Simon Maharaj, managing consultant and lawyer at D2 Legal Technology, writes that 2025 has brought a major shift in TradFi attitudes towards digital asset technology.
Major financial institutions are actively embracing blockchain and Distributed Ledger Technology (DLT), cryptocurrencies and stablecoins are having a second wind, and some are now heralding the “third revolution in asset management”: fund tokenisation.
By inserting blockchain technology into the core of asset management, fund administration tasks can be moved on-chain and automated in real time through smart contracts. Instead of having disparate participants executing workflows sequentially, participants can now work synchronously at once.
As the industry begins to make these incremental steps towards adopting fund tokenisation, Simon Maharaj, D2 Legal Technology, explores the key steps and considerations towards fund tokenisation adoption.
What is fund tokenisation?
Fund tokenisation involves the issuance of digital tokens, with each token representing a share or unit of the fund which normally correlates to the capital contribution of the investor in the fund.
Traditionally investments such as private equity, hedge funds, and venture capital have been limited to institutional investors due to high barriers to entry and long lock-up periods. Fund tokenisation offers the potential to break through these barriers, allowing digital tokens to be more accessible to other market players, traded more efficiently and enabling higher liquidity.
How does fund tokenisation work?
Fund managers can either tokenise an existing fund or launch a digitally native fund. When tokenising an existing fund, basic regulatory registration and documentation should be complete before tokenisation. Once this is completed, the tokenisation process involves:
1) Selecting the blockchain protocols for the fund.
2) Tokens are categorised according to agreed parameters e.g. share classes and number of shares per investor.
3) The tokens are issued to each investor, each token containing ownership rights for the investor.
4) The fund tokens are mapped to blockchain wallet addresses, with digital asset custodian management provided
Benefits
Fund tokenisation provides a real-time electronic registration system in the blockchain to hold and register book-entry securities. Investor tokens are safeguarded in segregated digital wallets, enabling automated reporting, reconciliation and data storage.
Corporate actions can now occur automatically, for example, share issuances, redemptions, updating holder records, and cancelling and issuing certificates. NAV (net asset value) calculations can be integrated on-chain through smart contracts, creating auditable calculations intertwined with share issuance history.
These operational efficiencies will ultimately lead to lower costs for investors. There is potential to further widen the pool of investors. Previously illiquid funds can be fractionalised to facilitate lower minimum investment amounts and improved liquidity, making funds more accessible to retail investors.
Gaining ground
This model has started to gain ground in low-risk areas such as money market funds (MMFs). Digitising MMFs allows these assets to be used immediately as collateral. Blackrock’s USD Institutional Digital Liquidity Fund debuted on the Ethereum blockchain and now operates on seven blockchains, holding approximately USD2 billion in cash and US Treasuries. Franklin Templeton offers a similar tokenised fund that currently has a USD692 million market capitalisation. Tokenisation removes the need for distressed sales to meet cash settlement obligations while providing KYC and AML efficiencies
Considerations for fund managers
Given the clear benefits, firms should consider several factors for successful tokenisation.
● Fund Operations: The choice of blockchain will depend on distribution strategy – public networks suit broad retail distribution, while private networks work for defined professional investor groups. Fund managers must determine interoperability with digital asset exchanges and decide how much information to reveal on-chain versus off-chain. Settlement can occur with digital or fiat currencies, but conversion costs currently apply with fiat settlement.
● Digital Asset Custodians: When tokens are issued, custodians hold them in a segregated wallet with private keys governed by the custody documentation. Crucial considerations include the legal basis for token segregation, alignment with fund regulations and client asset rules, and operational restrictions between blockchain providers and fund managers.
● Legal and regulatory implications: The Trump administration has signalled a decidedly pro-crypto legislative environment with a light-touch regulation to retain U.S global leadership on digital assets. Jurisdictions like Luxembourg, Switzerland and Singapore are leading in recognising digitally native securities. The location of funds, blockchains, managers and investors will need to be analysed on any tokenisation so there is no ambiguity relating to legal and regulatory discrepancies between different jurisdictions. Delaware remains a popular state for the establishment of funds, with the state having passed laws to recognise blockchain-native securities and registries.
This is just the start. Significant regulatory and market change will continue to operationalise fund tokenisation globally. It represents a fascinating innovation offering enhanced liquidity, greater accessibility, and operational efficiencies. However, both transparency and an understanding of how fund tokenisation can work are needed. It is now time for TradFi to evaluate this approach and prepare for the next revolution in digital asset technology.
