TradFi: The Tokenization Tightrope

The siren song of Tokenized Real-World Assets (RWA) has become the dominant melody across the financial landscape. It represents the ultimate fusion of Wall Street’s capital and Silicon Valley’s cryptographic innovation, promising to unlock trillions of dollars in global capital, usher in continuous 24/7 trading, and eradicate the archaic settlement lags that plague traditional finance (TradFi).

RWA tokenization is not merely a technological upgrade; it is the blueprint for a programmable economy. Yet, despite this monumental potential and the aggressive entry of financial giants, the movement struggles to move beyond the sophisticated but contained proof-of-concept (PoC) stage.

This essay argues that the bottleneck is not fundamentally regulatory, though compliance remains critical, but architectural. The clash between TradFi’s legacy systems, built for delayed reconciliation and centralized oversight, and the blockchain’s ethos of real-time, deterministic code execution, presents a formidable hurdle.

To successfully cross this Tokenization Tightrope, the industry must bridge a profound divide in operational philosophy.

To dissect the complexity of this transition, we draw upon the expertise of industry leaders: Arthur Firstov, CBO of Mercuryo; Federico Variola, CEO of Phemex; Vivien Lin, CPO & Head of BingX Labs; Lucien Bourdon, Bitcoin Analyst at Trezor; Bernie Blume, Founder and CEO of Xandeum Labs; Patrick Murphy, Managing Director UK & EU of Eightcap; and Vugar, Chief Operations Officer (COO) of Bitget.

Their collective insights reveal that scaling tokenization requires nothing short of a complete structural re-engineering of how financial institutions manage risk, custody, and compliance.

The Architect vs. The Regulator: Scaling Beyond the Sandbox

The first challenge to be addressed is the pervasive belief that regulatory uncertainty is the chief antagonist of tokenization. While clear legal frameworks, such as the EU’s MiCA regulation or Germany’s eWpG, are essential for institutional comfort, the real impedance lies deep within the operational core of finance.

Patrick Murphy of Eightcap provides clarity on the current regulatory approach, emphasizing adaptation over radical rewriting:

“Tokenised real-world assets, whether real estate, bonds or other financial instruments, present an existing evolution in capital markets, but they don’t exist in a regulatory vacuum. What’s happening is that KYC/AML frameworks are now being adapted (as opposed to being rewritten) to account for this new form of ownership.”

Murphy adds that from a regulatory perspective, tokenized assets are typically treated as securities if they represent a claim on underlying financial value.

“What this means is that issuers and platforms must comply with existing securities regulations, including investor disclosure obligations and trading rules, even when the asset exists on a blockchain.”

Murphy confirms that KYC/AML obligations are definitely being extended to digital assets:

“Investors in tokenised assets will still need to be properly verified, and transactions will still need to be monitored for suspicious activity, just like traditional financial markets. I am seeing many platforms now integrating automated identity verification and blockchain analytics tools to ensure these standards are met without compromising the effectiveness that tokenisation offers.”

Arthur Firstov of Mercuryo frames the issue squarely as one of conflicting system design. He observes the high visibility of current pilots, such as BlackRock’s tokenized money-market fund or Robinhood’s experimentation with tokenized equities, acknowledging them as significant milestones. However, he categorizes them as self-contained ecosystems with minimal real-world interoperability.

“Right now, tokenization lives mostly in the proof-of-concept phase,” states Firstov.

“These are important milestones, but they’re still self-contained ecosystems with limited interoperability. The execution and compliance rails remain off-chain—meaning settlement, custody, and policy enforcement still depend on traditional infrastructure. You can wrap an asset in a token, but if the control logic runs off-chain, you haven’t solved for speed, automation, or composability.”

TradFi’s operational model is fundamentally incompatible with the blockchain’s instantaneous nature. Traditional systems rely on batch processing, manual sign-offs, and end-of-day reconciliation to confirm transactions. Blockchain, conversely, demands programmable, real-time logic.

Tokenization alone doesn’t modernize the operational rails-programmable custody and automated compliance are what actually bring TradFi closer to blockchain’s deterministic execution model

“Until institutions adopt programmable custody and automated compliance frameworks, tokenization will stay a pilot exercise rather than a live, composable market,” Firstov contends. “It’s not regulation slowing it down—it’s architecture.”

This complexity is further underlined by the necessity of building robust and trustworthy entry points for institutional capital. Vugar from Bitget emphasizes that for TradFi to move billions, the infrastructure must be unimpeachably secure and operationally reliable from the very first step.

Vugar (Bitget) adds:

“To scale tokenization into the multi-trillion-dollar market it promises to be, you need more than just a token standard. You need secure, battle-tested on/off ramps and institutional-grade access points. TradFi needs absolute certainty that their first exposure to the chain—the initial custody, the first settlement—is entirely bulletproof and regulators must see a clear, compliant path built into the core architecture.”

This architectural necessity leads to a philosophical impasse, particularly for Bitcoin maximalists and decentralization advocates. Lucien Bourdon of Trezor articulates this skepticism, questioning the fundamental value proposition of tokenized RWA. If the legal title and backing of the asset remain centralized, secured by paper contracts and court systems, not cryptographic consensus, does blockchain technology truly enhance decentralization?

“I’m skeptical of the RWA narrative,” Bourdon admits.

“Traditional platforms can modernize their systems to offer 24/7 trading without blockchain technology. These are still paper assets backed by centralized legal frameworks, and tokenizing them doesn’t fundamentally change that. When you’re trading centralized assets on centralized platforms, the trust model stays centralized regardless of the underlying technology.”

For tokenization to fulfill its promise, it must demonstrably solve a problem that simple infrastructure upgrades cannot. It must offer programmability and composability, the ability for different financial applications to seamlessly interact with and build upon the tokenized asset, which is something centralized databases inherently struggle to provide.

The Friction of Integration: From Data Feeds to Actionable Policy

The technical hurdles encountered when integrating massive, complex institutional frameworks with blockchain are more subtle than mere data migration. The core difficulty, as identified by Arthur Firstov, is transitioning from data on-chain to actionable finance on-chain.

He illustrates this using the example of data oracles, noting that high-quality, verified U.S. government economic data (GDP, PCE) can now be published directly to the blockchain via services like Chainlink. This is a monumental achievement in oracle reliability. However, Firstov explains why this changes little for a regulated entity:

“The biggest friction isn’t about putting data on-chain—it’s making that data operational within regulated systems. … From an institutional standpoint, that alone changes very little if custody, permissions, and risk systems can’t interact with it programmatically.”

To scale, every counterparty in a tokenized transaction, from the custodian to the settlement layer, must upgrade its mechanisms for handling cryptographic keys, policy enforcement, and KYC events.

Projects like Citi’s Regulated Liability Network (RLN) and JPMorgan’s Onyx show that tokenized settlement is possible, but scaling it requires every participant to have deterministic and composable systems.

The lack of composability is the central frustration for the crypto-native audience. The data exists, but the ability to act upon it is missing.

“You can have a smart contract that ‘reads’ GDP in real time, but you can’t have a regulated fund automatically rebalance its portfolio based on it,” Firstov observes.

“That’s the gap between data feeds and actionable finance—and it’s why onboarding TradFi still feels like stitching together two separate operating systems.”

Vivien Lin of BingX Labs reinforces this notion of systemic incompatibility, highlighting that the transition demands a massive re-architecture of operational norms:

“The biggest friction point is that bringing TradFi onto blockchain isn’t a simple plug-and-play but it forces everyone to rethink every layer of the process, from regulation to infrastructure.”

“These systems weren’t built with blockchain in mind, so everything from compliance workflows to data handling needs to be re-architected.”

Furthermore, the technological friction extends to human capital. Lin points out the steep learning curve required for institutional staff: “Understanding wallets, custody mechanics, and decentralized protocols still requires a foundational grasp of crypto.”

The transition is therefore not merely a technical migration, but a cultural and educational shift away from decades of established manual procedures.

The Paradox of Private Credit: Risk, Liquidity, and Data Integrity

The tokenization of historically illiquid assets, such as private credit, corporate debt, or structured real estate, represents the most aggressive play for RWA.

Patrick Murphy highlights the distinct impact of tokenization on both institutional and retail investors:

“For institutional investors, tokenisation introduces much more liquidity and tradability, allowing institutional investors to manage their exposure more dynamically. Meaning, they can enter and exit positions much more efficiently, monitor fractional ownership of their tokenised assets and diversify their holdings across smaller, different assets, reducing overall concentration risk.

“That being said, tokenised structures introduce new operational and technological risks, including custody considerations and a massive reliance on the platform’s governance.”

“For retail investors, tokenisation opens up access to asset classes that were previously out of reach due to high investment requirements. Fractional ownership lowers barriers to entry, enabling participation in real estate or even infrastructure projects with much lower capital requirements. This inevitably opens retail investors to risks such as illiquidity in secondary markets and regulatory uncertainty.”

However, as Vivien Lin cautions, this transformation is not without its own set of dangers, primarily stemming from the introduction of private assets into a volatile, high-speed environment:

“A huge risk in tokenization is that we’re taking assets that have historically been private and illiquid and introducing them into a new environment where their behavior under different market conditions is still largely untested,” she warns. “We don’t fully know how these assets will react when exposed to 24/7 trading, instant liquidity, and global participation.”

The risk is amplified by the sheer complexity of the underlying documents. To collateralize an on-chain private loan with RWA requires far more than just a token ID; it requires proof of creditworthiness, legal titles, employment history, and proof of address.

Bernie Blume of Xandeum Labs addresses this critical infrastructural gap:

“Tokenization of private credit or other illiquid assets is tough to go on-chain without more on-chain storage. For on-chain loans to get collateralized with real world assets, on-chain storage requirements (holding credit reports, titles, employment history, proof of address, etc) will explode. Xandeum set out to fulfill that need.”

This highlights the delicate balance: the rewards of tokenization (liquidity and accessibility) cannot be realized without solving the complex problem of secure, compliant, and massive-scale on-chain data storage and data privacy, which is necessary to back the asset’s value.

Private Chains: Sandboxes or Silos?

The most defining trend in current institutional exploration is the proliferation of private, permissioned blockchains (like those utilized by Onyx and GS DAP). These closed networks allow financial firms to experiment with smart contracts and tokenized settlement while retaining full control over participants and maintaining regulatory compliance.

The consensus is that these private chains function as necessary regulatory sandboxes, offering a controlled environment to build operational confidence. Arthur Firstov sees them as a crucial intermediate step.

“It’s both a bridge and a filter. Private, permissioned chains… serve as regulatory sandboxes,” he confirms.

“They let large institutions test programmable settlement without full exposure to the open internet. In the short term, they’re essential—you need those controlled environments to build operational confidence and compliance tooling.”

Vivien Lin agrees, viewing them clearly as a stepping stone:

“I see private, permissioned chains as more of a stepping stone than a threat. They give traditional financial institutions a controlled environment to experiment with blockchain technology while maintaining the compliance and oversight they’re used to. It’s a way to test how tokenization and smart contracts can work within existing regulatory frameworks before moving toward more open systems.”

However, the longer-term threat remains the creation of isolated liquidity silos, counteracting the very spirit of open finance. The global liquidity and network effects reside on public chains like Ethereum.

“Private chains are safe walled gardens; public infrastructure is the global market,” warns Firstov. He continues:

“But long term, the liquidity, transparency, and composability of public blockchains like Ethereum or Layer 2s such as Arbitrum and Base are what give tokenization real utility.”

However, the longer-term threat remains the creation of isolated liquidity silos, counteracting the very spirit of open finance. The global liquidity and network effects reside on public chains like Ethereum. Vugar from Bitget emphasizes that isolation defeats the purpose of tokenization entirely.

Vugar (Bitget) cautions:

“The ultimate value of tokenization is universal accessibility and deep liquidity, both of which are network effects of public chains. If every major bank builds its own silo, the whole point of RWA tokenization—creating a singular, global, 24/7 market—is lost. Permissioned chains are a necessary start, but they must eventually serve as compliant gateways to public networks, not as permanent barricades against them. We need bridges, not walls, to aggregate true liquidity.”

This ideological tension is vocalized by Federico Variola of Phemex, who emphasizes the responsibility to protect the decentralized core of the industry.

“As an industry, we must make a deliberate effort to prioritize and reward the builders who have shaped this ecosystem from the ground up,” Variola argues. “Although TradFi hybrids may offer attractive financial opportunities, we should remain mindful of the risk that such shifts could dilute the ethos that makes crypto unique.”

The true test of the private chain model will be interoperability. If they remain isolated, they merely automate an old, siloed system. If they build bridges to public infrastructure, they become the vital gateway for institutional capital to access the global market.

The Winning Architecture: The Era of Programmable Finance

The successful journey across the tokenization tightrope demands an architecture capable of merging the strict governance requirements of TradFi with the radical programmability of DeFi. The consensus is coalescing around a model that treats the rules of the asset as code, not just the asset itself.

Arthur Firstov outlines the key features of this “winning architecture”:

“The winning architecture will merge TradFi-grade governance with DeFi-grade programmability. That means self-custodial smart accounts with policy layers, automated settlement, and composable compliance.”

This involves integrating technologies like Account Abstraction (smart contract wallets) with policy frameworks, allowing institutions to enforce complex KYC/AML rules and trading restrictions directly within the code of the token and the account itself.

We are already witnessing the foundational efforts: SWIFT’s interoperability pilots using Chainlink to securely connect traditional banking messaging to public blockchains, and the experiments at BNY Mellon to manage both on-chain and off-chain assets using a single, unified policy framework. These initiatives are focused on making risk, reporting, and execution programmatic, eliminating manual intervention and end-of-day uncertainty.

“Once risk, reporting, and execution become programmable instead of manual, tokenization becomes infrastructure, not an experiment,” Firstov concludes. “The future isn’t just tokenized assets—it’s programmable finance that operates in real time.”

Ultimately, the tightrope walk is about confidence. TradFi needs to gain confidence in the security and regulatory compliance of decentralized code, while the crypto community needs confidence that the influx of institutional capital will not lead to the complete centralization of this new layer of financial infrastructure.

The winning model will be the one that minimizes friction, maximizes liquidity, and upholds the security and composability that only deterministic, programmable finance can provide. The tokenization era is not just about putting assets on a blockchain; it is about building the future financial machine from the ground up.