From derivatives to digital: liquidity was never just about selling the asset

One of the most important lessons I took from working in derivatives at Citi nearly 30 years ago, and later from more than two decades in property, is that asset liquidity and investor liquidity are not necessarily the same thing. That distinction is increasingly relevant as we discuss tokenisation and real-world assets. The technology has changed enormously; the underlying financial problem has not.

When a liquid security became an illiquid position

In the late 1990s, while working on Citi’s derivatives desk in London, I advised a large European corporate client that found itself holding a substantial position in publicly traded shares following a corporate transaction. The position was worth tens of millions of dollars.

The shares had a visible market price and traded in an active secondary market, so by any conventional definition they were liquid securities. Yet the company was restricted from selling them for roughly 12 months. The asset was liquid; that particular investor’s position was not.

The company did not need to sell immediately, but it could not comfortably leave a substantial position exposed to an uncontrolled fall in the share price while it waited for the restriction to expire. The question was therefore not how to sell the shares, but how to manage the economic exposure until the position became saleable.

Subject to the applicable restrictions and approvals, we structured an equity collar. The company bought a put option to establish a downside floor at maturity and, in exchange, sold a call option at a higher strike price, surrendering some potential upside.

The premiums on the two options could be structured to offset one another substantially, resulting in little or no net upfront option premium. That did not make the structure economically costless — the price included the surrendered upside, along with the usual transaction and counterparty considerations — but it reshaped the exposure without forcing a sale.

We did not remove the restriction, change the underlying shares, or create a buyer. We changed the economics of holding the position while a sale remained unavailable. The company retained ownership but gained greater certainty over the range of outcomes it could face when the restriction expired. The collar did not create liquidity. It made a period of illiquidity more manageable.

Liquidity is not a binary condition

That transaction stayed with me because it showed that liquidity cannot be understood simply by asking whether an asset trades. It also depends on the investor’s legal rights, the size of the position, the time available to sell and the price the market is prepared to offer.

An investment might be technically transferable but legally restricted. It might be legally transferable but have very few willing buyers. It might have buyers, but only at a price materially below its indicated value. Even in a deep market, the relevant question is rarely just whether one can sell, but how much can be sold, how quickly, and at what price.

When conditions deteriorate, market depth can fall, bid–ask spreads can widen, and the price impact of a meaningful sale can rise sharply. A quoted price is not necessarily an executable price, and the price available for a small transaction may not be available for a substantial position.

Under stress, liquidity may remain available, but only at a higher transaction cost, with greater price impact and on materially worse terms; in some markets, it can disappear altogether. This is why investors generally require an illiquidity premium: an additional expected return for accepting restrictions on when, how quickly, and at what cost they can recover their capital. That cost is often least visible when markets are calm, and most consequential when many investors want to sell simultaneously.

Income, capital risk and exit are different questions

When I assess an investment, particularly in property, I treat income, capital risk and exit as separate, although economically connected, questions.

The first concerns what the asset produces while you own it. For property, that means examining rental income, occupancy, operating and financing costs, reserves and the sustainability of the resulting net cash flow. I want an investment to make economic sense while you hold it, rather than depending entirely on someone paying substantially more for it at some future date.

The second concerns the underlying capital. Is the asset soundly valued? What could impair that value? How resilient are the income, financing and operating assumptions if conditions change?

The third question is different again: how do I get my capital back? Who is the natural buyer, how deep is that market, and what is the realistic holding period? What happens if the anticipated exit takes one or two years longer than expected? Can the asset be refinanced, can part of the investor’s interest be transferred, and is the expected return sufficient compensation for committing capital to something that may be difficult to sell?

An asset can produce an attractive income and still be a poor investment if its capital or exit assumptions are unrealistic. Income rewards the investor for holding; liquidity affects how readily, and at what price, that capital can be redeployed. The two are related, but they are not interchangeable.

Where tokenisation genuinely fits

The discussion around tokenisation needs to become more sophisticated. Putting an asset onto blockchain infrastructure does not automatically convert an illiquid investment into a liquid one. A building remains a building, and its physical and economic fundamentals do not change just because an interest in it is represented digitally.

What can change is how the legal and economic interests associated with that building are structured, and this is where digital securities become genuinely interesting.

One investor may want to reduce an exposure while another wants precisely that exposure. If the rights are clear, the transfer is legally permitted, the information is reliable, and a willing, eligible buyer exists, those investors may be able to transact without selling the property itself. That can provide meaningful optionality. It is not guaranteed liquidity.

Tokenisation can make an interest more divisible and operationally transferable, and digital infrastructure can improve issuance, settlement, ownership records, administration, reporting and compliance. It may also help suitable investors discover and assess opportunities more efficiently.

These are meaningful improvements, but transferability is not the same as liquidity. Genuine liquidity still requires enforceable rights, active buyer demand, market depth, credible price discovery, reliable information and compliant trading infrastructure.

A broader pool of potential investors may improve the conditions for liquidity to develop, but a potential audience is not the same as an active two-sided market. A token can provide the infrastructure around which a market develops. It cannot create that market on its own.

The bridge from derivatives to digital

This is where my derivatives experience and my later experience in property come together. Nearly 30 years ago, we used derivatives to separate an asset’s ownership from specific elements of its economic risk, allowing a client to retain legal ownership while limiting or transferring part of its economic exposure.

Today we have a different generation of tools: digital securities, tokenisation, blockchain settlement, fractional interests, digital identity, automated compliance and, increasingly, AI-assisted underwriting.

The distinction between the two eras matters. Unlike a derivative, tokenisation does not itself separate or transfer a particular risk; the legal and economic structure defines the investor’s rights, and digital infrastructure then improves how those rights are issued, recorded, administered and transferred.

But the underlying question remains remarkably familiar: which part of the economic exposure does this investor want to retain, and which part do they want to transfer? That is a structuring question, and good structuring begins with the investor’s economic problem, not with the technology available to solve it.

The objective does not always have to be making the underlying asset liquid. Sometimes the more realistic objective is making the economic exposure to that asset more transferable.

What the ROX pilot established

This distinction also shapes how I think about LANDHIVE’s initial ROX pilot. Twenty investors participated in a deliberately limited test tranche, with economic participation linked to one apartment within the completed ROX Brighton development.

During its first six months, the limited pilot made distributions equivalent to an average annualised yield of 8%, funded from rental income and paid using stablecoins. The stablecoin was the payment mechanism; it was not the source of the return.

This is a historical result from a limited pilot, not a forecast, guarantee or reliable indicator of future returns. More importantly, the pilot was not evidence of a liquid secondary market, and it should not be presented as such.

It showed that a defined operational chain could function in a controlled case: investors could be onboarded, the legal and administrative structure could operate as intended, property income could be recorded and reported, and distributions could reach investors. It tested the machinery. It did not prove the wider model at scale.

That precision matters, because the real test of financial technology is not whether an asset can be tokenised. It is whether the resulting structure solves a genuine problem for the investor while preserving clear rights, appropriate protections and economic substance.

Structuring comes before technology

Financial technology often tempts us to start with the technology and then search for a problem it can solve. I believe that sequence is backwards. My background was in financial structuring before blockchain existed, and I then spent more than two decades working directly with property, so LANDHIVE sits at the intersection of those experiences. Our starting point is not what we can tokenise, but the problem the asset owner, developer or investor has, and whether we can structure a better solution.

Sometimes the appropriate answer involves debt, sometimes equity, sometimes a combination of the two, and sometimes fractional economic interests. AI can support underwriting and help connect suitable capital with suitable opportunities, and digital infrastructure can improve settlement, administration, reporting and the broader distribution of an opportunity to eligible investors.

But these are tools. Blockchain is infrastructure, not the investment thesis. AI supports judgement; it does not replace it. The product remains the financing structure, and its value still depends on the quality of the underlying asset, the credibility of the developer, the suitability of the capital structure and the rights received by the investor.

The enduring principle

A security can be liquid while a particular investor’s position in it is illiquid. An investor does not always need to sell an asset to change their economic exposure. Income, capital risk and exit should be assessed separately. Tokenisation does not manufacture liquidity; it creates infrastructure through which liquidity may develop when market conditions allow, because liquidity is created by the market around the instrument, not by the instrument alone. Sometimes the objective is not to make the underlying asset liquid at all, but to create a credible, transparent and legally robust mechanism for moving economic exposure from one investor to another.

Technology changes, but the fundamental discipline of financial structuring does not. That is the bridge I see between the derivatives transactions I worked on nearly 30 years ago and the digital infrastructure being developed today.

Different technology, different assets, but the same discipline: understand the exposure, identify the risk the investor does not want, preserve the value they do want, and create a structure that lets capital move more intelligently.

This article is published for information only. It is not investment, legal or tax advice, and it is not an offer to sell or a solicitation to buy any security. Capital is at risk and you may get back less than you invest.