The role of tokenization in secondary markets: hype or game-changer?

Tokenized assets do not start in the secondary market. They usually begin in the primary market, where an issuer creates, mints, or distributes new tokens. After that, existing holders may trade those tokens with other buyers through a secondary venue.

That split matters because primary and secondary markets serve different roles. In the primary market, an issuer may raise capital, distribute new tokens, or set the initial terms. In the secondary market, the price can fluctuate based on supply, demand, liquidity, investor sentiment, and broader crypto market dynamics.

This is different from mining. Bitcoin, for example, uses mining as part of its issuance mechanism. Tokenized securities or tokenized private assets are usually created through a legal and technical mint process tied to an issuer, asset, or platform. That difference is important: tokenization is not just about creating a coin. It is about connecting a digital token to real-world rights, compliance rules, and transfer limits.

Blockchain technology offers a transparent and timely way to store cryptocurrency and other digital ownership tokens. The blockchain is decentralized, which basically means transactions on it don’t need middlemen. As such, it can streamline current processes, reduce costs, and increase liquidity. 

A widely-known example of “digital ownership tokens” would be NFTs, which surged to popularity in 2021 as a blockchain-based certificate of ownership and proof of provenance in the digital art market. However, the tokenization use case extends far beyond cartoon ape JPEGs. 

Investment banks like BlackRock, Goldman Sachs, and HSBC are already tokenizing funds and bonds. Tokenization uses smart contracts, or programmable code on the blockchain, to automatically update ownership records when they are bought and sold. That means the potential for instantaneous settlements and reduced complexity in the secondary markets. 

McKinsey estimates the total market cap of tokenized assets could reach $2 trillion by 2030 — and that doesn't include crypto, stablecoins, or CBDCs. As tokenization grows, ownership of all kinds of assets could move to the blockchain. 

These could include public secondary assets like mutual funds, ETFs, and securities, as well as private secondaries, such as pre-IPO stock. In fact, McKinsey sees $1 billion potential in private secondary markets, and another $1 billion in alternative assets.

Once a token exists, the next question is where it can trade. In crypto markets, trading may happen through centralized exchanges, decentralized exchanges, OTC desks, or more controlled platforms built for regulated assets.

Centralized exchanges

Centralized exchanges act as an intermediary between buyers and sellers. Platforms like Coinbase or Binance can make it easier to deposit fiat currency, buy cryptocurrencies, and trade tokens through a familiar account-based experience.

For liquid assets like bitcoin or ethereum, a centralized exchange can support deep order books, faster execution, and visible market cap data. For tokenized securities, the picture is more limited. A regulated asset may not be able to trade freely on a general-purpose crypto exchange because investor eligibility, transfer restrictions, and securities rules still apply.

Decentralized exchanges

A decentralized exchange, or DEX, uses smart contracts instead of a central intermediary. On networks like Ethereum, a DEX can allow holders to trade through on-chain liquidity pools or other automated mechanisms.

That model is powerful for many cryptocurrencies, but it does not always fit private assets. A tokenized private security may still need compliance checks before any exchange of ownership. That means open DEX trading can create problems if the token represents a regulated asset with transfer limits.

OTC and compliant marketplaces

Some tokenized assets may trade through OTC trading or permissioned platforms. This can be especially relevant when the asset is less liquid, the transaction is large, or the issuer needs to control who can become a holder.

For tokenized private markets, the more realistic path may be a compliant platform that combines digital settlement with identity checks, eligibility rules, issuer permissions, and regulatory oversight. In that setting, the exchange mechanism is not just technical. It is also legal and operational.

Stablecoins offer a useful example of how primary and secondary markets can interact. A fiat-backed stablecoin is generally designed to track a currency such as USD. In the primary market, approved customers may deposit dollars with an issuer, and the issuer may mint and distribute stablecoins. In the secondary market, holders trade those coins across crypto markets.

In normal conditions, arbitrage can help keep the stablecoin near its target value. If the coin trades below one dollar on an exchange, a buyer may purchase it at a discount and redeem it through the issuer, assuming redemption is available. If the coin trades above one dollar, new supply may enter the market and push the price closer to parity.

But stablecoins also show why tokenized markets are not frictionless. If redemption slows, banking rails are constrained, or confidence in the issuer weakens, secondary prices can move away from the target value. The token may still exist on-chain, but the market depends on trust, liquidity, reserves, and access to the primary market.

That lesson applies beyond stablecoins. Tokenized private assets may trade on a blockchain, but their value still depends on the quality of the underlying asset, the strength of the issuer, the rules governing transfer, and the depth of the buyer pool.

Market revolutions usually don't happen overnight, and indeed, there are several key hurdles in the way of widespread tokenization.

One of the biggest: regulation and compliance. Regulations vary by jurisdiction, and emerging tokenization projects need to meet strict securities, tax, and property laws. Tokens would also need to comply with regulations in each jurisdiction they are created, bought, and sold. 

On top of that, blockchain technology is still relatively untested, not to mention broad. In other words, there’s not just a blockchain, but a number of blockchains that run smart contracts, each with different security protocols, transaction speeds, and fees. Few institutional actors have fully explored the ins and outs of each, and interoperability — the way the blockchains talk to each other — is still evolving. So it’s not necessarily a question of “when” to start, but rather, “where”.

Another issue is pricing. Tokenization offers a way to trade non-traditional assets, but how do you determine their value? 

Fortunately, this particular problem is well on its way to being solved. Augment* enables better price discovery for private assets by connecting buyers and sellers of shares in pre-IPO companies. Augment's private secondary marketplace lets qualified investors track historical prices of private companies, providing a solid basis for valuations and deal-making. 

Finally, we reach what McKinsey calls the "cold start problem". It's a Catch-22 when innovating new products: you need significant liquidity and demand for investors and institutions to see value in tokenization. But that liquidity won't materialize until people take the plunge and fully embrace the new technology.

Crypto markets can move quickly. They also operate across venues that may not follow the same rules, controls, or disclosure standards. That can create risks around wash trading, thin-market manipulation, insider trading, and unreliable pricing signals.

For tokenized secondary markets to work at scale, investor protection matters as much as speed. A market needs clear rules around who can trade, how prices are displayed, how conflicts are managed, and how suspicious activity is monitored.

This is especially important for tokenized securities. Moving a security onto a blockchain does not remove the need for compliance. The Securities and Exchange Commission and other regulatory bodies may still regulate the offer, sale, and trading of tokenized securities, depending on the asset and transaction structure.

For private market investors, this is a key point. A faster exchange mechanism is useful only if the market is also fair, transparent, and controlled enough to protect buyers and sellers.

Another issue is pricing. Tokenization offers a way to trade non-traditional assets, but how do you determine their value? 

Augment aims to facilitate price discovery for private assets by connecting buyers and sellers of shares in pre-IPO companies. Augment's private secondary marketplace lets qualified investors track historical prices of private companies, which may help inform valuation analysis and deal-making.

Tokenization can make transfers faster, but it does not automatically create liquidity. A token can be technically transferable and still have very few buyers.

In liquid crypto markets, arbitrage can help improve pricing efficiency. If the same asset trades at different prices across exchanges, traders may buy on the cheaper exchange and sell on the more expensive one. That mechanism can narrow gaps and support price discovery.

Private assets are different. A tokenized private security may not be freely transferable across every exchange. The buyer may need to be approved. The issuer may restrict transfers. The platform may need to verify identity and eligibility before the trade can settle.

Those limits can weaken arbitrage. They can also cause prices to trade at a discount or premium depending on supply, demand, valuation, and market access. If there are many sellers and few buyers, the tokenized asset may trade below its latest valuation. If the company or fund is in high demand and supply is limited, buyers may accept a premium.

In other words, tokenization may improve the plumbing, but liquidity still depends on people. There needs to be a real buyer, a willing seller, a trusted exchange or platform, and enough confidence in the underlying asset.

Finally, we reach what McKinsey describes as the "cold start problem". It's a Catch-22 when innovating new products: you need significant liquidity and demand for investors and institutions to see value in tokenization. But that liquidity won't materialize until people take the plunge and fully embrace the new technology.

The evolution of new technologies is never straightforward. For example, today we think of railroads as a bedrock of American infrastructure, but it took decades to lay the tracks and perfect the technology. 

Tokenization has significant potential, particularly in private secondary markets, but the foundations are still developing. Clearer regulation, improved interoperability, and higher investor demand are all necessary before tokenization can fully take off.