How to Tokenize Physical Assets

Tokenizing physical assets—like real estate, commodities, art, or equipment—is no longer a speculative trend. It’s a practical, scalable solution for improving liquidity, streamlining ownership, and opening new financing channels. As institutional interest in blockchain infrastructure grows, asset tokenization is becoming a core strategy for unlocking value from traditionally illiquid assets.

But how exactly does it work—and what does it take to do it right? Below is a step-by-step breakdown of how to tokenize a physical asset, from legal structuring to trading and compliance.

What Is Asset Tokenization?

Asset tokenization is the process of converting ownership rights in a real-world asset into digital tokens on a blockchain. Each token represents a fractional or full claim to the underlying asset—backed by legal contracts and often held in a custodial structure.

Think of it as securitization meets blockchain: the goal is to create programmable, tradable representations of physical assets that are faster, cheaper, and more transparent to manage.

Step 1: Choose the Right Asset

The foundation of any successful tokenization project lies in selecting the right asset. While, in theory, almost anything of value can be tokenized, not all assets are equally viable or efficient for this process. The goal is to choose assets that lend themselves to both digitization and investment, without introducing unnecessary legal or operational complexity.

Ideal assets for tokenization generally share the following traits:

High Value and Illiquidity

Tokenization creates value when applied to assets that are otherwise difficult to trade or access. For example:

• Commercial real estate often has multi-million dollar price tags and limited secondary markets.

• Fine art may sit in private collections or vaults for years, appreciated by few.

• Machinery or industrial assets can be capital-intensive and hard to liquidate quickly.

By tokenizing these, institutions can unlock capital from dormant assets and offer investors access to new, yield-generating opportunities.

Easily Divisible or Fractionalizable

Assets that can be split into smaller investment units are ideal. Fractionalization allows multiple investors to own a piece of a large asset, significantly broadening participation.

• A $10 million property can be divided into 100,000 tokens at $100 each.

• A ton of gold can be tokenized gram-by-gram for individual investors.

This is especially useful in markets with high entry barriers, enabling liquidity and democratizing access to wealth-generating assets.

Stable or Predictable in Value

Assets that have clear valuation metrics and relatively low volatility are better suited for tokenization. This ensures investor confidence and simplifies regulatory classification.

• Gold, for instance, has well-understood pricing mechanisms.

• Carbon credits operate within standardized compliance markets.

• Income-generating real estate offers cash flow predictability.

While tokenizing highly volatile or speculative assets is possible, it may raise additional concerns around risk, classification, and investor protection.

Legally Transferable Under Existing Frameworks

One of the most important—but often overlooked—criteria is whether the asset can be legally transferred and owned through digital tokens under applicable laws.

• Some assets (e.g., land in certain countries) may have legal restrictions on foreign ownership or digital representations.

• Others (like art) may require physical custody agreements or export permits.

Ensuring clear title, transferability, and regulatory permissibility upfront avoids costly delays or legal challenges later.

Common starting points for institutions include:

• Real Estate: Commercial buildings, co-living spaces, REITs

• Gold and Precious Metals: Easily auditable and tradable

• Carbon Credits: ESG-aligned, verifiable, and in demand

• Luxury Goods and Collectibles: Cars, watches, wines, etc. (usually in niche markets)

• Private Equity / Revenue Streams: Tokenized income from operating businesses

These asset classes are popular because they combine market familiarity, tangible value, and legal clarity—making them ideal pilots for institutional tokenization strategies.

Step 2: Set Up the Legal Framework

This is where the real world meets the blockchain—and it’s arguably the most critical (and complex) part of any tokenization process. Without a solid legal structure, your token may have no enforceable connection to the underlying asset, exposing both you and investors to regulatory and contractual risk.

Create a Legal Wrapper for the Asset

You need to establish a legal entity or instrument that formally holds the asset and defines how tokens represent rights to it. Common structures include:

• Special Purpose Vehicle (SPV) - This is a dedicated company (often an LLC or LTD) created solely to own the asset and issue tokens. Investors buy tokens that represent equity or debt claims on the SPV. This is the most flexible and widely used model for real estate and private equity tokenization.

• Trust or Custodial Agreement - For high-value, non-income-generating assets (e.g., art, gold), a legal trust or third-party custodian can hold the asset on behalf of token holders. The token then represents a beneficial ownership or entitlement to the underlying.

• Asset-Bound Agreements - Clear investor contracts define what token holders are entitled to—such as income distribution, voting rights, resale rights, and redemption options. These should be standardized and digitized wherever possible.

This step anchors the token in law—transforming it from a digital receipt into a legal instrument with enforceable rights. It ensures investor protection and regulatory clarity—especially if you’re targeting institutional buyers or regulated markets. It enables secondary trading on compliant exchanges by aligning with securities regulations.

For example, in Switzerland and Singapore, asset tokenization frameworks already require clear segregation between token issuers and custodians, plus investor rights spelled out in smart contract-linked legal docs.

Step 3: Create and Configure the Token

Once your asset is wrapped in a legal structure, it’s time to digitize that ownership through a blockchain-based token. This token acts as the digital representation of the investor’s claim and includes all built-in logic and compliance rules.

Smart Contract Configuration

The token is created via a smart contract on a blockchain like Ethereum, Polygon, or Avalanche. You can deploy it using standards such as:

• ERC-20 or ERC-1400 for fungible security tokens

• ERC-721 or ERC-1155 for unique assets or fractional NFTs

Smart contracts should include:

• Token Supply and Fractionalization - Set the total number of tokens (e.g., 100,000 shares of a property) and their divisibility (e.g., 1 token = 0.001% ownership).

• Compliance Logic - Automatically enforce KYC/AML, accredited investor restrictions, and jurisdictional rules using on-chain whitelisting and access controls.

• Transfer Condition - Lock tokens during vesting periods or restrict secondary transfers to approved marketplaces or investor groups.

• Revenue Distribution - Automate payouts like rental income, yield, or royalties to token holders based on ownership percentage.

• Governance Functions - Optional voting rights or proposal mechanisms to let investors vote on asset sales, renovations, or manager changes.

Embedding these rules into the token’s code removes the need for manual enforcement, reduces the risk of non-compliance, and makes the asset programmable and scalable.

Security token platforms like Securitize, Tokeny, and Polymath have standardized many of these smart contract functions for institutional users. Depending on your needs, you can either use open-source templates or work with a compliant token issuance provider.

Step 4: Custody and Verification of the Physical Asset

Trust is the cornerstone of any asset tokenization project—especially when you’re dealing with physical or off-chain assets. Whether you’re tokenizing real estate, gold, fine art, or carbon credits, investors need confidence that the asset exists, is safeguarded, and is legally tied to the token they hold.

Institutional Custody Standards

To achieve this, the asset must be:

• Held or Verified by a Regulated Custodian - This could be a licensed trust company, bank, vaulting service (for gold), or real estate title agent. Their role is to ensure the asset’s safekeeping and provide legally recognized custody for investors.

• Backed by Independent Audits and Proofs of Ownership -nInstitutions require audit trails—often quarterly or annual reports—confirming that the physical asset remains where it’s supposed to be. This includes title deeds, notarized documentation, serial numbers (in the case of art or machinery), or on-chain proofs of reserve for commodity storage.

• Legally Linked to the Token - A formal agreement must define the relationship between the asset and the digital token—usually enforced via custodial declarations, SPV agreements, or token issuance documentation.

• Insured and Compliant - For high-value physical assets (e.g., rare artwork or gold), insurance coverage must be in place. This reduces counterparty risk and enhances the token’s credibility.

Without verifiable custody and periodic verification, the token risks becoming detached from its real-world value. This is non-negotiable for institutional adoption, particularly for fund managers, family offices, and banks looking to tokenize assets on behalf of clients.

Step 5: Token Distribution and Trading

Once your asset is secured and tokenized, the next step is to bring it to market—either by raising capital or offering liquidity options through secondary trading. This is where your legal structure, compliance setup, and platform integration all come into play.

Token Distribution Options

• Private Placement or Security Token Offering (STO) - For institutional deals or smaller investor groups, a private placement offers control and simplicity. STOs, on the other hand, are typically marketed more widely and require full regulatory filings in jurisdictions like the U.S. (SEC Reg D or Reg S), Singapore (Exempt Offers), or the EU (Prospectus Directive or MiCA-based regimes).

• Investor Onboarding & Compliance - Distribution platforms must be integrated with KYC/AML, accreditation checks, and jurisdictional controls. This ensures only qualified investors can participate. Many issuers use whitelisted wallets and geo-blocking features to enforce this.

• Smart Contract-Based Allocation - Tokens can be programmatically distributed via vesting schedules, milestone triggers, or payment conditions encoded in the smart contract.

Secondary Trading for Liquidity

After issuance, tokenized assets can be listed on:

• Licensed Digital Asset Exchanges - Platforms like ChainUp, INX, tZERO, or SIX Digital Exchange (SDX) support regulated security token trading. These enable real-time settlement, transparent order books, and compliant liquidity access.

• Bulletin Boards or Broker-Dealer Platform - In some markets, secondary trading may occur through registered bulletin boards or intermediaries offering OTC services for tokenized securities.

• Permissioned DeFi or P2P Transfers - Some tokens are tradeable within private pools or via smart contract-enabled peer-to-peer transactions—often within enterprise blockchain environments or via Layer 2 protocols with compliance controls.

This phase unlocks capital formation and liquidity—key benefits of tokenization. Whether you’re raising funds for a real estate project, enabling trading of fractional gold holdings, or offering early exit options to art investors, trading infrastructure determines the token’s true value and accessibility.

Step 6: Ongoing Management and Compliance

Tokenizing an asset isn’t a one-and-done project—it requires ongoing lifecycle management to maintain trust, ensure compliance, and deliver returns to stakeholders. This is where the power of smart contracts becomes most evident.

What Happens After Token Issuance?

Once tokens are live and in circulation, the following must be actively managed:

• Automated Income Distribution - For income-generating assets (e.g., real estate, renewable energy, or music royalties), smart contracts can automatically distribute dividends or interest to token holders based on their ownership share—without manual intervention.

• Cap Table Management & Transfer Logs - Ownership records (cap tables) update in real-time on-chain. When a token changes hands, the new ownership is instantly reflected. This reduces paperwork, eliminates reconciliation delays, and ensures transparency for all stakeholders.

• Compliance Enforcement On-Chain - Smart contracts embed restrictions based on jurisdiction, investor status, or asset type. For instance, transfers can be limited to KYC-verified or accredited investors. These rules execute automatically, ensuring regulatory alignment at all times.

• Audit Trails & Transparency - Every transaction—dividend, transfer, or ownership change—is recorded immutably on the blockchain. This real-time ledger supports audits, investor reporting, and regulatory inquiries with unparalleled clarity.

Integration with Enterprise Systems

To ensure scalability, many tokenization platforms connect with:

• Tax Reporting Systems (e.g., Form 1099 / CRS / FATCA tools)

• Legal Registries (e.g., land title registrars, IP databases)

• Digital Identity Providers (e.g., Civic, Fractal, or in-house KYC modules)

Together, these integrations reduce administrative burdens and make tokenized asset management as seamless and secure as traditional systems—if not more so.

Why Tokenize Physical Assets?

Tokenization is a strategic shift in how value is accessed, traded, and managed in the modern financial world. For institutions, it brings tangible advantages that directly impact liquidity, operational efficiency, and capital access.

Liquidity for Illiquid Markets

Tokenization unlocks liquidity from traditionally illiquid assets like real estate, infrastructure, art, and private equity. Instead of waiting years for an exit, investors can access secondary markets for early liquidity.

Fractional Ownership

High-value assets can be split into smaller, more affordable units, allowing broader participation from global retail and institutional investors alike.

24/7 Global Trading

Unlike traditional markets, tokenized assets can be traded 24/7 across jurisdictions, enhancing price discovery and market access.

Lower Costs & Faster Settlement

By replacing intermediaries with smart contracts, tokenization significantly cuts down on issuance fees, transfer costs, and settlement times.

Real-Time Compliance & Reporting

With programmable compliance, issuers can embed legal rules directly into token behavior—streamlining audits, reducing risk, and improving regulatory trust.

Final Thoughts

For institutions—from asset managers and real estate developers to alternative investment firms—tokenization is a new capital market model.

It enables new fundraising models, automated, borderless ownership, scalable compliance with less overhead, and future-proofing of traditional asset portfolios.

If you’re exploring tokenization for physical assets, ChainUp offers an end-to-end solution. We help businesses and institutions securely tokenize physical and financial assets. From smart contract creation and KYC integration to compliant trading infrastructure, our platform supports the full lifecycle of digital asset issuance and management.

Contact us to learn how ChainUp can help you unlock the potential of real-world asset tokenization.