Tokenized private stocks have a fundamental problem | Opinion

Tokenization is one of blockchain’s applications, proving truly disruptive in its utility and scale. Real-world assets such as bonds, art, and even real estate are fractionalized and digitalized as tokens recorded on blockchain’s private ledgers, becoming tokenized investments and part of a transparent system of ownership. This increases accessibility to typically ring-fenced assets and pulls in greater liquidity by making it easier for investors to access and invest in these tokenized assets — at any time.

Considering the above, it is not surprising that tokenization is now being applied to private company shares. At first glance, it makes sense; private companies can yield large returns and unique investment opportunities, so simply adding them to a blockchain should, in theory, unlock capital in previously untouchable markets. The hypothesis is that tokenized private stocks will enable 24/7 trading, allowing public access to a greater share of the world’s return-generating assets.

Unfortunately, the reality is less appealing. Instead of tokenization making private stocks more accessible and transparent, investors are presented with digital wrappers on top of an opaque, fragmented, and illiquid trading system.

This is a major step back from the original purpose of tokenization. However, there is still time to course correct — the RWA community must rally around its fundamental principles to ensure that future adoption achieves the democratising aims of tokenization.

Tokenized private stocks lack real equity

The driving force behind the tokenization of private stocks is the democratization of access to high-value assets and the elimination of gatekeepers. The hope is that retail investors, buoyed by opportunities to invest in Silicon Valley unicorns or pre-IPO tech firms, would be quick to support the tokenization of private stocks.

But the truth is that retail investors who purchase tokenized private stocks would only be buying into locked-up instruments with no guaranteed exit, few investor protections, and unclear rights to underlying assets. In their current form, tokenized private stocks are over-engineered, introducing complexities around regulation and uncertainty around the custody of the underlying stock.

Properly tokenizing private companies

Given the aforementioned problems with tokenized stocks, it would not be unreasonable to expect the RWA community to abandon them altogether and for financial regulators to prohibit them completely. However, such actions might be too heavy-handed and drastic. Rather, we need to revisit the infrastructure underpinning tokenized private stocks.

If platforms want to uphold basic principles of investment while tokenizing currently private companies, they must treat their platforms as a middle ground between complete privacy and a public listing. Three base improvements are necessary for any platform attempting to properly tokenize private stocks:

1. Equity ownership rights — legally enforceable ownership that provides, at a minimum, economic rights (the ability to transfer ownership and receive dividends).
2. Traceability — clear records of previous ownership, market participants, and token holder rights listed on the blockchain.
3. Support from private companies — clear endorsement from the listed private companies, ensuring that investors are not put off by competing public statements.

Tokenization is gaining traction

Outside of private stocks, tokenization has proven its credibility as a mechanism of accessing high-value, yield-generating assets that were previously inaccessible to many. Take the tokenized real estate market; worth $3.2 billion in 2024, current estimates predict that the market will grow 21% year-on-year and reach $19.4 billion in 2034. Real estate investment is traditionally opaque, paper-based, and inefficient — characteristics that in fact lend themselves perfectly to market transformation through tokenization, with fractional investments and digitalisation democratising access to the property market on a traceable blockchain.

Without the underlying principles of democratization and traceability, tokenized private stocks will eventually be exposed for what they truly are: a digital wrapper on an inaccessible asset. Their current form is not decentralization; it’s window dressing.

But tokenized stocks don’t have to remain this way.

If we can create clear ownership structures that link tokens to legitimate legal rights for investors, establish unified secondary markets with tangible liquidity, implement investor protections, and, most importantly, gain the consent of the companies involved, tokenized private stocks can be a marquee success for the crypto industry.

Tokenized private stocks can become a uniquely powerful tool for investors, unparalleled by traditional instruments. But only if we stop pretending the current model works. By reimagining these assets as stepping stones to public markets, we can bring trust, access, and efficiency to a corner of finance that desperately needs it. Anything less risks undermining the very credibility of tokenization itself.