Can You Tokenize Your Fund?

R Tamara de Silva

Blockchain technology has gone mainstream. While the largest financial institutions began investing in blockchain technology years ago, some of the most compelling use cases have arrived-the tokenization of financial products and funds. While investment houses are leveraging blockchain to transform the asset management landscape-this groundbreaking technology isn't just for the largest players on Wall Street.

Tokenization refers to converting ownership rights in an asset into digital tokens on a blockchain. This process enables assets, including real estate, art, stocks, and even money market funds, to be divided into smaller, tradable units. By doing so, tokenization offers a more efficient, transparent, and accessible way to manage and trade assets.

BlackRock, the largest asset allocator, just announced a collaboration with Securitize to launch the BlackRock USD Institutional Digital Liquidity Fund (BUIDL). This fund is a tokenized money market product and represents a significant step in the mainstream adoption of blockchain technology. Securitize is, a leading platform for issuing and managing digital securities. It provides a compliant way to tokenize assets. Securitize does this by acting as a transfer agent, a tokenization platform, and placement agent for the fund. The BUIDL fund will be listed on Securitize's platform and aims to offer a stable $1 value, holding assets such as cash, U.S. Treasury bills, and repurchase agreements​.[i]

There are many benefits to a tokenized fund offering as opposed to offering a non-tokenized security offering. Among these benefits are the following:

Fractional Ownership: Democratizing Investment

One of the most compelling benefits of tokenizing a fund is the ability to offer fractional ownership. Traditionally, investments in private funds require substantial capital, restricting participation to high-net-worth individuals and institutional investors. Tokenization changes this dynamic. By dividing the fund into smaller, more affordable units represented by digital tokens, investment becomes accessible to a broader range of investors. This democratization allows more people to participate and diversify their portfolios. Lowering the barrier to entry attracts more investors, increasing the capital available to your fund.

Lower Fees: Enhancing Efficiency and Reducing Costs

Blockchain technology streamlines the investment process by reducing the need for intermediaries such as brokers, custodians, and clearinghouses. This has long been the promise of blockchain in finance in general.

Removing intermediaries cannot but lower transaction fees and administrative costs. Smart contracts, which are self-executing contracts with terms written directly into code, automate functions like compliance checks, dividend distributions, and voting processes. Automation reduces costs, minimizes human error, and speeds up transactions. This provides a far more efficient and cost-effective solution for both fund managers and investors.

Enhanced Liquidity: Accessing a Global Market

Tokenization enables secondary market trading of fund shares on digital asset exchanges. Unlike traditional private equity or venture capital investments, which are typically illiquid, tokenized assets can be bought and sold more easily. This enhanced liquidity is attractive to investors who may need to access their capital before the fund matures. Furthermore, the global nature of digital exchanges allows you to tap into a wider pool of investors, transcending geographical barriers and increasing the potential for raising capital. There are caveats and regulations.

Transparency and Security: Building Investor Trust

Blockchain's immutable ledger ensures a transparent and tamper-proof record of all transactions. Investors can verify the authenticity and ownership of their tokens, enhancing trust and confidence in the investment. Additionally, blockchain's robust security features protect against fraud and hacking, safeguarding investor assets. This transparency and security can be a powerful differentiator, attracting savvy investors who prioritize these attributes.

Accessibility and Flexibility: Catering to Modern Investors

Tokenized funds offer unparalleled accessibility and flexibility. Investors can manage their holdings directly through digital wallets, giving them greater control over their investments. The 24/7 nature of blockchain markets also means that trading is not confined to traditional market hours, providing flexibility to investors around the world.

Regulatory Compliance: Navigating the Legal Landscape

While the benefits of tokenization are clear, navigating the regulatory landscape is crucial and far less clear. At De Silva Law Offices, we can help you navigate the regulatory landscape and try and ensure that your tokenized offerings comply applicable federal and state securities laws. Tokenization is possible while adhering to Reg D requirements. It does also require stringent anti-money laundering (AML) policies and know-your-customer (KYC) protocols. There are few more hurdles to launching a tokenized fund but it is possible.

Tokenization is a transformative approach to raising capital and managing investments. Fractional ownership, lower fees, enhanced liquidity, transparency, and security are just some of the advantages. If you are considering a Reg D offering, embracing tokenization can unlock new opportunities and drive growth.

To explore the potential of tokenizing your fund, contact us today.