Definitions of tokenisation across the industry are often oversimplified. McKinsey & Company, for example, defines tokenisation as “the process of creating a digital representation of a real thing.” While accessible, such definitions point to a broader issue, the risk of generalisation.
The term “tokenisation” has become central to discussions of financial market infrastructure, with financial institutions increasingly positioning it as a driver of a new decentralised paradigm within capital markets.
While experimentation with tokenised structures has been underway for over a decade, tokenisation is now presented as a defining component of how assets may be issued, transferred and managed on distributed ledger technology (DLT), with institutions such as BlackRock claiming tokenisation will shape how investors access markets entirely.
However, the rise of a singular perspective on tokenisation has introduced a more fundamental issue.
Tokenisation is increasingly treated as a unified transformation, despite being applied to systems that perform materially different legal and economic functions. This framing obscures critical structural distinctions and risks distorting how these arrangements are understood, regulated and relied upon in practice.
“Tokenisation continues to be overgeneralised as a single category, when in practice it is simply a method of representing fundamentally different financial instruments,” explained Pavan Kaur, operating partner at Gunnercooke.
“The underlying rights and risk profiles remain unchanged. The real challenge is ensuring that these distinctions are preserved as assets move into digital form.”
This overgeneralisation is not simply a matter of terminology. It reflects a deeper misalignment between how tokenisation is described in market discourse and how it operates in practice through a legal and regulatory lens. At the centre of this misalignment is a more precise question, often overlooked in broader discussions, on where completion authority sits and how that ultimately determines what a token represents.
Surface homogeneity, structural difference
The convergence of traditional and decentralised finance has accelerated in recent years, bringing tokenisation into closer proximity, and increasingly the same space as existing financial systems. As this integration progresses, questions of interoperability, particularly across legal and regulatory frameworks, are becoming increasingly important. However, these questions remain unresolved.
Within this context, the tendency to treat tokenisation as a singular concept is not without explanation.
As Stephen Cartwright, legal director at Fieldfisher noted: “From a legal and regulatory perspective, tokenisation is better understood as a set of structural models applied to traditional financial assets, rather than a single asset class.”
This reflects a broader challenge in how tokenisation is framed. While underlying structures differ, the systems through which they are implemented often appear uniform, creating a surface-level consistency that masks deeper distinctions.
Kaur echoed this tension: “The difficulty is not conceptual but operational. It lies in applying these distinctions consistently across increasingly automated and distributed systems.”
Consequently, shared terminology is becoming a problem, introducing the potential for the misclassification of risk across tokenised systems, particularly for regulators, institutional participants and investors seeking to understand the nature of their exposure.
The consequences of misclassification
The risks associated with tokenised systems carry an additional layer of complexity, particularly in how core concepts are interpreted. Settlement finality, defined as the point at which a transaction is legally final, irreversible and enforceable, provides a clear example.
The risk does not lie in settlement finality itself, but in how it is often misunderstood.
As Kaur explained: “Settlement finality is often framed as a technical outcome, but for institutional participants, it is fundamentally about certainty.
“Achieving this requires alignment between system design and the policy frameworks that define when a transaction is settled.”
This distinction is critical. The execution of a transaction on a distributed ledger does not, in itself, guarantee that it is legally complete. Where legal authority remains external to the system, the appearance of finality may mask an underlying dependency on institutional or regulatory validation.
Cartwright reinforced this point by outlining the broader conditions required for true settlement finality, including the legal recognition of digital assets as property, the recognition of distributed ledgers as authoritative records of title, regulatory clarity on collateral and security interests and integration with payment and settlement infrastructure.
Ultimately, finality depends not only on system design, but on whether the surrounding institutional environment recognises the transfer as complete. Without this alignment, systems that appear operationally final may remain legally contingent, leading to a misclassification of risk across tokenised arrangements.
Why taxonomy is essential
The challenges outlined above point to the need for a clear organisational framework capable of distinguishing between fundamentally different forms of tokenised systems. Without a defined taxonomy, materially distinct arrangements continue to be assessed using uniform assumptions, limiting the effectiveness of both regulatory oversight and risk evaluation.
In the absence of a widely adopted framework, the responsibility has increasingly shifted to policymakers and industry leaders to develop structured approaches that support interoperability while preserving legal and economic clarity.
This shift is already visible within regulatory practice. Laura Clatworthy, head of digital assets at Edwin Coe and Daniel Tunkel, head of UK regulation at Edwin Coe, highlight that the Financial Conduct Authority has begun to formally differentiate between categories of digital assets:
“The FCA has helpfully distinguished between Specified Investment Tokens, which will be regulated in the same way that the underlying Specified Investment will be regulated, and unregulated digital assets, qualifying digital assets that will be regulated independently.”
This emerging regulatory differentiation reinforces the broader point. Tokenisation is already being treated as a set of distinct structures in practice, even if this distinction is not consistently reflected across market discourse.
Within this context, the need for a coherent taxonomy becomes clear.
Kula, a decentralised impact investment company, is working as an educator on the importance of tokenisation’s impact on financial services.
Its recent whitepaper: Where authority resides: A completion-based taxonomy of tokenisation, outlined the potential risk of overgeneralising tokenisation, and how market participants can categorise use cases for legal and regulatory certainty.
The whitepaper contributed to this development by proposing a framework that distinguishes between tokenised systems based on when and how entitlement becomes operative. Rather than focusing on the presence of a token, this approach centres on the conditions under which a transfer becomes legally and economically effective.
For regulators, lawyers and market participants, such distinctions are essential in ensuring that tokenised systems are classified, governed and deployed in line with underlying risk profiles.
The taxonomy itself
If tokenisation is to be understood as a set of distinct structures rather than a single transformation, then the point at which entitlement becomes operative provides a useful basis for clear categorisation.
Kula’s framework approaches tokenisation through this lens, separating systems by where authority lies, and when a token’s transfer becomes legally and economically final. In doing so, focus is carefully shifted away from a token’s presence, and towards the conditions under which ownership, rights and settlement are recognised.
Consequently, four broad categories emerge:
Referential tokenisation is where the ledger records exposure, while the change in economic position between the parties is recorded elsewhere.
Contractual tokenisation is where the ledger records a change that activates enforceable rights, with entitlement change between parties determined by an external legal document.
Title tokenisation occurs when the recorded state of a transaction is seen as the official source of ownership by a governing body.
Constitutive tokenisation refers to when the recorded state itself completes the transfer of entitlement between the parties.
The above spectrum reinstates a crucial piece of the tokenisation conversation, completion authority, the point at which a transfer becomes legally and economically effective, which ultimately determines what a token represents.
This perspective aligns with existing legal interpretations of tokenised assets.
As Cartwright outlined, tokenised structures can be understood through models such as direct, indirect and incomplete tokenisation, each defined by where legal ownership and authority reside.
Cartwright’s distinctions expose a shared logic. Direct tokenisation in that “the token itself is the legal form of the asset and embodies the associated rights and obligations,” and indirect models, “where the token represents rights against an intermediary that holds the underlying asset.”
Taken together, both perspectives point to a converging view on tokenisation: the process isn’t introducing an entirely new asset class but a set of structurally distinct arrangements through which existing assets are represented, governed and transferred. This clarity exposes both the technological and legal gaps that undermine the financial promise tokenised assets can deliver. Without closing them, jurisdictions cannot comprehensively regulate and institutions cannot credibly participate.
Therefore, the industry must move towards the view of tokenisation as an umbrella term under which there are multiple distinctions, each requiring differing risk types, and not a singular innovative process.
However, leaders such as Kula are moving forward with a regulation-first, educational approach to ensure the next phase of capital markets can innovate with tokenisation safely.
Kula’s latest whitepaper, Where authority resides: A completion-based taxonomy of tokenisation, sets out to bring greater precision to how tokenisation is defined and understood across the market. It argues that current definitions remain overly broad, masking important functional differences between tokenised arrangements.
In doing so, the paper draws attention to emerging regulatory blind spots, where frameworks risk being applied inconsistently to structures that operate in fundamentally different ways. This lack of clarity is not just theoretical. It creates real-world risk, particularly where assets that appear similar at a technical level are assumed to carry the same legal certainty, control mechanisms or settlement finality.
By grounding tokenisation in where authority and completion actually reside, Kula positions taxonomy as more than a semantic exercise. It becomes a prerequisite for market stability, providing institutions and regulators with the clarity needed to assess risk accurately, design appropriate oversight and build infrastructure that can scale with confidence.
