distinct networks. This makes it unclear which version is the authoritative record of ownership. Both public and permissioned blockchains can also be targeted by cyberattacks, including attempts to take over the network or exploit weaknesses in node management.

Data privacy is another challenge. Because blockchains are transparent and immutable, this can conflict with legal privacy requirements. It can also create market-integrity risks if visible transaction flows trigger panic or manipulation.

Fragmentation across different, non-interoperable DLT networks is also a critical issue, creating liquidity silos and introducing vulnerabilities in the bridges that link networks.

Other challenges include delays and high transaction fees due to network congestion, money-laundering risks, and smart contract vulnerabilities.

McKinsey estimates that total tokenized market capitalization could reach around US$2 trillion by 2030, excluding cryptocurrencies and private stablecoins. In a bullish scenario, this value could double to around US$4 trillion, it predicts.

Featured image: Edited by Fintech News Switzerland, based on image by thanyakij-12 via Freepik