Liquidity challenges in RWAs — why “tokenizing everything” doesn’t guarantee tradability

1) Introduction: promise vs. reality (and why liquidity is the bottleneck)

Real-world asset (RWA) tokenization has advanced from pilots to production in select categories (notably cash equivalents and short-duration credit). On-chain market trackers put total RWA value at roughly $34–35B as of Oct 22, 2025, with tokenized U.S. Treasuries ~ $8.4B—clear growth versus 2023, but still small relative to traditional markets. The key constraint today isn’t issuance: it’s secondary-market liquidity and price discovery. RWA.xyz+1

A recent arXiv paper—“Tokenize Everything, But Can You Sell It? RWA Liquidity Challenges and the Road Ahead” (Aug 2025)—documents the gap between tokenization and tradability: many RWA tokens show low transfer frequency, long holding periods, and limited secondary turnover, despite the theoretical benefits of 24/7, global markets. In short, digitizing ownership is necessary but not sufficient to create liquid markets. From an institutional perspective, liquidity shortfalls stem from regulatory gating, custody/venue limitations, valuation opacity, and fragmented rails—all of which suppress market-making incentives and investor participation. The rest of this article unpacks those mechanics with a practitioner lens.

2) What “liquidity” means in tokenized RWAs (precise definitions)

When we discuss liquidity for tokenized assets we mean:

• Tight, two-sided markets (bid/ask depth) with continuous or frequent quotes.

• Efficient price discovery with transparent reference/NAV signals.

• Low slippage and execution cost at realistic trade sizes.

• Operational finality and short settlement cycles (minutes to T+0/T+1), with controllable counterparty risk.

• Broad eligibility (who can hold/trade, where, and under what restrictions).

It is useful to separate:

• Primary (issuance) liquidity: the ease of subscriptions/redemptions from the issuer or SPV (often robust in today’s RWA products).

• Secondary liquidity: the ease of peer-to-peer transfers or venue trading between investors (where frictions remain largest).

  
  

Empirically, the arXiv analysis finds that the majority of tokenized RWAs do not experience sustained secondary turnover; activity is concentrated in mints/burns (primary flows) rather than trades (secondary flows). This mirrors what market dashboards imply: sizeable AUM/TVL does not imply active trading unless venues, market-makers, and valuation signals are in place. arXiv+1

Academic and industry reviews further emphasize that tokenization’s theoretical benefits—fractionalization, 24/7 access, programmable settlement—only translate into liquidity if market microstructure supports them (venues, market-makers, custody, disclosure). Otherwise, tokens are “trade-ready, not actively traded.” ScienceDirect

3) Structural barriers that suppress tradability (what actually breaks liquidity)

A) Regulatory gating & investor eligibility

Most RWAs are securities (or close analogs) and inherit the who/where/how limits of securities law: qualified purchaser/accredited investor constraints, transfer-agent oversight, whitelisting, and geo-fencing. These are not optional—permissioned token standards (e.g., identity-gated tokens) exist precisely to encode these rules. The upshot: even with perfect technology, addressable order flow is capped, reducing natural two-sided markets and quote depth. Katten

B) Venue and custody constraints (ATS pipes aren’t ubiquitous)

Compliant secondary trading for digital securities typically requires registered venues (e.g., U.S. ATS) plus qualified custody. The venue landscape is still narrow; many issuers rely on primary-only flows or closed, permissioned networks. A notable 2025 development—Ondo Finance acquiring Oasis Pro (an SEC-registered broker-dealer/ATS/transfer agent)—highlights that secondary liquidity requires licenses + plumbing, not just tokens. Until more venues and custodians interconnect, order routing and market-making will remain thin. Cointelegraph+1

C) Valuation opacity & infrequent marks (no price, no market)

Private credit, real estate, and bespoke funds lack high-frequency pricing; many still depend on appraisals or monthly administrator marks. Without frequent, auditable NAVs or loan-level data, rational buyers widen spreads—or don’t quote at all. The arXiv study specifically links low secondary activity to sparse pricing signals and limited transparency in underlying cash flows. Result: tokens trade at unknown premiums/discounts, deterring turnover. arXiv

D) Fragmented rails & token design differences (liquidity silos)

Issuance occurs across multiple chains with different transfer controls and settlement assets; bridging adds smart-contract/custody risk. Even when multichain support exists, liquidity often clusters on a primary chain and fractures elsewhere, cutting depth and hindering arbitrage. Legal state can also diverge across rails (which chain/version is the authoritative register?), complicating investor confidence and venue onboarding. World Economic Forum Reports

E) Demand mismatch & asset type illiquidity

Some assets are inherently buy-and-hold (e.g., certain real estate or private credit). Tokenization lowers minimums and improves access, but does not create natural trading interest where it didn’t exist. Without market-maker programs, redemption SLAs, and clear use-cases for token utility (e.g., collateral eligibility), secondary volumes remain structurally low relative to supply. Findings in the arXiv paper align with this dynamic. arXiv

Implication for practitioners: Liquidity is a design problem across legal, operational, and technical layers. Tokens alone are insufficient; you need regulatory pathways, venues, custody, transparent data, and MM incentives co-engineered from day one.

4) Empirical Evidence: What the Data Shows So Far

Despite the growing headlines, empirical research and on-chain tracking reveal a nuanced reality for RWA (real-world asset) liquidity.

• A key academic work titled “Tokenize Everything, But Can You Sell It? RWA Liquidity Challenges and the Road Ahead” (Aug 2025) uses data from platforms like RWA.xyz and documents that many RWA tokens show low trading volume, long holding periods, and limited secondary-market activity despite being on-chain. (arXiv)

• The on-chain tracker RWA.xyz lists a total on-chain RWA value of ~$34.61 billion (as of Oct 22, 2025), with nearly 492,878 holders across 228 issuers. (RWA.xyz)

• Growth in issuance is impressive: tokenized U.S. Treasuries alone have grown aggressively (MarketWatch notes > $30 billion in tokenized assets in 2025, with treasuries around $5.5 billion in April) but trading volumes relative to that asset base remain modest. (MarketWatch)

• Additional commentary in GrowthTurbine observes that tokenization often creates “paper liquidity” (i.e., the token exists) but not actual tradability, since secondary market depth remains thin and fragmented. (growthturbine.com)

Data points that stand out:

• Many tokenized real-estate and private-credit assets show less than 100 active trading addresses over long periods. (AInvest)

• Transfer frequency for many RWA tokens is heavily skewed toward issuance/redemption flows rather than peer-to-peer trading. The arXiv study highlights that the functional primitives of issuance and redemption dominate on-chain activity; transfers between investors remain rare. (arXiv)

• Liquidity metrics lag issuance metrics: although issuance has scaled into tens of billions, secondary trading infrastructure, market makers, and venue diversification have not grown at the same pace.

Interpretation for practitioners:The evidence suggests that tokenization is working for certain asset classes (low-duration, high-clarity assets like treasuries) but the liquidity enhancement promise (fractionalization + global tradeability) is still partially unrealized. Investors and issuers should calibrate expectations accordingly—illiquid tokenized assets are still the norm, not the exception.

5) Why Tokenization Alone Doesn’t Unlock Liquidity

Tokenization of an asset—i.e., representing a real-world claim via a blockchain token—addresses some structural inefficiencies (settlement delay, documentation, fractional access). But liquidity depends on a multi-dimensional ecosystem, and tokenization alone does not guarantee tradability. Key reasons:

A. Narrow investor base & gated roll-out

Many tokenized assets remain offered to qualified/ accredited investors, are geofenced, and require consent for transfers (KYC/AML whitelisting). Thus, even if the asset is tokenized, trading occurs within a restricted pool of participants, limiting liquidity depth.

B. Venue & market-maker dependency

Real secondary markets require regulated trading venues (ATS, broker-dealer platforms) and market-maker programs to provide continuous bids and asks. Without these, tokens may exist but not trade actively. The performance of tokens without a trading venue mirrors a traditional lock-up rather than a liquid instrument. As noted, acquiring a regulated transfer agent and ATS (e.g., the acquisition of an ATS by a tokenization platform) is a strategic move precisely because the lack of venue infrastructure blocks liquidity.

C. Valuation & reference pricing constraints

Many underlying assets (private credit, real estate, infrastructure) have infrequent valuation updates, opaque servicing metrics, and limited pricing transparency. Without a reliable reference price and frequent mark-to-market data, market participants are reluctant to quote or trade—widening spreads and reducing turnover.

D. Token design, systems fragmentation & chain risk

If tokens are issued on different chains, require bridging, or embed transfer restrictions, liquidity may fragment. In addition, when legal rights aren’t uniform across rails (chain A vs chain B), investor confidence drops. Technical and legal design mis-alignment reduces tradability even if token issuance is flawless.

E. Asset type structural illiquidity

Some assets are by nature less liquid (e.g., commercial real estate, private credit, infrastructure). Tokenization can reduce barriers but cannot fully remove the intrinsic asset characteristics that yield longer holding cycles and fewer trade events. Tokenizing an illiquid underlying doesn’t make it liquid—they still depend on servicing flows, credit events, and redemption structures.

F. Demand side inertia

Fractional ownership and tokenized access are compelling in theory, but secondary investor participation depends on familiarity, regulatory comfort, custody solutions, and pricing transparency. Many tokens are bought as buy-and-hold positions rather than traded, reducing the prospective turnover.

6) Designing for Liquidity: Pathways, Frameworks, and Technical Solutions

While the liquidity deficit in tokenized real-world assets (RWAs) is well documented, there are tangible design and policy frameworks emerging to address it. The focus is shifting from token issuance to liquidity architecture — building the microstructure, governance, and infrastructure needed for sustainable secondary trading.

A. Regulatory and Venue Architecture

Tokenized assets require regulated market infrastructure to support compliant transfers and price discovery:

• Alternative Trading Systems (ATS): Platforms such as Oasis Pro, Securitize Markets, and tZERO operate under U.S. FINRA/SEC oversight, providing legally recognized secondary markets for digital securities. These systems implement on-chain transfer restrictions, investor whitelisting, and off-chain record synchronization to maintain legal validity.

• Cross-jurisdiction initiatives: Project Guardian (MAS, Singapore) and Project Genesis (BIS, Hong Kong) are pioneering regulatory sandboxes for tokenized bonds and funds. Both emphasize identity-verified transfers, real-time settlement, and shared data registries.

• Custody regulation: MiCA (EU, effective 2025) and the U.S. SEC’s Custody Rule amendments are codifying how qualified custodians must handle tokenized securities — a prerequisite for institutional liquidity.

B. On-chain Liquidity Mechanisms

Technically, secondary liquidity can be enhanced through smart-contract market infrastructure, but these require rigorous compliance controls:

1. Permissioned AMMs (Automated Market Makers):

   • Protocols like Centrifuge and Clearpool Institutional are experimenting with liquidity pools restricted to KYC-verified wallets, enabling quasi-DeFi liquidity within a compliance perimeter.

   • Liquidity provisioning is controlled through whitelists and capital tiers, reducing systemic risk while allowing continuous quotes.

2. RFQ (Request-for-Quote) Protocols:

   • Maple and Untangled Finance have introduced RFQ frameworks that pair buyers and sellers via off-chain negotiation, then settle on-chain under verified legal agreements.

   • These structures emulate OTC trading desks but achieve on-chain finality, preserving auditability and settlement speed.

3. Tokenized Money-Market and Fund Shares:

   • The success of BlackRock’s BUIDL Fund and Franklin Templeton’s FOBXX Fund demonstrates that liquidity can be maintained through issuer-facilitated redemptions, rather than peer-to-peer trading. Investors achieve functional liquidity by redeeming with the issuer on demand.

     
     

C. Data Transparency and Price Discovery

No market can sustain liquidity without reliable data and valuation signals:

• Standardized NAV reporting: Platforms like RWA.xyz and Tokeny are creating standardized data schemas for daily or weekly NAV updates with machine-readable JSON feeds.

• On-chain proofs of reserve: Protocols such as Chainlink’s Proof-of-Reserve and Zoniqx enable automated attestation of underlying assets, linking blockchain state to custody records.

• Audit-ready data pipelines: Institutional issuers increasingly deploy ETL pipelines that map wallet addresses to transfer-agent registers, ensuring reconciliation between blockchain and back-office systems.

  
  

These mechanisms address what the arXiv study identifies as the “data opacity–liquidity spiral”: when valuation data is opaque, bid-ask spreads widen and turnover declines. Solving this requires real-time, standardized, verifiable data.

D. Market-Maker and Treasury Integration

Liquidity design must integrate with treasury operations and institutional credit frameworks:

• Incentivized liquidity programs: Similar to traditional market-maker rebates, tokenization platforms now implement smart-contract-based liquidity mining for institutional LPs, paying yields for maintaining narrow spreads within compliance thresholds.

• Tokenized collateral frameworks: Banks like J.P. Morgan and BNY Mellon are integrating tokenized RWAs into collateral optimization systems, using tokenized treasuries as repo collateral — effectively creating synthetic secondary demand.

  
  

Takeaway:True liquidity requires an ecosystem stack: regulation → custody → valuation → venue → market-maker incentives. Each layer must align for RWAs to transition from static representations to tradeable financial instruments.

7) Closing Outlook: From Representation to Market Integration

The next evolution of tokenized finance is not about more issuance but about functional integration with the global capital stack. Liquidity will emerge as on-chain systems merge with traditional finance infrastructure through four parallel shifts:

1. Institutionalization of Secondary Markets

Expect exponential growth in regulated digital-asset venues over 2025-2027. The key catalyst will be integration between asset managers, custodians, and ATS operators. BlackRock’s and Goldman’s tokenized funds serve as the proof-of-concept for compliant, scalable liquidity.

2. Interoperable Settlement & Cross-Chain Custody

Cross-chain settlement protocols (e.g., Chainlink CCIP, LayerZero, Axelar) will underpin standardized T+0 settlements between permissioned networks. However, widespread adoption depends on cross-jurisdiction legal harmonization and shared identity frameworks. Interoperability will shift from technical bridges to regulated message layers, embedding compliance metadata at the transaction level.

3. Data-Driven Liquidity & Predictive Analytics

Artificial intelligence and on-chain data analytics will enable real-time liquidity scoring, similar to credit scoring, where investors and platforms quantify market health using metrics such as wallet dispersion, NAV deviation, and redemption frequency. Predictive liquidity models (powered by ML algorithms) will soon inform pricing, capital weighting, and risk management for tokenized portfolios.

4. Evolution of Legal and Accounting Standards

Regulatory bodies (IOSCO, BIS, IFRS Foundation) are drafting guidance on on-chain settlement recognition, digital custody, and valuation frequency for tokenized funds. By 2027–2030, tokenized assets may gain explicit treatment in Basel III capital frameworks, further increasing their institutional utility and liquidity.