How does tokenization affect asset liquidity?

Tokenization converts ownership rights in an asset into digital tokens recorded on a distributed ledger. This process can materially change liquidity by altering how assets are divided, transferred, and traded. Work by Philipp Sandner at Frankfurt School Blockchain Center explores how fractional ownership lowers the ticket size barrier for investment, expanding the pool of potential buyers and sellers. Greater participation can increase the frequency of trades and the depth of order books, improving liquidity for assets that were previously illiquid such as private equity, fine art, or real estate.

Mechanisms that change liquidity

Fractionalization is central. By breaking a single asset into many tradeable tokens, tokenization creates more tradable units and allows investors to enter or exit positions in smaller increments. Continuous, programmable settlement enabled by smart contracts reduces the time between trade and final transfer, lowering settlement risk and the need for large liquidity buffers. Peer-reviewed analysis and industry reports from the Bank for International Settlements and the International Monetary Fund identify reduced settlement times and automated market coupling as channels that can speed price discovery and compress bid-ask spreads. At the same time, new trading venues that operate around the clock can smooth intra-day liquidity patterns but also shift volatility into previously quiet hours.

Risks, causes and territorial consequences

Causes for tokenization’s rise include advances in distributed ledger technology, demand for access to alternative assets, and commercial initiatives by financial market infrastructures. Jon Frost at Bank for International Settlements has highlighted that while tokenization can increase market efficiency, it also introduces operational and legal complexities that affect effective liquidity. Fragmentation is a key consequence: tokens for the same underlying asset may exist on different platforms with different standards for custody and disclosure, which can split liquidity across multiple venues and create price divergence. Cross-border token trading raises territorial issues because securities laws, tax regimes, and investor protections vary significantly between jurisdictions, and regulators documented by the International Monetary Fund emphasize the need for coordinated frameworks to prevent regulatory arbitrage.

Human, cultural and environmental nuances

Tokenization can democratize access to assets that historically favored wealthy or institutional investors, enabling local residents to co-invest in community assets such as cultural sites or small-scale renewable projects. However, digital divides mean that benefits will be uneven, potentially privileging populations with better access to digital infrastructure and financial literacy. Environmental impacts also matter. Research at the University of Cambridge has quantified high energy consumption for some blockchain networks, so the net environmental footprint of tokenized markets depends on the choice of underlying infrastructure and consensus mechanisms.

Net impact on liquidity is therefore conditional. Where technical standards, custodial solutions, and regulatory clarity align, tokenization tends to enhance liquidity by expanding participation and reducing settlement frictions. Where fragmentation, legal uncertainty, or unsuitable infrastructure prevail, tokenization can fragment markets and create pockets of illiquidity, with real economic and territorial consequences for investors and communities.