Tokenization Standards: The Missing Link for Institutional Adoption

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Intro

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Tokenization—converting real-world assets (RWAs) into digital tokens on blockchain networks—redefines financial markets, making transactions more efficient and unlocking new opportunities for asset ownership. By automating processes, reducing transaction costs, and improving liquidity, tokenization reshapes how assets are issued and traded. The market is projected to reach $16.1 trillion by 2030, growing at a 50.1% CAGR from 2022 to 2026.  

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However, regulatory uncertainty and fragmented token standards remain significant hurdles to mainstream adoption. Transparent, standardized compliance frameworks are essential for financial institutions and asset managers to embrace tokenization fully.

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However, regulatory uncertainty and fragmented token standards remain significant hurdles. Standardization and interoperability will be key to unlocking tokenization’s full potential.

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This article summarizes the key takeaways of Nethermind’s and PwC Germany’s report, Tokenization Standards: Taming the Regulatory Menagerie, which provides a deep dive into how token standards influence compliance, security, and interoperability.

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For a deeper analysis, download the full report here.

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Key Takeaways

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1. Tokenization is Reshaping Financial Markets

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Tokenization enables fractional ownership, making previously illiquid assets—such as real estate, private equity, and regulated securities—more accessible. By leveraging smart contracts, tokenized assets can be traded efficiently, settled faster, and automated for compliance. This shift reduces reliance on intermediaries, lowers costs, and enhances liquidity in traditionally rigid financial markets.

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2. Regulation is Both a Challenge and an Enabler

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While MiCAR (Markets in Crypto-Assets Regulation) provides a structured regulatory framework for crypto assets in the EU, it does not cover tokenized financial instruments. Instead, these assets fall under MiFID II (Markets in Financial Instruments Directive II), a broader financial regulation designed to enhance market transparency, investor protection, and compliance standards.

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This regulatory split creates complexity and leads to a fragmented compliance landscape across jurisdictions. While regulatory clarity will unlock institutional adoption, the lack of global standardization continues to pose challenges for financial institutions looking to expand tokenization initiatives.

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3. Token Standards Determine Compliance & Market Fit

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Ethereum token standards dominate the tokenization space, particularly ERC-20, which underpins most fungible token transactions. However, traditional ERC-20 tokens lack built-in compliance features, making them unsuitable for regulated financial markets.

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• ERC-1400: Designed for security tokens, integrating KYC (Know Your Customer), AML (Anti-Money Laundering), and transfer restrictions to meet regulatory requirements.
• ERC-3643: A compliance-focused token standard that embeds identity management and regulatory controls into each transaction, ensuring only verified participants can trade tokenized assets.‍
• CMTAT: A Swiss-aligned token standard that adheres to Swiss financial regulations but requires adaptation for broader global adoption.

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4. Compliance-Driven Token Standards Are Gaining Adoption

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Institutions are increasingly turning to compliance-aware token standards, such as ERC-3643 and ERC-1400, to ensure regulatory adherence while maintaining efficiency. These standards embed identity verification, investor protection, and transfer restrictions, aligning with institutional-grade security token requirements.

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A hybrid approach combining on-chain automation with off-chain compliance verification is emerging as the preferred model. This enables institutions to balance regulatory compliance with blockchain efficiency.

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The Road Ahead: Standardization & Interoperability

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Standardization and interoperability are essential for tokenization to scale across financial markets successfully. A lack of cross-chain compatibility and jurisdictional regulatory alignment limits widespread adoption.

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• Universal token standards will enable greater regulatory harmonization and reduce market fragmentation.
• Zero-knowledge proofs (ZKPs) and privacy-enhancing technologies will be critical in allowing institutions to meet security and compliance requirements while maintaining transactional confidentiality.
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To realize tokenization’s full potential, regulators, issuers, and technology providers must collaborate to establish scalable, compliant token standards. Interoperability and regulatory harmonization will be the key drivers of institutional adoption, ensuring that tokenized financial markets operate within a secure, efficient, and compliant framework.

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Download the full report to explore how token standards are shaping the future of digital asset markets.