What Is tokenization? Ownership vs. exposure explained

What is tokenization?

“Tokenization” is one of the most talked about concepts in finance today, but it can mean different things depending on how it’s used.

At a high level, tokenization is a way to record ownership of, or exposure to, assets as digital tokens, allowing them to be programmed, traded, settled, and recorded on a blockchain.

Tokenization aims to expand how financial assets are accessed and exchanged. By placing assets on blockchain infrastructure, tokens can potentially enable 24/7 trading, faster settlement, and access to more investments for more investors.

But all tokenized assets are not the same.

What are the different types of tokens? Ownership vs. Exposure

When it comes to tokenized assets – including stocks, bonds, and exchange-traded funds (ETFs) – investors should understand the important differences between different types of tokens, which can impact the performance of the investment and the investor’s experience.

Today, tokens are designed to provide either economic exposure to an underlying asset (i.e., participation in the price movements and distributions) or actual asset ownership (i.e., economic exposure and beneficial ownership rights, like voting), and can be grouped into two broad categories:

• Tokenized price representations (TPRs), which provide economic exposure,
• Tokenized ownership, which conveys ownership rights as well as economic exposure.

We believe understanding the different types of tokens is key for investors considering tokenized assets.

Tokenized price representations: Digital access to economic exposure

Some tokens are created to allow investors to gain exposure to the price movements of an underlying asset, such as a stock, bond, or an ETF, without actually owning that asset.

In other words, you own the token, but not the underlying asset that the token provides exposure to.

These tokenized price representations (TPRs) can offer investors a convenient way to access economic exposure to an underlying asset in a digital format, including through new platforms and trading environments, like crypto exchanges and decentralized finance (DeFi) protocols.

However, investors in TPRs should be aware they do not own the underlying asset (e.g., the stock, bond, or ETF the TPR references).

Instead, they own a token that is designed to track the underlying asset’s value. As a result, investors in TPRs may not receive all the same rights and benefits as an owner of the underlying asset, such as voting rights, shareholder protections, or some or all distributions.

This means that a TPR of an ETF may provide a token holder with exposure to the value of the ETF, but the token holder is not a shareholder of the ETF.

In addition, TPRs often rely on third-party arrangements that may not involve the issuer to provide this exposure. Because they may trade in separate markets than the underlying assets (e.g., on a crypto exchange vs. a traditional stock exchange) with no “direct” link to the underlying asset, prices of TPRs can diverge from the value of the underlying asset, particularly during periods of lower liquidity or when traditional markets are closed.

In short, TPRs provide economic exposure, but not asset ownership.

Tokenized ownership: Digital access to ownership rights

Another form of asset tokenization brings traditional investment products, like money market funds, stocks, and ETFs, onto the blockchain. In this model, the token purchased by investors represents an ownership interest of the asset itself, giving investors access to familiar investments in a new format.

This means that holders of these tokens are owners of the asset and typically receive the same economic and governance rights as investors in the “traditional” shares.

In other words, tokenized ownership provides ownership of assets, delivered via a new technological format from today’s traditional financial infrastructure.

Why structure matters for tokenized assets

While “tokenization” may be used as a broad term, investors should understand the important differences between categories of tokens because they can impact the performance of the investment and the investor’s experience.

For example, TPRs and asset ownership tokens of the same reference asset may trade at different prices during certain market conditions.

The structure of a token can shape both its risks and its outcomes. When considering the form of a tokenized asset, investors should take care to understand (among other things):

• The economic and ownership rights the token grants an investor (e.g., distributions and proxy voting);
• Whether purchasing the token exposes an investor to additional credit risk of a third party who is not the issuer of the underlying asset;
• How closely the token tracks the value of the underlying asset;
• How easy it is to buy or sell the token (and at what cost); and
• How market conditions might impact types of tokens differently

Key features: TPRs vs. tokenized ownership

The above table is for illustration purposes only. It serves as a general summary and is not exhaustive. It does not apply to every single product.

Conclusion

The bottom line: Tokenization is opening new ways to access financial markets, but not all tokenized assets are the same.

Some tokens provide only economic exposure, while others confer full ownership. Understanding this distinction is critical for evaluating the risks and rights of these tokens, as well as how they may behave in different market conditions.