What Is Asset Tokenization & Could It Prevent Financial Crises?

In September 2008, Lehman Brothers filed for bankruptcy, marking the peak of the great recession. This collapse was largely driven by its exposure to an asset that had at one time looked very valuable, but all at once went to zero—subprime mortgage-backed securities.

For years after the crisis, lawmakers and pundits blamed these infamous assets for being both complex and difficult to value, but today I want to focus on what could have been their biggest downside of all... They were incredibly illiquid. Lehman couldn't sell them, and therefore couldn't meet their leverage obligations.

I invite you to look at the phenomena of financial crises through this lens, and explore how the advance of tokenization and blockchain markets may present a means to lessen the impact of sudden liquidity shortfalls.

Liquidity Shortages in Other Financial Crises

Liquidity shortages have played a critical role in many of the most devastating financial crises in modern history.

• In 1973-74, during the Oil Crisis, an oil embargo by OPEC led to skyrocketing prices and a global economic slowdown, but it was the resulting liquidity crunch that led to stock market crashes and rampant inflation.

  
  

• Fast forward to 1987, when the Black Monday stock market crash saw the Dow Jones drop 22% in a single day, largely due to liquidity drying up in the face of panic selling.

  
  

• In the 1990 Savings and Loan Crisis, U.S. banks faced huge liquidity issues, as a large number of banks had to deal with toxic real estate loans and were unable to meet their obligations, which led to a massive government bailout.

  
  

• Other crises in the 90s included the 1992 Black Wednesday UK currency crisis, the 1997 Asian Financial Crisis, and the 1998 Russian Financial Crisis, all of which spooked international markets.

  
  

• The dot-com bubble burst in 2000 resulted in a liquidity crunch for tech companies, causing a sharp downturn as capital dried up.

  
  

• The 2008 Financial Crisis, as we know, was largely triggered by the illiquidity of subprime mortgage-backed securities and the sudden inability to sell these assets at their perceived value.

  
  

• Even the COVID-19 pandemic in 2020, central banks and governments had to step in with massive liquidity injections to stabilize global markets as investors feared the collapse of entire sectors due to lockdowns and economic uncertainty. We now see that this led to an inflation shock that toppled world leaders.

In each case, the inability to quickly transact or access capital led to exacerbated financial instability, highlighting how crucial liquidity is to preventing crises from spiraling out of control.

Likewise, periods of high liquidity—where capital flows freely and is readily available in the global financial system—have tended to produce booms. In these times, investors are more willing to take on risk, fueling market rallies, increased borrowing, and investment in both established and speculative assets.

Abundance of liquidity isn't necessarily ideal, though. For example, in the 2000s, the surge in liquidity driven by low interest rates, coupled with an abundance of cheap credit, led to the very housing bubble and speculative frenzy around mortgage-backed securities, which later collapsed.

Liquidity Since 2008

Similarly, the post-2008 era saw central banks inject unprecedented amounts of liquidity into global markets through quantitative easing and low interest rates, sparking a prolonged bull market in equities and an increase in corporate debt issuance.

High liquidity can create an environment where asset prices inflate beyond their true value, ultimately leading to corrections when liquidity tightens, but in the short term, it drives rapid growth and risk-taking.

The global financial sector has had over a decade and a half since the Great Recession to experiment with economics an monetary policy, and we've seen some crazy stuff happen. Since the start of the COVID pandemic, in particular, we've seen how rises and falls in liquidity impact inflation, asset prices, lending costs, and risky investing strategies.

While many pundits, policymakers, and economists focus heavily on the role of central banks and federal spending, there is another side to this that may drive healthier liquidity flows. Analysis of liquidity that goes beyond monetary and fiscal policy suggests that market-making and the ability to quickly connect buyers and sellers plays a significant role in financial markets' efficiency. Analysis has shown that well-functioning market-making mechanisms can significantly impact liquidity across various asset classes, ensuring price discovery and reducing volatility.

Bitcoins & Shitcoins (the Response to 2008)

There was another invention in the wake of the 2008 crisis that also opened our eyes—the invention of Bitcoin and other tokenized assets built on blockchain. Satoshi Nakamoto, the mysterious inventor(s) of Bitcoin, were motivated by the 2008 crisis and the subsequent bailouts to create the world's first decentralized cryptocurrency.

Proponents of Bitcoin point out that one of the reasons it's valuable is that it has inherent properties of scarcity and instantaneous transactability. In other words, Bitcoin is tremendously liquid. In the many years since it was invented, many critics claimed it was obviously a Ponzi scheme and that it would inevitably "go to zero" any day. The truth was that no matter how many spectacular rises and falls in price Bitcoin experienced, it never failed to find buyers in the market.

Bitcoin is the most successful cryptocurrency to date, but for a decade now, new incumbents and innovations have flooded into the space. Many of these assets seem extremely undesirable and have virtually no real-world value. Meme coins like Dogecoin, Pepe, and Bonk are extremely volatile and useless, yet they have billions of dollars in market cap, even on a bad day. As I write this, Fartcoin is even posting an impressive $439 million dollar market cap, down from its peak of nearly $800 million a few weeks ago.

If this sounds ridiculous, that's because it is. And it goes way beyond meme coins to decentralized applications and silly tokenized artwork (NFTs). But it demonstrates that the highly liquid market of tokenized assets has found a way to continuously connect willing buyers and sellers on LITERALLY ANYTHING.

Enter Davos 2025

There were a few pivotal moments in the crypto world in the past year. Bitcoin went on a spectacular run from $15k to $100k. Then there were Donald Trump and Howard Lutnick's proclamations at the 2024 Nashville Bitcoin conference, which kick-started a hopeful contagion that Trump 2.0 would make crypto mainstream. But besides some speculation about a strategic Bitcoin reserve, it was unclear what mainstream crypto adoption might entail.

Then the World Economic Forum met in Davos right after Trump took office, and the most powerful bankers of the world were buzzing about a topic that is old-news for the crypto world: tokenization of real-world assets.

According to the highest-profile bankers and CEOs in the world, tokenization of real-world assets could unlock trillions of dollars in previously illiquid marketable securities. This transformation could dramatically reshape the landscape of financial markets, allowing assets like real estate, bonds, art, and infrastructure to become more liquid, accessible, and tradable in ways that have never been possible before.

But how does this work, exactly, and why would these CEOs want it? And I would ask an even more compelling question: could it prevent the next great financial crisis?

Unlocking Trillions: What Does Tokenization Mean?

Today, there are an estimated $255 trillion in marketable securities globally, but according to the World Economic Forum, only about $28.6 trillion of those assets are actively used as collateral.

That means a staggering $226 trillion worth of assets remain largely illiquid, tied up in markets that aren’t easily accessible for most investors. Tokenization could change this by turning these physical or non-liquid assets into digital tokens on a blockchain, which can be fractionalized, traded, and used as collateral more easily than ever before.

Tokenization refers to the process of converting a real-world asset into a digital token on a blockchain, such as smart contract platforms like Ethereum or Polkadot, that represents ownership of the underlying asset. These tokens can be fractionalized, allowing for smaller, more accessible investments and giving global access to markets that were once exclusive or difficult to navigate.

For instance, tokenizing stocks or bonds could enable faster, more affordable settlements for banks. They could enable AI-powered portfolio management and 24-hour trading with minimal fees. Even a commercial real estate property or a famous painting could be tokenized, allowing investors to buy fractional shares.

Tokenized assets could be sold or used as collateral on blockchain-based platforms instantly with minimal fees. The liquidity that comes with this process could provide tremendous benefits to institutions and markets alike, unlocking capital, enabling quicker transactions, and allowing for more efficient risk management.

How Tokenization Supports Financial Stability and Liquidity

One of the main benefits of tokenizing real-world assets is the potential for increased market liquidity. In traditional markets, especially those involving high-risk assets like mortgage-backed securities (MBS), corporate bonds, or real estate, liquidity is often constrained. When markets turn volatile, as we saw during the 2008 financial crisis, illiquidity can exacerbate price declines, making it difficult for institutions to sell assets and meet obligations.

In a tokenized market, these assets would become easier to buy, sell, or trade, ensuring that liquidity is always available to buyers and sellers. In times of economic stress, having access to a deep, liquid market could prevent a panic sell-off and stabilize prices, rather than allowing asset prices to plummet due to a lack of buyers.

But liquidity alone doesn’t guarantee stability—it’s how that liquidity is created and managed that matters. This is where market-making plays a critical role. Market-makers ensure that there is a continuous stream of buy and sell orders for assets, which helps stabilize prices.

By increasing market depth through widespread tokenization, institutions would be able to access liquidity on-demand, while also supporting the price discovery process in riskier markets, such as those for high-yield bonds, equity in startups, or real estate investments.

The Transparency of Blockchain and Smart Contracts

Another critical advantage of tokenizing RWAs is the transparency offered by blockchain technology. In traditional markets, especially those dealing with complex financial products like MBS, there is often a lack of clarity about the true value and risks associated with an asset. This opacity can lead to mispricing, market manipulation, or, in extreme cases, complete market collapses when the true risk is revealed.

Blockchain and smart contracts—self-executing contracts with the terms of the agreement directly written into code—offer a solution to this problem. Tokenized assets on blockchain networks like Ethereum are transparent and immutable, meaning that every transaction, ownership change, and transfer is recorded on a public ledger. This allows investors and regulators alike to easily verify the status, ownership, and history of any tokenized asset.

With greater transparency, institutions (or automated AI systems) can more easily and quickly assess the risks associated with assets, and investors can make more informed decisions, potentially improving price discovery functions and reducing the chances of systemic financial collapse caused by sudden market shocks.

For example, mortgage-backed securities in 2008 were often opaque, with poor risk assessment and little visibility into the quality of underlying loans. In contrast, tokenized securities could be audited in real time, with each transaction traceable and each asset’s value clear. This would reduce information asymmetry, helping markets function more smoothly.

We need to admit there's also a (likely) flip side, where institutions could focus incredibly powerful automated systems at these markets to get any advantage over the rest of the market. This has already been the case in financial markets for some time with rudimentary AI systems, but it only enhances market efficiency (despite some expected level of manipulation).

From Meme Coins to Risk-On Assets: Why Tokenized RWAs Are More Stable

We already alluded to the rise of meme coins like Dogecoin. These tokens were not tied to any real-world value and were often viewed as speculative, yet they managed to attract significant market interest and liquidity. In comparison, traditional high-risk assets like mortgage-backed securities (MBS) or corporate junk bonds are still often hard to trade, especially in moments of economic uncertainty.

Tokenized high-risk assets, such as MBS or junk bonds, would likely attract far more stable interest than speculative meme coins. This is because the underlying value of these real-world tokenized assets would be tied to something tangible and easily verifiable—whether it’s the underlying real estate, loan book, or equity in a business.

With greater liquidity and transparency, these tokenized assets would provide better price discovery, meaning that their values would be better aligned with market fundamentals. Moreover, because tokenized assets can be used as collateral in decentralized finance (DeFi) or centralized blockchain-based platforms, the volatility associated with risk-on assets like junk bonds or even stocks could be reduced.

Tokenized MBS, for instance, could be used as collateral in lending protocols or traded more easily on blockchain exchanges, providing a liquid market where their value can adjust in real-time based on actual market conditions. This would help prevent the liquidity crunch that worsened the 2008 financial crisis when MBS became essentially unsellable.

Could Asset Tokenization Help Us Avoid a Debt Crisis?

As global debt levels continue to rise and productivity stalls, the ability of nations, institutions, and consumers to refinance this debt has become a critical challenge. Today, nations struggle to deal with past expansive fiscal policies and quantitative easing that seems to have triggered inflation shocks and slowed growth.

In an environment of tightening liquidity, as central banks experiment with quantitative easing and quantitative tightening measures, governments may find it increasingly difficult to manage their debt without significantly raising borrowing costs. The need for nations to manage their fiscal situations is increasingly profound.

This is where real-world asset tokenization could play a pivotal role. By unlocking previously illiquid markets and improving the accessibility and tradability of assets, tokenization can provide a new avenue for liquidity management.

The ability of tokenization of assets on a large scale to generate and access liquidity could ensure that liquidity remains available during periods of economic stress, thereby easing the pressure on governments and financial institutions. In theory, this could making it easier to refinance debt and avoid the drastic measures of money printing or debt restructuring, which could destabilize markets and the broader economy.

Can Tokenization Prevent a Crisis?

While no system can fully eliminate financial risk, real-world asset tokenization offers promising solutions to the vulnerabilities that contributed to the 2008 financial crisis. By improving liquidity, enhancing transparency, ensuring better price discovery, and reducing systemic risk, tokenization could significantly reduce the likelihood of future financial catastrophes.

As we continue to innovate with blockchain technology, these systems could become critical tools in fostering a more stable and resilient global financial system. In short, tokenization could very well be a cornerstone in preventing the next financial crisis, making markets more liquid, transparent, and accessible for all participants.