Key takeaways

While progress is being made, the main obstacles to the adoption of tokenization among financial institutions today include the following:

• A lack of interoperability of tokenized asset platforms — Scale will only be achieved when numerous market players are transacting with each other on common or interconnected platforms.
• High cost, particularly for early movers — Ultimately, the efficiencies of tokenization at scale should lead to reduced transaction costs for all market players. Today, however, all but the largest institutions are likely to find the costs of implementing tokenization projects prohibitive.
• The need for greater regulatory clarity in several areas to build confidence among investors and other market players.

This article and the accompanying FInsight podcast discuss the state of play and how matters are developing. Please click here to listen to the podcast.

In more detail

What can tokenization and tokens be used for, and what are their benefits?

The terms "tokenization" or "token" can sometimes be confusing, partly because they are not legally defined terms and are used in different ways in practice. "Tokenization" is often understood as the process of "linking" a token to an asset or legal position using a register built on distributed ledger technology (DLT), such as blockchain. It is therefore helpful to make a general distinction between two categories of tokens: 

• "Neutral" or "native" tokens — such as cryptocurrencies, with Bitcoin being the most prominent example — derive their value solely from market dynamics and investor demand. However, the term "cryptocurrency" itself warrants clarification, as such tokens typically do not qualify as legal tender or money in the ordinary legal sense.
• "Linked" or "non-native" tokens — such as digital securities or tokenized deposits — are associated with on-chain or off-chain assets. In these cases, the token represents a security or a legal position, such as entitlement to dividend payments or book money claims, as seen in the case of tokenized deposits, or even property.

In the last few years, the "tokenization wave" initially focused on digital bonds, which are fairly simple debt instruments that can be tokenized relatively easily. More recently, tokenization has extended to other real-world assets, such as investment funds and equities. For example, Germany and Luxembourg have distinct securities laws for those types of digital assets. Ledger-based securities have also been introduced into Swiss private law to ensure a level playing field and crucially to allow the transfer of tokenized securities to all market players.

Beyond securities, additional use cases for tokenization fall under the concept of "cash on chain." A prominent example is stablecoins, which include tokens "linked" to underlying fiat currencies such as the US dollar or the euro (or other assets). In this context, we at Baker McKenzie have advised on the legal framework for stablecoins in the EU, which is governed by the Markets in Crypto-Assets Regulation (better known as MiCAR). Another innovative private-sector solution for enabling cash on chain where we are engaged involves "tokenized deposits," where a client's book money claims against a commercial bank are represented on DLT. Both of these use cases aim to facilitate faster and more secure payment transactions, particularly in areas such as cross-border payments, where traditional correspondent banking is often considered expensive and complex. These solutions also aim to facilitate delivery-versus-payment transactions where, for instance, tokenized securities are purchased against a payment and where both the asset leg and the payment leg sit on the DLT. Certain applications of the DLT allow for near-instantaneous ("atomic") settlement, effectively enabling the exchange of value "at the push of a button" and unlocking the full potential of blockchain-based financial infrastructure.

Although the specific benefits of tokenization depend on the use case, there are some universal advantages associated with the underlying DLT:

• First, there is flexible programmability through smart contracts that can be used to automate complex processes (e.g., dividend payments for security holders or faster and more efficient cross-border payments).
• Secondly, transactions are more transparent and safer because DLT platforms provide an unchangeable and transparent record of transactions.
• Eventually, certain transactions will be performed more efficiently compared to traditional services.

In the case of securities transactions, for example, the exchange of (i) securities and (ii) cash can still take two days or more on traditional rails. This can be carried out much faster and at lower cost on a DLT platform.

Why is tokenization a technology to watch in 2025?

The reason why we should be paying attention — at least with respect to financial institutions — is that more mature regulatory frameworks are starting to be implemented such as the EU's MiCA legislation that focuses on stablecoins and other unregulated crypto assets. At the same time, the US Securities and Exchange Commission (SEC) is likely to now be more supportive under its newly confirmed chair, Paul Atkins. Moreover, there is growing support from financial regulators as financial institutions are understandably cautious in such an intensively regulated sector. This is reflected in initiatives like digital sandboxes and industry-led projects, such as Project Guardian launched by the Monetary Authority of Singapore (MAS). Another example is the still small, but rapidly expanding market for tokenized bonds in Europe. Unsurprisingly, we are seeing increasing interest from financial institutions in use cases and pilot issuances.

Legal issues for financial institutions as they explore tokenization use cases

It is important to recognize that despite ongoing regulatory developments, legal analysis surrounding the nature of tokens is still in its early stages. While many tokens replicate traditional commercial transactions through digital means, there are many novel and innovative forms of tokenization that play directly into the issuer's business model. There are myriad ways to conceptualize and classify the various types of tokens, each potentially leading to different regulatory treatments. However, there remains a lack of international consensus and coordination among lawmakers and regulatory authorities. While international organizations could provide guidance on the legal issues raised by tokens, standard-setting efforts have so far been limited, except in specific fields such as anti-money laundering.

A second topic is the validity of token transfers. Under Swiss law, specific amendments to the private-law framework — including the introduction of a ledger-based security — have created a solid framework and provided some legal certainty. However, as with regulatory matters, there is little international coordination and standardization regarding the validity of such transfers. This lack of harmonization means that potential buyers must conduct their own technical and legal due diligence in each case, which increases transaction costs and can hinder the overall efficiency and scalability of tokenization.

Another important consideration is the treatment of security interests — specifically, how to establish such interests over tokens through mechanisms like fiduciary transfers or pledges involving the transfer of control. This issue is particularly relevant for financial institutions engaging with tokenized assets. However, the legal treatment of security interests varies significantly across jurisdictions and remains in a nascent stage of development.

It is helpful to think of three layers in digital asset projects that address their complexity, as detailed below:

• The commercial layer is the strategic foundation — the "spark for an idea." It focuses on identifying profitable use cases that deliver tangible benefits to institutions and clients. Examples include instant settlement in securities transactions and 24/7 automated payment rails. This layer defines the business objective that the organization aims to achieve.
• The operational or technical layer explores what is technically feasible using DLT. The technology is highly flexible and capable of supporting a wide range of innovative solutions. It bridges the gap between the business vision and technical implementation.
• The legal layer ensures that the contemplated product and its related transactions are supported by a sound regulatory and civil law framework. Legal certainty is essential for adoption.

The challenge — and at the same time, the trick — is to effectively balance and integrate these layers. For example, if the use case is to create a tokenized bond, it may not be commercially relevant for the business or the client to fully understand the legal mechanics of how a digital security is linked to a token, or the precise legal and technical process behind asset transfers. Thus, considering the commercial, operational and legal perspectives helps develop clarity and design options for a product that not only meets the goals but also ensures legally certainty.

Practical challenges and obstacles to greater adoption of tokenization

What is lacking at present, in particular, is the interoperability of tokenized assets and platforms. This includes scalability between systems and integration with existing systems. In essence, this refers to the need for interactions between existing platforms or closed-loop solutions that we see in the market nowadays, on which, for instance, digital securities and tokenized cash can be exchanged. Our expectation is that traditional financial markets and DLT infrastructures are likely to coexist for at least another decade. This is not surprising for a new technology that relies on comprehensive interactions to develop its full potential.

Another challenge is cost, particularly for pioneers, as the investment cost of a first mover are typically high. Eventually, the efficiencies of tokenization at scale will lead to reduced transaction costs for all market players. However, there's a long way to go, though we are already seeing some interesting collaborations between platforms (e.g., in the securitites leg and payments leg of securities buy/sell transactions). Further practical obstacles reflecting tokenization's nascent development include limitations around available infrastructure. Other challenges include the following:

• The need for extensive development and testing to prove the degree of reliability and resilience expected by financial markets.
• Market immaturity, where, for instance, there is no across-bank solution for instantaneous cash settlement at scale, perhaps amplified by regulatory fragmentation and lack of standardization.
• The fact that capital market infrastructure players have yet to show the concerted will to build out tokenization capabilities or move markets onto DLT. There are no larger open platforms currently available for trading tokenized securities. While some platforms do exist, they are either highly restrictive in terms of the rights they allow for trading, or they operate as closed systems accessible only to one or a small group of financial institutions. Although open and interoperable systems have been conceptualized and are in development, they have yet to gain sufficient traction in international markets. However, recent market signals, for instance out of Switzerland, have been positive.

The challenge for the financial sector lies in effectively balancing and integrating commercial, operational and legal considerations. For example, in the case of a tokenized bond, it may not be commercially relevant for the business or client to fully understand the legal mechanics of how a digital security is linked to a token, or the precise legal and technical processes behind asset transfers. However, taking all three perspectives into account is essential. Doing so helps clarify the design space and enables the development of a product that not only meets business objectives but is also legally sound and secure.