What are the drawbacks of tokenized assets?
Put most directly, a tokenized asset is something one can own whose ownership has been made trackable through a digital representation on a blockchain network. A full explanation for what tokenized assets are can be found here. More assets are being tokenized every day. Existing tokenized-asset markets are growing, and new categories keep appearing. But there are still real headwinds preventing every asset from moving onchain. In practice, the challenges cluster around a few areas: regulation, custody, protocol risk and user experience.
Before diving into those, it helps to name a few key ideas that keep showing up.
Key concepts
- •Regulation: This is the set of laws, rules, and supervisory practices that govern how financial products can be issued, sold, and traded. For tokenized assets, this often means securities law, commodities law, banking law, and payments regulation, all of which were written long before blockchains existed.
- •Securities: A security is a financial instrument like a stock, bond, fund share, or similar product that represents an investment with an expectation of profit. If a tokenized asset is treated as a security, the issuer usually needs licenses or exemptions, and the token’s sale and secondary trading fall under strict rules.
- •Custody: This is the safekeeping of assets on behalf of others. In tokenization, custody often means an entity holding the underlying asset (dollars, gold, real estate, etc.) while issuing tokens that represent claims to it. The custodian’s reliability and legal setup are critical to whether the token is truly backed.
- •Off-chain enforcement: Off-chain enforcement is everything that has to happen outside the blockchain, offchain, to make the token’s promises real. This includes contracts, corporate structures (like LLCs or trusts), court systems, and regulators that recognize and enforce the link between the token and the underlying asset.
- •Proof of reserves: Proof of reserves is a method for showing that an issuer or custodian actually holds the assets they claim to hold. It can involve attestations from auditors, onchain transparency, or cryptographic proofs. It works best for fungible assets held in pooled form, like stablecoins or tokenized treasuries.
- •Liquidity: Liquidity is a measure of how easy it is to buy or sell an asset without dramatically moving its price. Highly liquid tokenized assets can be exited or entered quickly, illiquid ones might trade rarely or at steep discounts.
- •User experience (UX): User experience is the way the whole system feels from the user’s perspective: how easy it is to create a wallet, keep track of keys, pay gas fees, understand risks, and recover from mistakes. For mainstream adoption, UX matters as much as the underlying cryptography.
Regulation
A substantial share of assets that could be tokenized are, in the eyes of regulators, securities or otherwise regulated products. Tokenized stocks and tokenized treasuries often map directly onto existing categories of financial instruments. That means they inherit all of the rules that apply to their off-chain equivalents, even if they now live on a blockchain.
If a token is treated as a security, the issuer may need to register it or rely on specific exemptions. Tokens might only be allowed to trade among accredited or qualified investors. Secondary markets may need licensed intermediaries, and most venues are required to perform KYC (Know Your Customer) and AML (Anti-Money Laundering) checks. None of this is impossible to do onchain, but it adds friction, especially for small issuers or experimental products.
This is a key reason why tokenized stocks and some other financial assets have rolled out more slowly than the underlying technology would allow. It’s not that blockchains can’t represent those assets; it’s that the legal and compliance frameworks move on a different timeline than technology does. As of late 2025 the regulatory framework has become more clear and tokenized stocks have been actively traded on the Solana blockchain.
Custody
Custody is another major bottleneck. For many tokenized assets, especially real-world assets and some financial products, there has to be an issuer in the middle physically or legally holding the underlying asset. For a stablecoin, that might be a company holding dollars or short-term government bills in bank and custody accounts. For example, Circle the USDC issuer.
This setup is workable as long as the custodian is well run, transparent, and legally robust. The moment that custodian fails, lies about reserves, gets hacked, or is shut down by a regulator, the onchain tokens value changes. It may still exist in wallets and protocols, but it may no longer be redeemable at par or at all. In that case, the token stops being a claim on the underlying asset. For simpler assets like stablecoins and treasuries, the industry has developed tools to address this risk: proof-of-reserves and regular audits. These don’t eliminate risk, but they make it more visible.
Protocol Risk
Another drawback is protocol risk, this could be from the underlying blockchain or a protocol someone is interacting with. Bugs or design flaws in token contracts, bridges, and DeFi protocols can lead to sudden and irreversible losses. While security practices have improved, exploits still happen. For institutions handling client funds or regulated capital, that risk can be a strong deterrent.
A far less common but still real risk is to the chain itself. If a particular chain loses usage, developer support, or community interest, tokenized assets on that chain can become stranded. They may technically exist, but if there are no active markets or bridges, it becomes difficult and expensive to trade or move them. This is especially concerning for long-lived assets like real estate or long-duration bonds, where the lifetime of the asset and the lifetime of the chosen chain may not match.
User Experience
A very basic issue is bad user experience. The crypto space is still relatively young. The core ledger and computation layers of major blockchains have been battle-tested, but the day-to-day experience for normal users often still feels confusing for the average user.
Managing wallets and private keys is one of the biggest hurdles. For many people, the idea that “if I lose this string of words, my assets are gone forever” is understandably intimidating. Paying gas fees, picking networks, bridging assets, and dealing with transaction failures are all normal for crypto-native users but feel foreign and high-stakes for newcomers. There are many stories of people who lost their keys to wallets with tens of millions in assets, now lost forever.
Summary
Tokenized assets sit squarely at the intersection of crypto, traditional finance, and real-world law. The upside is significant: more accessible markets, fractional ownership, global participation, and composable financial infrastructure. There are still major headwinds namely, unclear regulation, custody, protocol risk and user experience.