Tokenised Markets Are Recreating Finance’s Fragmentation Problem
Financial institutions have started moving bonds, funds, equities and private-market assets onto blockchain networks. DTCC has processed tokenised securities in a live production environment, European institutions are developing new settlement infrastructure, and banks are issuing digital instruments to professional and private clients.
The market has therefore moved beyond asking whether tokenisation can work. Banks, exchanges and asset managers now need to decide how their separate systems will work together.
Many institutions are building on different public, private and permissioned networks, each with its own technical standards, access rules and settlement arrangements. A tokenised security may trade efficiently inside one platform but remain difficult to move, finance or use as collateral elsewhere. Unless the industry connects these systems, it could replace fragmented legacy infrastructure with a new collection of digital silos.
Tokenisation Works Best Inside A Controlled Environment
A bank can issue a tokenised bond, record ownership on a distributed ledger and automate parts of the instrument’s lifecycle. Smart contracts can process interest payments, apply transfer restrictions and update ownership records when investors trade.
These functions work most easily when the issuer, investors, custodian, payment provider and market operator use the same network. The platform controls who can participate, which assets they can hold and how transactions reach final settlement.
Institutional markets rarely remain inside one controlled environment. An investor may hold cash through one bank, securities through another custodian and collateral on a third platform. The asset manager may need to transfer the instrument between funds, pledge it against financing or sell it to a counterparty that uses different infrastructure.
Traditional markets already connect a complex network of trading venues, central securities depositories, custodians, clearing houses and payment systems. Tokenisation can simplify some of those relationships, but it does not remove the need to coordinate them.
A digital asset only becomes widely useful when institutions can move it across the market without losing its legal status, compliance controls or settlement certainty.
Separate Networks Create Separate Pools Of Liquidity
Financial institutions choose different blockchain systems because they face different requirements. A public network can offer broad distribution and transparent transaction records, while a permissioned ledger gives an institution more control over participants, privacy and governance.
Both models can support tokenised assets, but they do not automatically create a common market.
A token issued on one network may not be recognised on another. Investors may need separate wallets, onboarding procedures and custody arrangements for each platform. Market makers may divide their capital between several venues instead of supporting one deeper pool of liquidity.
Fragmentation weakens one of tokenisation’s most persuasive promises. Digital securities should move more easily and remain available for trading, financing and collateral management for longer periods. That benefit declines when each platform operates as an independent market with limited access to assets and cash held elsewhere.
The same problem appears when institutions create digital versions of an asset on multiple networks. Each version may represent a claim on the same underlying security, but the market still needs a reliable process to ensure that supply, ownership and investor rights remain consistent.
Technology can copy a token quickly. Financial infrastructure must prove that the copied representation carries an enforceable claim.
A Blockchain Bridge Does Not Create A Connected Capital Market
Crypto markets often use bridges to transfer value between blockchains. A bridge may lock an asset on one network and issue a corresponding representation on another, allowing users to move between otherwise separate ecosystems.
Institutional assets require more than a technical transfer.
A tokenised bond carries contractual rights, regulatory obligations and restrictions on who may own or trade it. The issuer may need to verify the investor’s identity, location and legal classification. A custodian must know which record proves ownership, while supervisors need access to reliable transaction information.
The transfer process must preserve those conditions when the asset crosses to another network. It must also determine which system provides the authoritative ownership record and what happens when the two records conflict.
Institutions cannot treat these questions as secondary legal work added after developers connect the chains. The legal claim, compliance logic and technical representation form one financial instrument. A transfer that preserves the token but weakens the investor’s rights has not achieved meaningful interoperability.
Bridges also introduce operational and cybersecurity risks. A vulnerability in the connecting mechanism can expose assets even when the individual networks remain secure. Financial institutions will therefore demand governance, controls and recovery procedures that extend beyond the underlying code.
Interoperability Has Several Layers
Market participants often discuss interoperability as though it described one technical function. In practice, institutions need several systems to work together at the same time.
Technical interoperability allows networks to exchange instructions and data. Asset interoperability lets a security move between platforms or remain usable across them. Cash interoperability gives buyers and sellers a suitable settlement asset. Identity interoperability prevents investors from repeating the full onboarding process for every network.
Legal and regulatory interoperability may prove even harder. The parties must know which law applies, when a transfer becomes final and which rights the token holder can enforce. An institution operating across several jurisdictions cannot rely on code alone to answer those questions.
Operational systems must also connect tokenised markets with existing infrastructure. Banks will not replace every ledger, custody platform and risk system at once. They need to reconcile digital assets with accounting records, compliance tools, collateral systems and conventional payment rails throughout a long transition period.
The market will not solve fragmentation through one universal blockchain. It will need common standards and trusted connections between different networks.
Settlement Money Remains A Critical Constraint
A tokenised security cannot settle by itself. The buyer must deliver a form of money that the seller accepts, and both transfers should complete together so neither party carries unnecessary principal risk.
Institutions can use commercial bank money, tokenised deposits, stablecoins or central bank money, depending on the platform and jurisdiction. Each option creates different questions about credit risk, liquidity, regulation and access.
A network may process the securities leg immediately while the cash payment still travels through a conventional system with limited operating hours. That arrangement can preserve some of the delays and reconciliation work that tokenisation was supposed to remove.
Stablecoins offer programmability and continuous availability, but regulated institutions may hesitate to hold them as a settlement asset. Tokenised bank deposits can remain within the commercial banking system, although deposits issued by different banks may not trade at equal value in every circumstance.
Central banks can provide the safest settlement asset for wholesale markets, but they must determine how tokenised central bank money will interact with privately operated ledgers. European authorities have placed this question at the centre of their plans because tokenised securities will struggle to scale without trusted cash on the same or a closely connected infrastructure.
The market needs interoperability between money and assets as much as it needs connections between blockchains.
Common Standards Can Reduce The Friction
Banks and market operators do not need to use identical technology, but they do need to describe assets, identities and transaction instructions in compatible ways.
Common messaging standards can help institutions exchange information between conventional systems and distributed ledgers. Shared token standards can define how an asset records ownership, applies transfer restrictions and communicates with other applications.
Identity frameworks could allow an approved institution or investor to carry verified credentials across several platforms without disclosing unnecessary data. Compliance controls could then read those credentials and determine whether a transaction meets the relevant rules.
Institutions also need consistent procedures for events that happen after issuance. Bonds pay interest and principal. Funds process subscriptions, redemptions and distributions. Equities carry voting and dividend rights. Tokenisation can automate parts of these processes, but each platform must interpret the instructions consistently.
Standards will not eliminate commercial competition. Networks can still compete on speed, privacy, governance and services while using common rules that allow assets and information to move between them.
The internet developed through connected networks rather than one centrally managed system. Tokenised finance may follow a similar path, although financial markets require stronger identity, legal and settlement controls than ordinary data exchange.
Established Infrastructure Providers May Gain More Influence
Tokenisation initially appeared capable of reducing the role of traditional intermediaries. Direct ownership records and programmable settlement could allow issuers and investors to interact with fewer institutions between them.
Fragmentation may produce the opposite result.
When many networks coexist, the market needs operators that can connect them, verify records and coordinate settlement. Central securities depositories, custodians, payment networks and market-infrastructure providers already perform comparable functions in traditional finance. They can adapt that position to tokenised markets.
DTCC plans to support multiple blockchain networks while keeping tokenised securities connected to established ownership and settlement processes. Swift has tested transfers between digital platforms and existing payment systems. LSEG is developing infrastructure designed to link conventional and tokenised securities markets.
These organisations may not control every ledger, but they can provide the shared layer that allows institutions to use several of them. Their existing regulatory relationships, operational experience and market reach give them an advantage over technology providers that understand blockchains but lack institutional access.
Tokenisation may change how intermediaries work before it removes them.
Institutions Need To Design For Portability
Issuers should consider interoperability before they choose a network. A platform may meet the requirements of the first transaction but restrict the asset’s future distribution, liquidity or use as collateral.
Banks and asset managers need to assess whether investors can transfer the token to another custodian, whether market makers can support trading across venues and whether the asset can interact with different forms of digital money. They should also understand what happens when the chosen platform changes its rules, loses participants or ceases to operate.
A tokenised asset can remain economically dependent on one technology provider even when its legal issuer retains formal control. Institutions that ignore that dependency may reproduce the vendor lock-in and data migration problems they already face in conventional infrastructure.
Portability does not require unrestricted movement. Regulated assets will always carry controls, but those controls should travel with the instrument rather than trap it inside one platform.
The Market Will Connect Before It Consolidates
Capital markets are unlikely to choose one blockchain and move every asset, institution and payment onto it. Public networks, private ledgers and conventional systems will coexist because participants value different combinations of openness, privacy, control and performance.
The industry must therefore make connection a core part of the infrastructure rather than treating it as a later technical upgrade.
Tokenised securities can reduce processing time, automate lifecycle events and improve collateral mobility, but institutions will capture those gains only when assets, money, identity and legal rights remain consistent across networks. A fast settlement system offers limited value when investors cannot reach it or move the asset elsewhere.
Banks and exchanges have already shown that they can issue and process financial instruments on distributed ledgers. Their next challenge carries less novelty but greater commercial importance: building a market in which those instruments can circulate.
Without that work, tokenisation will digitise individual products while leaving the financial system as fragmented as before.
