Tokenisation is increasingly being discussed as the next evolution of financial markets. By representing financial assets on a blockchain, institutions can potentially improve settlement efficiency, automate transactions, and make assets easier to transfer across digital platforms. From bonds and investment funds to real-world assets, the possibilities extend well beyond cryptocurrencies. But as financial institutions explore these opportunities, one important question deserves more attention: does digitising an asset automatically make it secure?
The answer is no. Tokenisation changes how assets are represented, transferred, and managed, but it does not eliminate risks related to access, authorisation, governance, or operational failure. In some cases, it makes these questions more important because transactions can be executed rapidly and, once confirmed on a blockchain, may be difficult or impossible to reverse. The security challenge behind tokenised finance is therefore not just about protecting a blockchain. It is about securing the entire system through which digital assets are controlled.
Security extends beyond the blockchain
Blockchain networks are designed to maintain transaction records and enforce rules governing how digital assets move. However, the security of the underlying network is only one part of the equation. An institution can operate on a secure blockchain and still face risks if its private keys are compromised, transaction approvals are poorly governed or access privileges are mismanaged. A legitimate transaction executed using stolen credentials may be processed exactly as the network was designed to process it.
This distinction is particularly important for institutional investors. Their requirements extend beyond ensuring that an asset cannot be accessed by an unauthorised external party. They must also ensure that legitimate access is appropriately controlled, transactions comply with internal policies and no single individual has unchecked authority over significant assets.
In other words, the security of tokenised finance depends as much on the controls surrounding a transaction as on the technology processing it.
The private key is becoming a governance issue
In traditional finance, asset ownership and transaction authority are mediated through established institutions, account structures and approval processes. Tokenised assets introduce a different technical mechanisms: smart contracts, that hold the logic (at times even transfer controls) and wallets that deploy, access and manage these smart contracts. Obviously the end investor wallets that hold and transfer assets also form another part of this system. So net net cryptographic keys determine not only who can authorise transactions on-chain, but who can control the smart contract logic and rules that will govern how the tokens can be used.
This makes key management and the governance thereof, a critical component of institutional risk management.
If access to a private key effectively enables the switching of an asset from non-transferable in the hands of the investor, to transferable, institutions must carefully determine who can access that key, under what circumstances it can be used and how transactions are approved. Treating key management as simply an IT security function overlooks its wider implications for corporate governance.
A sound institutional framework should separate the ability to generate a smart contract or initiate a transaction from the authority to approve and deploy or execute it. Role-based access, multiple approval requirements and clearly defined transaction policies can help prevent a single compromised account or individual from gaining unrestricted control.
Technologies such as multi-party computation (MPC) and hardware security modules (HSMs) can support these controls in different ways. MPC can help distribute cryptographic signing authority across multiple parties or components, while HSMs provide specialised, protected environments for cryptographic operations. Neither is a complete security strategy on its own. Their effectiveness depends on implementation, access controls, governance and the broader operating environment.
The objective is not merely to protect a key. It is to ensure that control over an asset is never dependent on an inadequately governed point of access.
The risks that emerge when something goes wrong
Security frameworks are often assessed by how effectively they prevent attacks. Institutional custody must also be evaluated by how well it handles failures.
What happens when an employee with transaction privileges leaves the organisation? How can access be revoked if credentials are compromised? What happens if an authorised employee initiates a transaction in error? How does an institution recover access if critical infrastructure becomes unavailable?
These are not peripheral operational questions. They are fundamental to maintaining control over assets.
In conventional financial systems, institutions have established processes for account recovery, transaction disputes, reversals and operational continuity. Blockchain-based transactions may not offer equivalent remedies. Once an asset has been transferred and the transaction confirmed, recovery may depend on the recipient’s cooperation or the specific mechanisms available within the relevant network and legal framework.
Institutions therefore need to plan for failure before deploying tokenised assets at scale. This includes secure backup and recovery arrangements, documented incident-response procedures, regular access reviews, transaction limits and tested business-continuity plans.
The ability to recover from an incident should be considered alongside the ability to prevent one.
Tokenisation does not remove the need for accountability
Another misconception is that transparency on a blockchain automatically translates into accountability.
A distributed ledger can provide a record of transactions, but that record does not independently establish whether the underlying transaction was legally appropriate, properly authorised or consistent with an institution’s obligations.
Consider a tokenised bond. Its digital representation may move between wallets, but institutions still need to establish who owns the relevant rights, how those rights relate to the underlying security, how interest payments and redemptions are managed, and who is responsible if records or processes fail.
The same principle applies to other tokenised assets. Security must encompass not only the token, but also the relationship between the token, the underlying asset, the legal arrangements and the institutions responsible for administering them.
This is why segregation of assets, auditable approval processes, clear accountability and appropriate compliance controls remain essential. Technology can automate certain processes, but it does not remove the need to define who is responsible for their outcomes.
Building security into the architecture
As tokenisation develops, institutions should approach security as an architectural requirement rather than a feature added after an asset has been issued.
That means assessing the entire asset lifecycle: how keys are generated and protected, how access is granted, how transactions are approved, how assets are monitored, and how recovery works when systems or people fail.
It also means ensuring that security controls can evolve. Institutions may operate across multiple blockchains, custody arrangements and counterparties, each with different technical and operational requirements. A fragmented approach can introduce gaps in visibility and control. Common governance standards, interoperable systems and consistent risk policies will become increasingly important as these environments expand.
For banks, asset managers and other institutions, the objective should be to combine the efficiencies of programmable financial infrastructure with the safeguards expected of regulated financial services.
Trust will determine whether tokenised finance scales
Tokenisation has the potential to change how financial assets are issued, transferred and settled. But its long-term success will depend on more than transaction speed or the number of assets represented on-chain.
Institutions must be able to demonstrate that assets are protected, access is governed, transactions are properly authorised and operational failures can be managed. Investors must have confidence not only in the underlying technology, but also in the systems and institutions responsible for safeguarding their interests.
Ultimately, the defining security question in tokenised finance is not simply whether the blockchain can be trusted. It is whether the entire system surrounding the asset can be trusted.
The institutions that recognise this distinction will be better positioned to adopt tokenised financial infrastructure responsibly. Because when assets become programmable, security is no longer just about protecting what an organisation owns. It is about governing who can move it, under what conditions, and who remains accountable when something goes wrong.
The article has been written by Manhar Garegrat, India Head, Liminal Custody
