Tokenization Needs a Better Business Case

By Moish Peltz and Kyle Lawrence

For years, bringing real-world assets on-chain has been one of crypto's defining ambitions. After years of pilot programs and proofs of concept, institutional adoption appears to be gaining real momentum.

BlackRock's tokenized money market fund, BUIDL, has become one of the largest tokenized Treasury products on the market. Franklin Templeton continues expanding its OnChain U.S. Government Money Fund, while firms including Apollo Global Management and Hamilton Lane have partnered with Securitize to tokenize private credit and private equity investments. The appeal is straightforward: blockchain infrastructure promises faster settlement, greater automation, improved collateral mobility, and lower operational costs than many existing financial systems.

But amid the enthusiasm, one question often receives surprisingly little attention: Why does this asset actually belong on a blockchain?

That question sits at the center of a recent conversation on the Block & Order Podcast with Panther Hollow Ventures founder Eric Swartz. While much of the industry continues debating how quickly every asset class can move on-chain, Swartz argues builders should first establish whether blockchain infrastructure meaningfully improves the product they are offering. As he put it, "Why would someone want to bring this on-chain? What's the purpose?... It can't be just because it's magical." 

 

Technology is not a business case

The appeal of tokenization is easy to understand. Distributed ledger technology can reduce settlement times, automate reconciliation, improve collateral management, and make ownership records easier to track across counterparties. Those efficiencies become particularly valuable in markets where financial institutions already spend significant resources on post-trade processing.

That helps explain why many of the earliest institutional use cases have centered on relatively standardized financial products. Tokenized Treasury funds, repos, and money market instruments already operate under well-established legal frameworks, involve frequent settlement activity, and rely on extensive operational infrastructure. Even modest reductions in settlement risk or administrative costs can create meaningful economic value.

But not every proposed tokenization project offers those same advantages. Many companies have marketed tokenized real estate, private equity, collectibles, and other traditionally illiquid assets as a way to increase liquidity through fractional ownership. A digitally represented asset is still subject to the same economic fundamentals that determine whether buyers and sellers exist in the first place.

Simply issuing a token representing ownership does not automatically reduce costs, improve liquidity, or create new demand. Without a clearly defined operational benefit, blockchain infrastructure risks becoming an additional layer of technological complexity rather than a meaningful improvement.

Some markets are easier to move on-chain than others

Swartz argues builders should focus on products where blockchain infrastructure solves an existing operational problem instead of attempting to reinvent financial markets wholesale.

Markets such as repurchase agreements and securities lending illustrate that point. These businesses operate on relatively thin margins, require significant back-office coordination, and involve constant collateral movement between counterparties. Automating portions of those workflows can directly improve efficiency while preserving the underlying economics of the transaction.

The calculus looks different for many private market assets. Although firms including Apollo, Hamilton Lane, and Securitize have made significant investments in tokenized private markets, tokenization itself does not eliminate the legal restrictions that make many of those assets relatively illiquid. Securities sold under exemptions such as Regulation D remain subject to transfer restrictions and investor eligibility requirements regardless of whether ownership is recorded through a traditional transfer agent or on a blockchain. The technology changes how ownership is recorded. It does not necessarily change who is legally permitted to own or transfer the asset.

Compliance remains one of the largest obstacles

That distinction is easy to overlook amid excitement around tokenization. Most tokenized securities remain subject to the same legal obligations as their traditional counterparts. Securities registration requirements, accredited investor rules, know-your-customer obligations, anti-money laundering requirements, sanctions screening, custody rules, and broker-dealer regulations continue to apply unless legislation or regulation specifically provides otherwise.

Those realities help explain why many institutional blockchain initiatives have emphasized permissioned infrastructure rather than unrestricted public trading. JPMorgan's Kinexys platform, the Canton Network, and several tokenized fund offerings restrict participation to approved counterparties or incorporate compliance controls directly into the underlying infrastructure. Rather than replacing existing regulatory requirements, they seek to automate compliance with them.

Swartz is skeptical that many public-chain tokenization proposals adequately account for those realities. "Wanting RWAs to trade on crypto rails is just very unrealistic," he said. "It's just obvious non compliance in my view." 

Whether one agrees with that conclusion or not, it reflects an increasingly common institutional approach. Many of the largest financial institutions entering the space are not attempting to recreate permissionless crypto markets. Instead, they are adapting blockchain technology to fit within existing regulatory frameworks.

What legislation doesn’t solve

Some market participants expect pending market structure legislation to resolve many of these questions. It almost certainly will not.

Legislation may clarify which regulator oversees particular digital assets or establish new statutory frameworks for tokenized securities. It is unlikely to answer how transfer restrictions should operate on-chain, how existing securities exemptions apply to programmable assets, how blockchain-native transfer agents should function, or how regulators will supervise new market infrastructure. Those questions will largely be resolved through agency rulemaking, examinations, no-action guidance, enforcement actions, and litigation.

That implementation process has always been part of financial regulation. As Swartz observed, "There's a process of creating the rules and then there's a process of figuring out how to comply with the rules." 

Builders planning products around assumptions of immediate legal certainty risk underestimating how financial regulation actually develops. Even after new legislation passes, firms, regulators, and courts will spend years determining how those rules apply in practice.

Building infrastructure for existing markets

None of this is meant to diminish the potential of tokenization. Institutional adoption has progressed further over the past two years than at any point in the industry's history, and major financial institutions are committing real resources to bringing portions of traditional finance on-chain.

The projects most likely to succeed, however, may not be the ones attempting to tokenize the broadest range of assets. They are more likely to be the ones that begin with a specific operational problem and can demonstrate that blockchain infrastructure produces measurable improvements in cost, efficiency, settlement, or collateral management while remaining compatible with existing legal requirements.

Financial institutions, Swartz argued, are not looking for entirely new financial products. Instead, "they want you to faithfully and very, very, very, very accurately reflect every underlying rule from these very well developed templatized documents."