In the 1990s, Exchange-traded funds (ETFs) were a new idea. Many viewed them simply as a new wrapper for traditional assets – a convenient repackaging of mutual funds. In reality, ETFs have sparked a revolution in market structure. By introducing creation/redemption mechanisms and arbitrage-based liquidity, ETFs fundamentally changed how markets functioned and how investors accessed assets. ETFs have blurred the line between primary and secondary markets and transformed arbitrage into a mechanism to hold the system together.
How does tokenization reflect the revolution in ETF market structure? In almost every key aspect.
A robust tokenized asset is not simply “issued” once, like a stock or bond: it can typically be issued or burned on demand against a pool of underlying assets or rights. For example, where a token represents shares of a fund or stock, authorized participants (or smart contracts acting as such) should be able to deposit the underlying and create new tokens or redeem tokens against the underlying assets.
If the token trades above the value of its underlying holdings, arbitrageurs will create new tokens (by injecting supply) until prices realign; if it trades below, they will buy back the tokens (reducing the supply) until the discount closes. The economic principle is identical to ETFs. The token is a wrapper over the same assets, and arbitrage keeps its price honest.
When it comes to ETFs and tokenization, the wrapper is simply a liquid representation of a basket of economic exposures. An ETF share is not the underlying securities themselves, but a standardized claim on a basket that trades efficiently because creation and redemption keeps it aligned with the underlying assets. Tokenization follows the same logic. The token becomes the liquid instrument, while the underlying assets remain the economic anchor. What matters is not the shape of the packaging, but the strength of the arbitration link between the packaging and the basket.
ETFs already represented a major step forward in transparency by allowing baskets of assets to be continuously traded on exchanges, with visible prices, intraday liquidity and alignment with the underlying value through arbitrage. Tokenization builds on this foundation. Where blockchains can go further is in making issuance, transfers and exceptional supply observable in near real-time, potentially expanding visibility into how the wrapper is evolving relative to the underlying basket.
One of the most important features of tokenized markets is their ability to trade continuously, even when the underlying markets are closed. For anyone who has traded ETFs globally, this is not a new capability but a familiar and very valuable one when it comes to market structure. Continuous trading outside of local market hours allows prices to incorporate new information as it emerges, rather than waiting for the next open, and allows investors across time zones to transfer risk when they actually need to. These prices reflect informed expectations – constructed using correlated instruments, futures, currencies and broader market signals – in the same way that international and multi-time zone ETFs have worked for decades.
U.S.-listed ETFs that hold European or Asian stocks already demonstrate how credible pricing can exist when the underlying cash market is closed. These ETFs continue to trade during the US session even after Europe or Asia closes, and their market price naturally reflects updated expectations – based on futures, FX, ADRs, macro news and other correlated signals – rather than outdated closing numbers. In practice, authorized participants and market makers continually estimate an “intrinsic fair value” for the ETF, including the next expected opening price for holdings in closed markets, and quote around that price to keep the market price of the ETF anchored at that fair value.
The same concept can be applied to tokenized Apple shares, for example, which can be traded on Saturday based on the assessment of Apple’s likely next price on Monday. If big news came on Saturday, you would see the token react immediately. Liquidity providers would quote a price that takes this news into account, likely by hedging with any related instruments, such as Nasdaq futures, if available. By Monday’s open, Apple’s actual stock price would likely catch up with that of the token traded over the weekend. In effect, the token becomes a leading indicator of the underlying security.
Not all market participants (especially in different time zones) operate on US Eastern Time. A European investor holding a tokenized US bond fund might appreciate the ability to adjust their positions on a Friday at 8 p.m. CET, rather than waiting until Monday. However, providing liquidity 24/7 increases the “cost of carry” or the risk of holding a position when the underlying markets are closed. In practice, this simply means that spreads can be a little wider outside of opening hours, as is the case, for example, in foreign exchange markets during public holidays – but the main difference is that the digital asset market remains open. And as more participants sign up and risk management tools improve, these costs come down. In the long term, a 24/7 foreign exchange market should become as natural as the 24/5 foreign exchange market is today.
The current dialogue around tokenization looks a lot like the early days of ETFs: initial skepticism, early traction in niche segments, and growing institutional involvement. This same scheme ultimately transformed ETFs into a $10 trillion-plus market.
I firmly believe that tokenization is on the same path, because the structural forces driving it are the same ones that made ETFs successful. The relevant test is not technological novelty, but rather improving the efficiency, access and robustness of the system. When these conditions are met, tokenization is not only comparable to the evolution of the ETF: it represents its logical continuation.
