A Simple Guide to Tokenizing Securities

Key Takeaways

A security is a financial instrument that represents ownership, a loan, or rights to an asset.
The Howey Test says an investment is a security if you invest money, pool funds, expect profits, and rely on others’ efforts.
Tokenization turns ownership rights into digital tokens on a blockchain.
Tokens are minted to represent shares of the asset and sold in a regulated offering.
Smart contracts automate income distributions and corporate actions.
Fractional ownership lets you buy small pieces of high-value assets.
Tokenization makes illiquid assets more liquid by enabling round‑the‑clock trading.
Global investors can access tokenized assets without complex cross‑border steps.
BlackRock’s BUIDL fund on Ethereum lets big investors buy and redeem tokens in minutes.
Securitize offers a full platform for issuing, trading, and managing compliant security tokens.

A security is a fungible, negotiable financial instrument that holds monetary value and represents an ownership stake, creditor relationship, or right to ownership in an underlying asset. In simple terms, when you buy a security, you’re buying a piece of something—like a share of a company, a loan to a government, or a contract that gives you certain rights.

Main Types of Securities

Equity Securities (Stocks): Represent ownership in a corporation. Stockholders can earn dividends and may benefit from share price appreciation.
Debt Securities (Bonds, Notes): Represent loans made by investors to issuers (governments, corporations). Issuers pay periodic interest and return the principal at maturity.
Derivative Securities: Contracts whose value derives from an underlying asset (e.g., options, futures). These allow investors to hedge risk or speculate on price movements.
Investment Funds (Mutual Funds & ETFs): Pooled investments managed by professionals. Funds hold baskets of stocks, bonds, or other assets, providing diversification in a single security.

The Howey Test: Defining an “Investment Contract”

In U.S. law, not every transaction is automatically a “security.” The Howey Test, established by the Supreme Court in 1946, determines whether an arrangement qualifies as an “investment contract” and thus a security under federal law. Under this test, a transaction is an investment contract if it involves:

An Investment of Money – Investors commit their own funds.
A Common Enterprise – Investors’ fortunes are pooled and tied together.
An Expectation of Profits – Investors anticipate financial returns.
Efforts of Others – Any profit arises primarily from the efforts of a third party or promoter.

If all four criteria are met, the offering must comply with SEC registration and disclosure requirements, ensuring transparency and investor protection.

An Overview of Tokenization

Tokenization is the process of converting rights to an asset into a digital token on a blockchain. Think of a token as a digital certificate that proves you own a fraction—or all—of an asset. These tokens live on public ledgers (blockchains), which record every transaction transparently and immutably. Tokenization bridges the gap between traditional assets and digital finance, offering faster settlement, reduced costs, and enhanced access for investors worldwide.

Tokenizing Securities: How It Works and Why It Matters

1. Structuring and Compliance

Legal Framework: The issuer (e.g., a real estate developer or fund manager) sets up a legal entity—often a special purpose vehicle (SPV)—that holds the underlying asset.
Regulatory Alignment: Smart contracts embed KYC/AML checks and securities regulations, ensuring tokens comply with applicable laws (e.g., SEC registration for U.S. security tokens).

2. Issuance of Tokens

Minting Tokens: Using a tokenization platform, the issuer mints digital tokens, each representing a proportional share of the underlying asset.
Offering to Investors: Tokens are sold through a compliant offering (similar to an IPO or bond issuance), allowing both institutional and retail investors to participate.

3. Secondary Trading

Blockchain Marketplaces: Tokenized securities can trade 24/7 on blockchain-based exchanges or approved platforms.
Instant Settlement: Trades settle on-chain within minutes, eliminating multi-day clearing and settlement cycles common in traditional markets.

4. Asset Servicing

Automated Distributions: Dividends, interest payments, or rental income are distributed automatically via smart contracts.
Corporate Actions: Token splits, buybacks, or voting rights are managed on-chain, reducing administrative overhead.

Benefits of Tokenized Securities

Fractional Ownership: High-value assets (e.g., $10 million real estate) can be divided into millions of tokens, enabling investors to buy small stakes with minimal capital.
Enhanced Liquidity: Illiquid assets—like private equity or real estate—gain liquidity as tokens trade around the clock on global platforms.
Transparency: Public blockchain ledgers record every transaction, ensuring clear audit trails and reducing fraud risk.
Cost and Time Efficiency: By removing intermediaries (custodians, clearinghouses), tokenization lowers fees and speeds up settlement from days to minutes.
Global Access: Investors worldwide can participate without complex cross-border processes, democratizing access to institutional-grade assets.

Real-World Examples: BlackRock & Securitize

BlackRock’s BUIDL Fund on Ethereum

In March 2024, BlackRock launched the USD Institutional Digital Liquidity Fund (BUIDL) on the Ethereum blockchain. This tokenized money market fund allows qualified investors (minimum $5 million) to subscribe and redeem tokens representing shares of the fund, earning interest directly through on-chain transactions. The fund maintains a stable $1 NAV and settles redemptions in minutes rather than days.

Securitize’s Compliance Platform

Securitize is a leading tokenization platform that enables compliant issuance and management of digital securities:

End-to-End Solution: From issuance and investor onboarding to secondary trading and corporate actions, all on-chain.
Regulatory Automation: Smart contracts enforce KYC/AML and SEC registration requirements, simplifying compliance.
Diverse Asset Classes: Real estate projects, private equity funds, and even tokenized ETFs.

By partnering with asset managers like BlackRock, Securitize is helping to mainstream tokenized securities and build institutional-grade infrastructure.

Tokenizing securities is more than a tech trend—it’s a transformational shift in capital markets. By marrying blockchain’s transparency and efficiency with traditional regulatory frameworks, tokenization opens doors to new investors, enhances liquidity, and reduces costs. As pioneers like BlackRock and Securitize drive adoption, the tokenized future of finance is rapidly becoming a reality. Whether you’re a seasoned investor or just starting out, understanding tokenized securities will be key to navigating tomorrow’s markets.