Are tokenisers making a mistake in choosing to ignore the conventional public capital markets?

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Are traditional exchanges doing nothing about tokenisation?

Anecdotal evidence suggests all major exchanges have large teams exploring digital assets, some of which have moved beyond Proofs of Concept (PoCs) and pilot tests and are now close to launching products, but little of their work has seeped into the

public domain. This is less because of intellectual property considerations, or lack of buy-in by senior management, than the fact exchanges tend to be regulated and often listed entities and must be careful what they disclose to avoid any suggestion

of market abuse. Certainly, it is hard to judge from public information how seriously exchanges are taking the tokenisation opportunity. A Future of Finance survey in June 2024 of information made public by 87 traditional stock exchanges found two out of three were apparently doing nothing at all about tokenisation. Of the third that were active, half were focused on cryptocurrencies only. A World Federation of Exchanges (WFE) paper, also published in June 2024, argued that blockchain based tokenisation technologies lack the processing capacity to displace traditional exchanges; are bedevilled by interoperability problems, even conflicts of interest; that atomic settlement procedures are antithetical to liquidity; and that blockchain technologies are too expensive to implement anyway. This encouraged the perception that traditional exchanges were content to adopt a wait-and-see policy on tokenisation.

What explains the apparent lack of investment by traditional exchanges in tokenisation?

Regulatory uncertainty, which was identified by the audience as a barrier, is an obstacle in Europe. Under the Central Securities Depositories Regulation (CSDR) of the European Union (EU), a security must be issued into a central securities depository (CSD). Which means an existing equity, for example, must be issued in traditional form into a CSD as well as in tokenised form on to a blockchain network. This undermines the economic rationale for tokenisation, which depends on assets being issued on to blockchain networks in native form only. Once the regulatory uncertainty is cleared, and native digital assets become possible, traditional exchanges can be expected to embrace tokenisation. This is happening already. Exchanges that are taking part in the DLT Pilot Regime, the regulatory sandbox launched within the EU on 23 March 2023 and overseen by the European Securities and Markets Authority (ESMA), offers participants multiple exemptions from the provisions of the CSDR.

Is the indifference of traditional exchanges towards tokenisation a failure of imagination? 

By seeing regulatory uncertainty as a constraint, traditional exchanges are calling in effect for a replication of the existing system. They struggle to envisage a capital market without the conventional infrastructure of CSDs and central counterparty clearing houses (CCPs), the surrounding carapace of regulatory permissions and the prevailing fiat currency division of cash between central bank money and commercial bank money. By their implicit acceptance that tokenisation must accommodate itself to the status quo and by expecting the tokenised future to imitate rather than transform the current system, incumbent exchanges hobble their ability to formulate strategies for a tokenised future.

Have traditional exchanges failed to identify a tokenisation model that is commercially viable?

Certainly, the systems and infrastructural investment required to move the high volumes of equity issuance and trading in the developed markets on to blockchain networks is immense. Nor is the technology enough. Exchanges face the further burden of investing to generate liquidity. In the United States, for example, where tokenisations have taken advantage of Rule 504 of Regulation D (Reg D) of the Securities and Exchange Commission (SEC) – which allows companies to raise up to US$10 million in securities within a 12-month period without full registration of the offering with the SEC – liquidity is intrinsically hard to generate, because investors are subject to a 12-month holding period before they can resell the tokenised securities.  Furthermore, the benefits within reach, such as round-the-clock trading, real-time atomic settlement, operational cost savings and more efficient asset servicing, do not yet promise a sufficient return to warrant making the investment. Indeed, real-time settlement risks inflating costs if it reduces the scope for netting transactions and increases the number of transactions that settle cash and assets gross. The end-state, of peer-to-peer trading between issuers and investors without intermediation, is too remote to influence the behaviour of exchanges now.

Are the traditional capital markets too efficient?

The public bond and equity markets function well. New issuers and issues are accommodated efficiently. The markets are large, the securities are accessible and transferable, transactions are agreed in microseconds and settlement is secure. But the main reason traditional markets appear relatively efficient is that token markets are struggling to prove they can deliver meaningful value. Token markets are plagued by unpredictable costs such as surges in gas fees; asset servicing deductions charged by smart contracts; frequent Layer One blockchain downtimes; the need to purchase from vendors the services that facilitate interaction with multiple blockchain protocols; and a lack of standardisation across token specifications, data “oracles” and digital asset exchanges as well as the underlying blockchain protocols. Institutional experiments with blockchain are conducted largely on permissioned networks without disintermediation, when capturing the benefits depends almost entirely on peer-to-peer transfers on public networks. Firms that aspire to service tokenised markets as brokers, market makers and custodians also incur considerable costs clearing regulatory hurdles to secure a licence to operate as a “virtual asset service provider” (VASP), even if they are already meeting the same or sterner tests in another part of their business.  So it is a challenge for tokenisation, in its current state of development, to bring measurable benefits to the public markets. This, rather than the intrinsic efficiency of public markets, is why tokenisation pioneers are focused on the alternative funds markets and the markets in privately managed assets, where the assets are demonstrably harder to access, trade and transfer with current systems and infrastructure.

Is tokenisation technology too expensive for exchanges and their users to deploy?

Tokens traded on blockchain networks face several technological obstacles. They cannot match the transaction speeds achieved by traditional exchange technologies. Interoperability between blockchain networks, and between blockchain networks and traditional markets, is limited. Cost savings over current methods have proved elusive. At present, the blockchain infrastructure cannot compete with the traditional securities market infrastructure. But blockchain technology is closing the gap with traditional markets, so the technological barriers to adoption are being cleared. 

Is the lack of fiat currency on-chain a barrier to engagement for traditional exchanges?

It is, in the sense that their users are fiat currency based. However, institutional quality Stablecoins are now available from payments service providers such as PayPal and Stripe as well as Paxos, so the problem is being solved. As on-chain forms of cash gain acceptance, operating a traditional stock exchange that settles transactions off-chain through the conventional banking system will become an increasingly irksome and costly point of friction for users. User preference for digital forms of cash could prove to be the instrument that drives adoption of tokenisation by traditional exchanges.

Are issuers letting exchanges off lightly on tokenisation?

In theory, tokenisation enables issuers to reach new investors, especially across national borders. So far this has appealed mainly in privately managed and specialist areas, such as tokenisation of real estate (where developers seek liquidity by selling to retail investors) or reinsurance contracts (where insurers as issuers are eager to reach international investors). Transaction volumes in these issues are low, even when technology vendors add interoperability for assets listed on multiple exchanges. In Germany, corporate issuers such as KfW (which issued in December 2022, July 2024, October 2024 and January 2025) and Siemens (which issued in February 2023 and September 2024) have issued bond tokens on to public blockchains under the German Electronic Securities Act (Gesetz über elektronische Wertpapiere, or eWpG). But equity tokens remain the preserve of smaller companies prepared to experiment with novel security token platforms, usually as an alternative to crowd-funding. Large corporations, by contrast, continue to believe that they can maximise distribution by listing conventional securities on large traditional exchanges. They are concerned that digital asset exchanges will fragment liquidity in their securities, causing them to be mispriced, and so potentially raising their cost of capital. And traditional exchanges have no incentive to encourage them to behave differently, since they earn handsome listing fees from large corporations. Digital twin tokenisations of the kind launched so far – in which the security continues to exist in analogue form, and investors are free to choose between the digital and the analogue versions – have done little to change issuer attitudes. Experience with “wrapped” equities traded on blockchains also shows liquidity remains with traditional exchanges and multi-lateral trading platforms (MTFs).

Are exchanges failing to engage with end-investors such as sovereign wealth funds, pension funds and insurers?

Institutional end-investors are cautious about investing in digital assets because law and regulation is not yet settled. They do not trust smart contracts to pay their entitlements. They are not convinced digital asset custodians will make them whole if their assets are stolen or lost. This is partly because independent, bank-owned custodians are still a rarity, and partly because the right combinations of regulated exchanges (to buy and sell the tokens) and regulated custodians (to safekeep the tokens) are hard to achieve in such a fragmented marketplace. In the United Kingdom, pension funds also incur additional consultancy fees if they invest in any asset class that is not listed on a public exchange, which inevitably makes them less adventurous. This disincentive will persist until tokenised assets are recognised by law and regulation as an acceptable asset class for pension funds to invest in without taking advice. In the meantime, one catalyst that exchanges could use to encourage engagement by end-investors is cash. Tokenisation offers end-investors convenient access to higher-yield alternatives to bank deposits as a way of holding cash or cash collateral margin payments. Tokenised money market instruments or money market funds are alternatives available already. Tokenisation can also help end-investors lend tokenised cash or money market instruments in the securities financing markets to generate additional revenue. If tokenisation means they collect a yield pick-up, or work existing assets harder, end-investors will engage with tokens. There is still a need for education too, because even some otherwise sophisticated end-investors still struggle to distinguish between cryptocurrencies and security tokens. Likewise, insurance-linked contracts, despite their long track record, lack of correlation with other asset classes and enthusiastic recommendation by the legendary Warren Buffett, remain obscure to most institutional investors in their conventional form, let alone in tokenised form.

What other potential client groups might be interested in working with exchanges on tokenisation?

Stablecoin issuers investing their reserves in tokenised money market funds are one target. Corporate treasurers using Stablecoins to hold cash and make payments are another. Decentralised Finance (DeFi) applications (dApps) that offer users lending and borrowing or asset management services could also play a role in attracting institutional money to the token markets.  Aave Labs, for example, has launched an initiative called Horizon, which aims to encourage institutions to trade tokenised real-world assets by giving them easier access to Stablecoins to use as cash on-line, secured by tokenised money market fund shares posted to Aave as collateral.