Fund Tokenization Explained With Real Examples
Linh Tran

The funds industry is poised to undergo a radical change driven by tokenization. Traditionally, alternative investments like private equity, hedge funds, and venture capital hold the potential for high returns, but remain out of reach for many due to high entry costs and long lock-up periods. Through tokenization, funds are converted into smaller, bite size tradable tokens on the blockchain, fostering greater investor diversification and supplying fund managers with the capital they need.

In this article, we will explore the basics of fund tokenization, covering:

  • What is fund tokenization
  • Real-world examples of tokenized funds
  • The difference between tokenized funds and traditional funds
  • Fund tokenization process
  • Benefits of tokenization
  • Challenges in tokenizing assets

What Is Fund Tokenization? 

Fund tokenization is the process of creating digital tokens that represent shares or units in a traditional investment fund, such as a mutual fund, venture capital fund, or private equity fund. 

Several fund types are well-suited for tokenization. Funds with high barriers to entry, such as those with high minimum investment requirements or residency restrictions, benefit from tokenization. Additionally, funds that deal with illiquid assets, like private equity or real estate, can see significant improvements in accessibility, liquidity, and fractional ownership through tokenization.

Examples of ideal funds for tokenization:

  • Real Estate Funds: This type of fund is traditionally illiquid assets with high entry barriers. Tokenization can create a secondary market for shares, increasing liquidity and potentially lowering investment minimums.
  • Private Equity Funds & Venture Capital Funds: These types of funds are traditionally limited by high minimum investments. Tokenization allows for fractional ownership, democratizing access to these high-growth asset classes.
  • Hedge Funds: Hedge funds often come with complex structures with limited access. Hedge fund tokenization can provide investors with a more accessible way to invest in complex strategies, with improved liquidity and transparency.
  • Infrastructure Funds: Investments in large-scale infrastructure projects can be tokenized, allowing more investors to participate in funding these projects.
  • Commodities Funds: Funds that invest in physical commodities like gold, silver, or oil can be tokenized, providing easier and more flexible trading options.
  • Debt Funds: Tokenizing debt funds which invest in bonds, government securities, and money market instruments can offer improved liquidity and accessibility for investors looking to invest in debt securities.

Also read: What Assets Can Be Tokenized

Real World Examples of Tokenized Funds

Below are examples of tokenized funds, including the world's largest tokenized treasury fund (as of July 2024), a tokenized commodity fund, and two tokenized venture capital funds.

The Largest Tokenized Fund - BlackRock's BUIDL

In March 2024, Blackrock debuted in tokenization with the launch of BUIDL, which became the world's largest tokenized fund at that time, capturing almost 30% of the $1.3 billion tokenized Treasury market in just six weeks. Its assets under management (AUM) hit $483,311,326 as of July 2nd, 2024.

1. About The Fund:

  • Name: BlackRock USD Institutional Digital Liquidity Fund
  • Inception date: March 21st, 2024.
  • Portfolio assets: cash, U.S. Treasury bills, repurchase agreements.
  • Ticker: $BUIDL
  • Blockchain network: Ethereum
  • Protocol: Securitize
  • AUM: $483,311,326 (Updated July 2nd, 2024)

2. Service Providers:

  • Investment manager: BlackRock Financial Management, Inc
  • Custodian: Bank of New York Mellon
  • Transfer agent and tokenization platform: Securitize 
  • Placement agent: Securitize Markets, LLC
  • Fund auditor: PricewaterhouseCoopers LLP

3. Investor Benefits:

  • U.S. dollar yields
  • Redemption
Blackrock’s BUIDL AUM chart - Source: rwa.xyz

Source of information: Securitize, RWA.xyz.

Tokenized Funds On InvestaX

  • Diamond Standard Fund is a commodity fund that enables investors to buy shares in a pool of diamonds at an affordable minimum through a tokenized fund structure. Learn more here
  • Methodic CoinDesk ETH Staking Fund (“The Fund”) is a tokenized private fund that aims to deliver the total return of ETH and Ethereum staking rewards. The issuer has embraced tokenization to expand the Fund access to a broader investor base. The Fund allows subscriptions in fiat or in-kind, with rewards accruing in ETH and redemption in fiat or in-kind. Learn more here.
  • SPiCE is a venture capital fund that has embraced tokenization, issuing tokens to represent ownership in its SPiCE venture capital fund to invest in blockchain-focused startups. Learn more here.
  • COSIMO X is an evergreen tokenized venture capital fund that invests in early-stage companies as well as follow-on Series A rounds of selected portfolio companies in various industries, including fintech, disruptive mobile commerce, mobile applications, M2M, SaaS, cybersecurity, connected hardware systems, enabling technologies and services. Learn more here

Visit our deal hub for more information.

How Do Tokenized Funds Differ From Traditional Funds?

The emergence of tokenized funds presents a new investment landscape for both issuers and investors, offering potential benefits alongside considerations compared to traditional fund structures. 

  • Fees: Tokenized funds have the potential to reduce fees associated with intermediaries in traditional fund structures, making subscriptions to financial products cheaper for investors.
  • Entry barrier: Tokenization enables fractional ownership of assets, meaning investors can purchase smaller portions of a fund, potentially lowering the entry barrier and enabling more diversified investments.
  • Accessibility: Fund tokenization can potentially remove geographical barriers to investment and offer broader accessibility to a global investor base. For instance, issuers can launch tokenized funds for global investors on InvestaX’s Singapore-licensed tokenization platform.
  • Liquidity: Tokenized funds have the potential to offer greater liquidity compared to traditional funds, allowing investors to buy and sell their holdings more easily on secondary marketplaces such as InvestaX’s IX Exchange.
  • Record-keeping: Blockchain technology can provide a secure and transparent record of transactions for tokenized funds. This can potentially increase transparency for investors compared to traditional fund structures.
  • Technical Literacy: Investing in tokenized funds may require a certain level of technical literacy or familiarity with digital wallets and blockchain technology compared to traditional funds.
  • Regulatory framework: The regulatory environment for tokenized funds remains dynamic, requiring issuers and investors to opt for established tokenization platforms for assured expertise and legal certainty. 

Fund tokenization is an important attribute of the vision of an end-to-end on-chain investment industry. However, like any nascent industry, it faces challenges. Embracing and enhancing it promptly will drive growth and innovation, ensuring the industry's resilience and success in the long run.

Fund Tokenization Process

A fund tokenization process follows the standard asset tokenization process, typically involving the following steps.

1. Asset selection and evaluation‍

The asset tokenization journey begins with selecting a suitable asset for tokenization. Its value is then carefully assessed and documented, following standard financial practices.

2. Legal structuring‍

When designing a robust legal structure for tokenization projects, it’s crucial to ensure that the digital tokens represent a valid claim to the underlying asset. This involves defining the specific rights associated with the tokens and choosing an appropriate tokenization structure. 

The two common tokenization structures include Tokenized Special Purpose Vehicle (“SPV”) and Direct Asset Tokenization:

  • Tokenized SPV: Tokenized SPV approach also known as indirect tokenization is a common approach where the asset is held by an entity, either a private limited company or a trust. This entity is then tokenized, and tokens are issued through a pooling of funds from multiple investors, giving investors indirect interests in the underlying RWA. This is often a better approach as it fits within the securities regulations.
  • Direct Asset Tokenization: The asset itself is directly tokenized and the tokens represent a direct claim on the underlying asset This approach is typically less common due to regulatory challenges and issues such as non-fungibility, lack of regulatory clarity, and limited use cases. 

Each tokenization structure often comes with different licensing requirements. Check out the Licensing Requirement Analysis for Asset Tokenization by InvestaX’s legal team for more details.

3. Custody‍ of the RWA and Custody of RWA Tokens

Most times if it's a tangible movable RWA like whiskey barrels the RWA is securely stored and managed by qualified custodians, trustees or licensed managers. This ensures the asset is immobilized and safe kept before its digital representation is created on the blockchain. 

On the other hand, the digital representation i.e. security tokens can be either i) Self Custodized or ii) Custodizing security tokens with a licensed digital asset custodian

1. Self-custody 

Self Custody wallets are wallets used to store digital assets providing users full control over their private keys and, consequently, their funds and assets. It is the practice of individuals taking full control and responsibility for storing and managing their own digital assets without relying on third-party intermediaries. 

With self-custody, users hold their own private keys, which are essential for accessing and transacting with their crypto funds. Self-custody wallets, which can be software-based (like mobile or desktop applications) or hardware-based (physical devices), allow users to interact directly with blockchain networks, giving them complete ownership and control over their assets. 

While self-custody offers enhanced security and privacy, it also requires users to be vigilant about safeguarding their private keys and recovery phrases, as there is no central authority to recover lost or stolen funds. 

2. Custodizing RWA Tokens with a Licensed Digital Asset Custodian

Licensed Digital Asset Custodians are regulated and authorized to provide custody services. These custodians are typically subject to stringent regulatory requirements and oversight, ensuring they adhere to high standards of security, operational integrity, and compliance. By leveraging the services of a licensed digital asset custodian, organizations can mitigate the risks associated with holding and managing digital assets, ensuring they are stored securely and in compliance with relevant regulations. 

Some of the security measures adopted are decentralized security protocols and multi-party computation (MPC) to eliminate single points of failure, thereby enhancing the protection against both external and internal threats. Additionally, custodians often implement multi-signature wallets, hardware security modules (HSMs), and key sharding to further safeguard private keys. These technologies are complemented by rigorous compliance with regulatory standards, such as Know Your Customer (KYC) and anti-money laundering (AML) rules, ensuring that custodians meet stringent reporting, auditing, and fraud detection requirements

At InvestaX, we work with licensed custodians to provide you with a trustworthy and credible custody infrastructure.

One thing fund managers should note is that there are many different types of assets in the world and how they are handled is widely different. 

4. Tokenization‍

The representation of the ownership of the asset is converted into digital tokens (which we often call “RWA tokens”) on a chosen blockchain and launched on either the RWA issuer’s website or via licensed asset tokenization platforms (like InvestaX and IX Swap). 

5. Primary Offering

A primary offering is the initial sale of new securities, such as equity or debt, by a company to an investor class. This process allows a company to raise capital directly from investors, which can be used for various purposes such as expanding operations, paying off debt, or funding new projects. During a primary offering, the company works with underwriters to set the price and sell the securities. 

With InvestaX, we tokenize the securities into RWA tokens, allowing it to be more accessible to different investor classes.

6. Secondary Trading

Following the initial offering, RWA tokens may be traded on secondary markets through various channels: 

  • Peer to peer trades on Licensed RWA broker-dealers platforms such as InvestaX
  • Licensed RWA exchanges such as InvestaX’s IX Exchange
  • Decentralized exchanges (DEX) like IX Swap's Automated Market Maker (AMM) DEX

7. Ongoing Management 

Post-tokenization management involves essential services like regulatory compliance, tax management, regular asset valuation, and facilitating corporate actions such as dividend distribution and voting rights. This management continues throughout the token's lifespan until its maturity or redemption. 

After RWA tokenization, ongoing compliance is also necessary to ensure continued adherence to regulatory requirements. This includes monitoring changes in securities laws, implementing necessary updates to smart contracts, conducting periodic audits, and managing investor relations.

Benefits Of Tokenization

Asset tokenization isn’t just a one-sided affair. It’s a narrative where all parties involved in the tokenization landscape can benefit. While the specific benefits may vary depending on the project's goals, the following are common benefits observed for those involved.

Benefits for investors

  • Accessibility: Tokenization facilitates fractional ownership of investment units, allows investors to participate in traditionally high-barrier-to-entry asset classes like private debt and private equity with potentially lower minimum investment amounts.
  • Liquidity: Secondary market trading of tokenized fund units allows investors to buy and sell their holdings. As a result, investors in traditionally less liquid assets like private equity funds or venture capital funds gain greater flexibility and control over their investments.
  • Increased Transparency: Information on crucial metrics like returns, ownership history, and transaction history of the fund units can be more accessible on a public, distributed ledger system. This assists investors in making informed decisions.  

Benefits for issuers such as fund managers, financial institutions, asset management companies, and investment firms

  • New Capital Raising Venue: Tokenization offers fund managers a novel and innovative approach to capital raising, complementing traditional fundraising methods.
  • Better Investor Reach: Tokenization enables fund managers to access global investors through a licensed marketplace like InvestaX.
  • Increased Operational Efficiency: Tokenization automates many traditionally laborious processes involved in the creation, issuance, and management of securities, reducing errors and costs. By eliminating intermediaries and utilizing smart contracts, transactions can be settled faster and more accurately.
  • Cost Reduction: By automating processes and reducing the need for intermediaries, tokenization can significantly lower transaction and operational costs compared with traditional methods.

Benefits for service providers

  • Reduced Reconciliation: The blockchain acts as a single source of truth for all fund data, eliminating the need for constant reconciliation between different service providers.
  • Faster Trade Settlement: Tokenized fund units can be settled on the blockchain almost instantaneously, significantly reducing settlement times compared to traditional methods.
  • Potential for New Revenue Streams: Tokenization creates new opportunities for service providers to develop and offer specialized services tailored to the tokenized fund landscape. For example, custody of digital assets. 

More on this: Top 8 Benefits of Tokenization

Challenges In Tokenizing Assets

Like any nascent industry, the RWA tokenization industry faces challenges. One of the biggest ones being the lack of established infrastructure:

Handling the life cycle of RWA tokens—including issuance, trading, custody, and post-tokenization management—requires licenses and robust technological infrastructure. However, few tokenization service providers offer a complete end-to-end solution. Here are four common paths for issuers to tokenize assets:

1. Self-build platform

2. Token Issuance only (no licenses)

3. Token Exchange only

4. All-in-one Solution Provider

The self-build path may take issuers years to secure the necessary licenses and technology. Alternatively, if you choose a tokenization service provider, it's crucial to select one that offers a comprehensive solution to avoid a "batteries not included" service. 

For RWA token issuers and investors, it is important to choose an established, licensed tokenization platform and marketplace like InvestaX for a secure, regulatory-compliant transition to the RWA industry. 

Singapore, Hong Kong S.A.R, and Switzerland are considered the leading jurisdictions for asset tokenization, according to KPMG Singapore’s analysis in October 2023. These regions have demonstrated a strong commitment to nurturing a competitive tokenization market through robust government support, legal frameworks, regulatory environments, and market infrastructure. 

KPMG's regulatory landscape analysis for tokenization (October 2023)

Tokenize Your Asset On Top Of Our Infrastructure

InvestaX's Singapore-licensed Tokenization SaaS platform offers a complete and regulatory-compliant solution for tokenizing real world assets (RWA). Our SaaS offering grants issuers access to tokenization technology, licenses, and Singapore-regulated primary and secondary marketplaces, allowing them to tokenize their assets quickly and at the lowest cost in a legally compliant manner. Contact us to discuss your fund tokenization strategy.

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