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This is a chapter from the book Token Economy (Third Edition) by Shermin Voshmgir. Paper & audio formats are available on Amazon and other bookstores. Find copyright information at the end of the page.
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The tokenization of real-economy assets has the potential to replace entire back-office operations in asset management through the use of smart contracts. The ability to tokenize any asset—from the physical or digital economy—simplifies the implementation of fractional ownership and opens new investment opportunities for certain asset classes. This financialization of the real world, however, not only comes with opportunities but can also create unintended market dynamics.
Asset tokenization refers to the creation of a Web3-native digital certificate that represents any physical object, financial asset, or digital file. The token embodies the rights associated with its physical or digital counterpart and is collectively managed on a blockchain infrastructure. The publicly verifiable nature of blockchain networks creates a frictionless settlement environment that significantly reduces the transaction costs of managing these rights—such as ownership rights, management rights, or voting rights—compared to traditional systems.
By enabling fractional ownership and lowering price discovery costs, tokenization enhances divisibility, increases market liquidity, and reduces market fragmentation. This is particularly beneficial for real-world assets that require high capital commitments, such as art or real estate. Tokenization allows ownership rights and management rights to be divided into smaller, tradable fractions, making investment accessible to a broader pool of investors. Greater divisibility improves transferability, attracting participants with smaller financial means and increasing overall market liquidity. As a result, asset tokenization could pave the way for entirely new use cases, business models, and asset types that were previously unfeasible.
The tokenization of real-world assets requires several prerequisites: (i) a well-defined regulatory framework for various asset token classes, (ii) online exchanges tailored to trading these asset tokens, and (iii) trusted custodians to manage the physical assets, particularly in cases of co-ownership. The terms asset token, real-world asset, security token, and non-fungible token have overlapping definitions and are sometimes used interchangeably, but distinguishing between them is important:
Non-fungible token (NFT) is a term that emerged in the Web3 community to describe a token that represents any type of unique asset (digital or physical) or identity-based digital certificate. NFTs typically represent assets that have more complex properties than fungible assets. They include metadata that describe the unique properties of the asset and have a more sophisticated rights management logic built into the token contract.
Security tokens are the digital representation of traditional securities that enable embedded automated rights management, which can streamline the settlement process between buyers and sellers, potentially reducing brokerage fees. In the current financial system, the settlement of securities and other financial products remains slow and fragmented. While 24-hour markets exist, they are rarely peer-to-peer, and settlements require coordination across multiple institutions, each maintaining its own private ledger. Despite technological advancements, real-time settlement is still uncommon. Security transactions often rely on a complex, document-heavy process where data is siloed within the servers of various stakeholders. This fragmented approach results in inefficiencies, delays, and high costs, with settlements typically taking at least two business days. These delays are not always technically necessary but are often a relic of old practices.
Web3 infrastructure mitigates existing issues as it allows for real-time and peer-to-peer settlement without compromising legal protections, as compliance rules are encoded directly into the token contract. Settlement updates are executed via the consensus mechanism of the underlying blockchain network, ensuring transactions occur strictly according to the rules embedded in the smart contract. The self-enforcing nature of smart contracts provides an efficient solution to the complexities of securities trading, where regulatory requirements can vary depending on asset class, investor type, and jurisdiction. Dividend payouts, for example, can be automated, offering real-time distribution—an enhancement over many conventional financial settlement systems.
The programmable nature of security tokens also allows for greater customization, making it more cost-effective to implement asset structures that were previously impractical due to economic constraints. However, trading security tokens still requires integrating a complex set of legal frameworks. Their adoption is both a technological and regulatory challenge, often influenced by network effects.
From a regulator’s point of view, security tokens are traditional securities that are simply represented by a new substrate (Web3 token) and managed by a new technological infrastructure (blockchain network). They are not a new product or economic phenomenon and therefore are fairly easy to understand and regulate. However, there is no common global understanding of what constitutes a security, as regulation differs from country to country. In some jurisdictions, the term “security token” applies to any token that represents a recognized asset or investment concept. Other jurisdictions have a more narrow definition.
To facilitate compliant issuance and trading of security tokens, third-party service providers have introduced standardized token frameworks. These standards incorporate transparent issuance mechanisms for asset and security tokens while addressing critical regulatory requirements such as Know-Your-Customer (KYC) and Anti-Money Laundering (AML) compliance.
Real estate tokenization refers to the process of creating unique, tokenized digital ownership certificates—real estate NFTs—that represent the deeds for physical properties such as apartments, office buildings, or land. Beyond ownership, these tokens can be programmed to include additional rights, such as voting rights in property governance, management privileges, and revenue-sharing mechanisms. Each token is unique, containing information about key property details, including size, location, price, ownership history, and other relevant data. By registering this information on a blockchain, the ownership status, property status, and embedded rights are notarized on a collectively managed and globally accessible public infrastructure.
The tokenization of the real estate market facilitates (i) rights management, (ii) fractional ownership and new forms of real estate funding, (iii) automated fractional rent collection, and (iv) tokenized real estate credit. For example, the property rights to a real estate asset can be divided into parts and sold to several co-owners. Even if a token represents a physical asset that is not divisible, as in the case of an apartment, the NFT representing the property rights is divisible. This means that investors can become fractional owners of a property without needing to buy the entire building. Depending on the regulatory environment and how the smart contract is set up, these fractionalized tokens may become eligible for global trading. This opens up the traditionally exclusive property market to a broader audience by allowing smaller investments. These fractions can be traded on decentralized or centralized exchanges, thus providing more liquidity to a historically illiquid asset class. An investor in France could easily buy fractional tokens in an office building in Canada with a few clicks on a real estate token exchange, without having to travel to Canada or hire an attorney there to handle legal matters. Similarly, an investor in Mexico could fund a private apartment building in India.