What actually happens when a stock becomes a token?

Tokenized securities are digital tokens on blockchain networks that represent ownership claims of real world financial assets—stocks, bonds, funds, or commodities—held by a regulated custodian. They are created through minting, where an issuer acquires real securities, deposits them in custody, and issues corresponding tokens on blockchain networks. They are destroyed through redemption, where a token holder returns tokens to the issuer, the custodian liquidates the underlying asset, and cash is paid out. The backing model, typically a 1:1 ratio of tokens to custodied assets, is what ties a token's value to the real security it represents. This article walks through each stage of the securities tokenization process in detail—starting with how tokens are minted, then how they're redeemed for cash, and finally how the backing model holds the system together. For foundational context on what tokenized real-world assets are and why they exist, see Understanding tokenized real-world assets. For a breakdown of the asset types available—Treasuries, equities, private credit, commodities, and more—see RWA categories in 2026. For a checklist on evaluating issuers and custodians, see How to verify RWA tokens. Disclaimer: This guide is for educational purposes only. It is not financial advice, not a solicitation, and not for UK audiences. Tokenized securities are risky and not suitable for all users. Holders of tokenized equities hold tokens providing economic exposure, not the underlying stock itself. No shareholder voting rights. Not available to US users.

How minting tokenized securities works

Minting is how new tokenized securities come into existence. The process moves through four stages, each connecting the traditional financial system to a blockchain network.

The issuer buys real securities

An issuer—such as Ondo Finance, which powers tokenized equities available through MetaMask's RWA integration, starts by purchasing real world stocks, bonds, or funds on the traditional financial markets through a licensed broker.

The upfront cost is significant. If an issuer wants to create a pool of one million tokenized shares and the underlying stock trades at $200 per share, that pool requires $200 million in real securities. Issuers either use their own capital or raise funds from institutional investors before minting begins.

The issuer places them with a custodian

Once the issuer owns the real securities, they hand them over to a custodian—a regulated financial institution whose job is to hold and protect assets on behalf of clients. Think of a custodian as a secure vault with a legal obligation to keep the assets safe and separate from its own holdings.

The issuer receives a custody receipt confirming the deposit. From this point on, the custodian is responsible for the real assets. If anything goes wrong at the custody level, the tokens built on top of those assets lose their foundation. For a deeper look at how to evaluate custody arrangements, see How to verify RWA tokens.

The issuer creates tokens on blockchain networks

With real assets secured in custody, the issuer creates a smart contract on a blockchain—most commonly Ethereum, where the majority of tokenized securities liquidity exists as of June 2026. A smart contract is a program that lives on the blockchain and automatically tracks who owns how many tokens.

If one million real shares are in custody, the issuer mints one million tokens at a 1:1 ratio, one token for every one real share.

Once minted, these tokens can be bought, sold, or held like any other digital asset. MetaMask displays tokenized equity balances directly in the wallet and supports buying and selling tokenized stocks, funds, and commodities through its Ondo Global Markets integration.

Backing connects the token to the real asset

Every token in circulation is meant to correspond to one real asset in custody. This 1:1 backing ratio is what gives a tokenized security its value. Without verified backing, a token is just a number on a blockchain with no claim behind it.

Reputable issuers hire independent auditors to confirm that the number of real assets in custody matches the number of tokens outstanding. These reports, sometimes called proof-of-reserves audits, are the main way to confirm that backing is being maintained. For a broader overview of the risks token holders should understand, including oracle risk, smart contract risk, and regulatory risk, see RWA tokens: what crypto wallet users need to know.

How redemption of tokenized securities works

Redemption is minting in reverse. A token holder converts tokens back into cash by triggering a process that sells the underlying real world asset.

The holder submits a redemption request

The process starts on the issuer's platform. The holder specifies how many tokens to redeem. The issuer checks the blockchain to confirm the holder actually owns those tokens, then locks them in the smart contract so they can't be sent or sold while the redemption is being processed.

The issuer sells the underlying asset

The issuer tells the custodian to sell the corresponding number of real securities on the traditional market. The custodian executes the sale through standard brokerage channels. Settlement follows traditional timelines—typically one business day (T+1) for US equities, a rule the SEC put in place in May 2024 (SEC Rule 15c6-1(a)).

Cash from the sale arrives in the issuer's account once settlement clears.

Cash goes out, tokens get burned

Once the issuer has the cash, they send the equivalent value to the token holder, either by bank wire or stablecoin transfer. The locked tokens are then burned, meaning they're permanently deleted from the smart contract. This reduces the total number of tokens in circulation to match the reduced number of real assets in custody.

How long does redemption take? Roughly two to four business days. One day for the traditional market sale to settle, plus one to three days for the cash to arrive, depending on payment method and location.

The delay comes from the traditional finance side, not the blockchain side. Locking and burning tokens takes seconds. Selling real shares on a stock exchange and wiring cash follows conventional banking timelines. For a full comparison of how tokenized securities differ from traditional securities on settlement speed, cost, and transparency, see Tokenized real-world assets vs traditional securities.

How backing maintains value

Backing is the link between a token's price and the underlying value of the real world asset behind it. Three backing models exist in practice.

Full backing (1:1)

The standard approach: for every token in circulation, exactly one real asset sits in custody. One million tokens means one million real shares with the custodian. Every single token can be redeemed.

Partial backing

If an issuer holds fewer real assets than tokens outstanding, some token holders will not be able to redeem. A pool with one million tokens but only 800,000 real shares has a backing ratio of 80%—meaning 200,000 tokens have no real asset behind them. Proof-of-reserves audits exist specifically to catch this. [For how to evaluate these reports, see How to verify RWA tokens.]

Over-collateralization

Some issuers hold more assets than tokens issued, creating a safety buffer. A 110% backing ratio means the issuer could absorb a 10% price drop in the underlying asset before the pool falls below full backing. This is a more conservative structure, typically seen in institutional-grade issuances. For an in-depth comparison of how different issuers structure their tokenization—including SPV wrappers, blockchain registries, and secondary market liquidity—see Tokenization methods for RWA liquidity.

What smart contracts do, and what they can't do

Smart contracts handle the blockchain network side of the minting and redemption cycle. They track token ownership across wallet addresses, lock tokens during redemption so they can't be double-spent, burn tokens once the issuer confirms settlement, and maintain a permanent record of every mint and burn.

But smart contracts have hard limits. A smart contract cannot look inside a custodian's vault and confirm that real assets are actually there—it trusts that the issuer has maintained backing. It cannot recover assets if a custodian fails or goes bankrupt. It cannot move money through the banking system; fiat transfers happen entirely outside a blockchain network. And it cannot enforce laws or regulations across different countries.

This is the core tradeoff of tokenized securities: the blockchain layer is transparent, automated, and tamper-proof, but it relies completely on off-chain institutions—issuers, custodians, auditors, and regulators—to do their part. The blockchain tracks ownership. Traditional finance protects the underlying value. For a broader look at how self-custodial and custodial models compare across crypto trading, see Self-custodial vs custodial trading explained.