The dark side of Wall Street’s tokenization boom

For years, tokenization looked like one of blockchain’s most promising real-world applications.

The basic idea makes sense: Take an asset that’s difficult to buy or sell—like real estate, private company equity, or another traditionally illiquid investment—and divide its ownership into digital tokens.

Suddenly, investors can theoretically buy smaller pieces of the asset… ownership can transfer more easily… and markets that once required huge amounts of capital can become accessible to far more people.

We’ve been talking about the potential of tokenization for years. In fact, in 2019, we even launched our own security token, the Curzio Equity Owners token, giving investors a direct equity stake in Curzio Research.

But now that Wall Street is embracing tokenization in a much bigger way, the industry is starting to look a lot more concerning.

Remember: Tokenization doesn’t automatically make an investment better. It simply makes that investment easier to distribute.

And Wall Street currently has trillions of dollars’ worth of private assets it desperately wants to distribute.

That’s where investors need to be careful.

The original promise of tokenization

The easiest way to understand tokenization is to think about an office building.

Say a building is worth $100 million. Traditionally, buying meaningful ownership in that property requires a huge amount of capital. Selling your stake can also be complicated and time-consuming.

Tokenization could theoretically divide that same property into thousands or millions of digital pieces. Now investors can own a fraction of the building rather than buying the entire thing.

More importantly, those pieces could potentially trade on a marketplace, creating liquidity in a historically illiquid asset.

That’s truly disruptive technology because it solves a real problem.

But the value becomes much harder to see when Wall Street starts tokenizing assets that are already incredibly easy to buy.

Let’s look at an example…

Does anyone really need a tokenized Microsoft share?

Robinhood now offers European investors tokenized exposure to hundreds of U.S. stocks—including Microsoft (MSFT).

The international access argument makes sense. Someone overseas who previously struggled to access U.S. securities can suddenly gain exposure much more easily.

But think about the average U.S. investor. Anyone with a brokerage account can already buy or sell Microsoft stock in seconds.

And depending on how the token is structured, it may actually come with fewer rights than owning the stock itself.

For example, Robinhood’s European stock tokens track the price of the underlying securities, but token holders don’t actually own those shares and don’t receive shareholder voting rights.

That raises other questions investors should understand:

• How are dividends handled?
• Who holds the underlying security?
• What protections apply if something happens to the platform?
• Can the token be transferred elsewhere?

Putting an asset on a blockchain doesn’t automatically make it superior to owning the asset directly.

That doesn’t mean tokenized public stocks have no future. It means investors should ask what problem tokenization is solving.

And right now, there’s one corner of Wall Street trying to solve a very big problem.

Private equity has a massive exit problem

Private equity firms make money by buying companies, improving them, and eventually selling them for more than they paid.

The problem they’re having right now is finding buyers for those assets.

As of June 30, private equity firms were sitting on 33,575 unsold portfolio companies, according to PitchBook data reported by The New York Times. That’s more than double the number from a decade ago. Altogether, roughly $4 trillion worth of companies remain unsold in private equity portfolios.

Higher interest rates have made debt-financed acquisitions more expensive. At the same time, many private equity firms are reluctant to sell companies at prices below the valuations they’ve been carrying on their books.

So the assets sit. And the longer they sit, the bigger the problem becomes. Private equity investors want their capital back. Firms need that capital freed up for new deals. And some portfolio companies need additional money just to keep growing.

Simply put, private equity desperately needs more buyers.

And that’s where tokenization comes in.

Tokenization could open private equity to retail investors

Imagine a private equity firm owns a company it values at $1 billion. It wants to sell… but it can’t find a buyer willing to pay that much. And the public market doesn’t support a $1 billion IPO.

Traditionally, that leaves the private equity firm with two unpleasant choices: lower the price or keep holding the asset.

Tokenization potentially creates a third option.

Instead of finding one buyer willing to pay $1 billion, it could divide the company into millions of digital tokens and offer pieces of it to individual investors.

For retail investors who’ve never had access to the private markets, that could sound highly appealing.

But before buying, ask one critical question:

Why couldn’t the current owner sell this investment to someone else?

Remember: Tokenization improves an asset’s liquidity. It doesn’t inherently improve the asset itself.

And we’ve seen a version of this playbook before.

A lesson from the SPAC boom

SPACs gave companies another way to enter the public markets. During the boom, plenty of legitimate companies used them.

But the structure also created an incredibly efficient pipeline for moving speculative companies from private owners to public investors.

A private company that might have struggled to complete a traditional IPO could merge with a SPAC, hit the public markets at an aggressive valuation, and suddenly have thousands of new investors able to buy the stock.

Meanwhile, sponsors and early investors often entered under much more favorable terms than the retail investors buying after the deal.

When those companies failed to live up to the valuations they received during the boom, the investors who bought near the end of that distribution chain took the biggest losses.

We could see something similar happen with tokenization. Tokenization doesn’t eliminate business risk, leverage, weak cash flow, or poor management. Nor does it guarantee a fair valuation.

It simply gives more people the ability to buy.

Private market access isn’t automatically an advantage

There’s a powerful marketing appeal to the private markets.

Investors hear about early investments in companies like Facebook, Uber, SpaceX, and countless other huge winners and understandably think: Why couldn’t I get access to those companies earlier?

That frustration makes sense. But just because an investment was previously unavailable to retail investors doesn’t make it attractive.

Sometimes a company is private because it’s young, growing quickly, and doesn’t need the public markets yet. Sometimes it’s private because its owners can’t find a buyer willing to pay the valuation they want.

Those are radically different situations.

That’s why retail investors need to look through the technology and evaluate what they actually own.

Ask these questions before buying a tokenized private investment

1. Why does this investment need to be tokenized? Is tokenization solving a legitimate liquidity or access problem… or is it simply making an asset easier for someone else to sell?
2. Who’s selling? There’s a huge difference between putting fresh capital directly into a growing company and providing liquidity to an existing owner who wants out.
3. What’s the valuation? Public markets constantly tell investors what buyers and sellers are willing to pay. Private market valuations can remain unchanged for months or even years. If a private company was valued at $1 billion during a much stronger market, that doesn’t mean it’s still worth $1 billion today. Putting that valuation on a token doesn’t make it accurate.
4. What rights come with the investment? Do you receive voting rights? How are distributions handled? Can you actually sell the token when you want to? Who holds the underlying asset? What protections do you have if the platform fails?

Don’t confuse better access with a better investment

Don’t get us wrong: Tokenization still has enormous potential.

For genuinely illiquid assets, the technology could expand access, reduce friction, and create markets that couldn’t efficiently exist before.

But that same ability to create liquidity can also be extremely valuable to someone struggling to sell an asset. And private equity currently has a lot of those.

So as Wall Street brings more private investments onto the blockchain, investors need to look past the technology’s novelty and ask what they’re actually being offered.

Because there’s a massive difference between Wall Street giving you access to an opportunity… and Wall Street giving itself access to your money.