ConceptIllustrative
Blockchain and digital assets
Tokens change how ownership is recorded and moved. They do not remove the questions every financial asset must answer: who owes what to whom, who holds it, and what happens when everyone wants their money back.
The tokenization lifecycle
Select a stage to see what happens, who is involved and the question worth asking before trusting it.
01 Define asset and rights
- What happens
- The underlying asset and the exact legal rights a holder will have are written down: claim on cash flows, ownership share, or a right to redeem.
- Who is involved
- Issuer, legal counsel
- Key risk
- The token may promise more than the legal documents deliver.
- Question to ask
- Which document defines my rights, and under which law?
02 Issuance
- What happens
- Tokens are created on a ledger in an amount that should match the asset or reserve behind them.
- Who is involved
- Issuer, smart-contract developers
- Key risk
- Code errors or unchecked minting can create tokens that nothing backs.
- Question to ask
- Who can create new tokens, and how is supply checked against the asset?
03 Record ownership
- What happens
- The ledger records which address holds which tokens. That record may or may not be the legal register of ownership.
- Who is involved
- Ledger operators or validators, registrar
- Key risk
- The on-chain record and the legal record can disagree.
- Question to ask
- If the ledger and the registrar disagree, which one wins?
04 Custody and transfer
- What happens
- Holders keep tokens themselves or through a custodian, and transfer them, sometimes with restrictions on who may receive them.
- Who is involved
- Custodians, wallets, exchanges, holders
- Key risk
- Lost keys, custodian failure or a mis-sent transfer may not be reversible.
- Question to ask
- Who controls the keys, and what happens if they are lost?
05 Redemption or retirement
- What happens
- The token is exchanged back for the asset or cash, or retired when the asset matures, and removed from supply.
- Who is involved
- Issuer, custodian of the reserve, holders
- Key risk
- Redemption may be slow, limited or suspended under stress.
- Question to ask
- How fast can I redeem, at what cost, and can redemption be paused?
DeFi and CeFi: where the counterparty sits
Both offer trading, lending and custody. The difference is who you rely on when something goes wrong.
| Question | Decentralized finance (DeFi) | Centralized finance (CeFi) |
|---|---|---|
| Who holds the assets? | Smart contracts, or users holding their own keys | A company holding assets on clients’ behalf |
| Who sets the rules? | Code, plus whoever can upgrade or govern it | The company’s terms of service and its regulators |
| Main counterparty risk | Contract bugs, governance capture, oracle failures | Insolvency, mismanagement or misuse of client assets |
| Liquidity under stress | Depends on pool depth; prices can move sharply | Depends on the firm’s reserves; withdrawals can be paused |
| Recourse if things go wrong | Often limited and unclear | Through the company and, where applicable, its regulator |
In practice many services mix both, and some activities labelled decentralized have identifiable operators. International standard-setters recommend regulating by function and risk rather than by label.
Stablecoins and the promise of redemption
A stablecoin aims to hold a steady value against a currency, usually the US dollar. For reserve-backed designs, that promise is only as good as the assets held against it and the holder’s right to redeem.
Three questions do most of the work: what the reserve is made of, how quickly it can be turned into cash, and whether holders have a clear legal claim to be paid back at par.
Redemption coverage model
An illustrative issuer with 1,000 million tokens outstanding. Adjust the reserve and a wave of redemptions to see whether same-day requests can be met from liquid assets.
IllustrativeTokens outstanding: 1,000 million
Risks to understand in plain language
- Counterparty risk
- Someone else must perform: an issuer, custodian, exchange or smart contract. If they fail, the token may not be worth what it claims.
- Liquidity risk
- An asset may be sound but slow to sell. Under stress, slow can mean paused redemptions or forced sales at a discount.
- Operational risk
- Keys get lost, code has bugs, oracles report wrong prices and systems go down. Ledgers make some errors permanent.
- Legal and regulatory uncertainty
- Rules differ between jurisdictions and are still changing. The same token can be treated differently in different places.
Educational explanation only. Nothing on this page assesses, recommends or endorses any token, platform or issuer, and it is not legal advice.