Tokenized equities have been discussed for a long time, but the real question for institutional investors has always been practical: how do you get into and out of a tokenized stock or ETF without creating unnecessary friction? Ondo Finance’s new in-kind conversion system aims to answer that question in a way that could make the whole process feel much more natural for professional investors and financial institutions.
In simple terms, Ondo’s system allows approved institutions to convert underlying securities directly into tokenized shares, and then convert those tokenized shares back into the original securities. Rather than forcing institutions to sell the underlying stock or ETF position first, raise cash, and then use that cash to buy or redeem tokens, the process can be done in kind. That means the asset itself can be used as the input and output, which is a meaningful shift in how tokenized equities are structured.
What Ondo’s in-kind conversion actually means
Most market participants are familiar with the basic idea of tokenization: a real-world asset is represented by a digital token. But the mechanics matter a lot in practice. If an institution wants exposure to a tokenized stock, the traditional approach may involve buying the underlying security, selling it, and then using the proceeds to acquire the token. Or, when exiting, it may need to redeem the token for cash and then buy back the underlying security later.
Ondo’s in-kind conversion changes that flow. Approved institutions can mint tokenized stocks and ETFs using the underlying securities themselves. Later, they can redeem those tokenized positions and receive the underlying securities back. That makes the tokenized version behave more like a direct representation of the asset rather than a separate instrument that requires a cash settlement step.
Why cash settlement has been a friction point
Cash settlement is not just an administrative detail. It can introduce market risk, timing risk, and operational complexity. If an investor must sell a stock first, they are exposed to price movement between the sale and the purchase of the token. If they need to redeem later, they may face the same issue in reverse.
For institutions managing larger portfolios, that kind of friction can be significant. It can affect execution quality, increase transaction costs, and make the tokenized product feel less like a seamless extension of the underlying security. By allowing conversion in kind, Ondo is addressing one of the practical obstacles that has kept some institutional players cautious about tokenized equities.
Why this matters for institutional investors
The most important point is that this kind of system makes tokenized stocks and ETFs more usable for institutions that already hold securities. Instead of treating tokenization as a separate product that requires a different funding path, institutions can move between the underlying asset and its tokenized representation in a more direct way.
That can matter for several reasons:
- Reduced execution friction: Investors do not need to convert securities into cash before entering or exiting the tokenized position.
- Improved capital efficiency: Institutions can keep the economic substance of the position intact while changing the form of ownership or settlement.
- Clearer operational flow: The process is easier to understand when the input and output are the same type of asset rather than cash and token.
- Better fit for existing portfolios: Firms that already hold stocks or ETFs can explore tokenization without restructuring their holdings in a way that feels disruptive.
How the mint and redemption process could work
At a high level, the concept is straightforward. An approved institution that holds a qualifying underlying security can use it to mint the corresponding tokenized share. If that institution later wants to exit the tokenized position, it can redeem the tokens and receive the underlying security back. The key is that the system is designed around the asset itself, not just a cash settlement layer.
That does not mean the process is simple in a regulatory or operational sense. In fact, it is likely the opposite. Institutions will need to deal with custody arrangements, eligibility rules, settlement timing, documentation, and compliance requirements. But from an economic perspective, the structure is much cleaner than a model where cash is the only bridge between the traditional security and the token.
What this means for tokenized stocks and ETFs
Tokenized ETFs and tokenized stocks have been part of the conversation for years, but adoption has often been slowed by questions about how useful they really are. If the token is only useful in a limited cash-settled environment, it may appeal to a narrower audience. If it can be converted directly with the underlying security, it becomes more relevant to a broader range of institutional use cases.
This is especially important for ETFs. Many institutional investors already hold ETFs as a core part of portfolio construction. If those positions can be converted into tokenized form and back, the product becomes easier to integrate into existing workflows. It also opens the door to new use cases around settlement, collateral, portfolio management, and digital asset infrastructure.
Regulatory and custody considerations still matter
Of course, the technical design is only part of the story. Institutional adoption of tokenized equities will depend heavily on how well the product fits within existing regulatory frameworks. That includes questions around securities law, investor eligibility, recordkeeping, transfer mechanics, and the legal rights attached to the tokenized position.
Custody is another major factor. Institutions will want clear answers about who holds the underlying assets, how they are protected, and how the tokenized representation is backed. If Ondo’s system is to be taken seriously by professional investors, the operational and legal structure behind the in-kind conversion will need to be as strong as the core concept.
The bigger picture
Ondo’s move is significant because it focuses on one of the practical gaps that has held back institutional tokenization. The idea of putting stocks and ETFs on a blockchain is not new, but the way those tokens are created and redeemed has often been a source of friction. By allowing conversion using the underlying securities rather than cash, Ondo is making the product more aligned with how institutions already think about ownership and settlement.
That could help tokenized equities move beyond the experimental phase. If institutions can enter and exit positions in a way that feels more natural, tokenized stocks and ETFs become more than just a crypto-adjacent novelty. They become a potentially practical tool for modern portfolio management.
Bottom line
Ondo’s in-kind conversion system is a meaningful step toward making tokenized stocks and ETFs more usable for institutional investors. By allowing approved institutions to mint and redeem tokenized positions using the underlying securities themselves, Ondo reduces some of the friction that has historically made tokenized equities harder to adopt. If the regulatory, custody, and operational details hold up, this kind of structure could help tokenized stocks move closer to the kind of institutional-grade product that serious market participants have been waiting for.
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