Table of contents
Preface
Executive Summary
Fund Tokenization: A Transformative Blockchain Application in Financial Services
How Tokenized Funds Create Value for Investors and Financial Institutions
Industry Participation Opportunities and Adoption Prospects in the Next 12 to 18 Months
Blueprint for the New Capabilities Ecosystem
The Urgent Need for Action

Executive Summary

In the wave of generative AI, the attention on Distributed Ledger Technology (DLT) seems to have diminished in recent months. However, in the financial services industry, DLT-based solutions have attracted increasing attention. Through an innovative technology called fund tokenization, which has numerous advantages, DLT is finding new applications in asset management, enhancing value creation, increasing transparency, and simplifying transaction processing. When DLT is combined with smart contracts that execute business logic

As DLT use cases continue to expand, banks are accelerating efficiency improvements across various markets, from cross-border payments to fixed income. However, fund tokenization, which we call the third revolution in asset management, has the potential to create billions of dollars in value for financial institutions and end investors. By the end of 2024, the assets under management (AUM) in tokenized funds are expected to surpass $2 billion, with one fund manager raising significant capital and charging above-average fees in just a few months. This reflects the growing trend of investor demand, especially from virtual asset holders (such as cryptocurrency foundations). In the coming period, we expect this demand to continue rising, especially with the advent of regulated on-chain currencies (such as regulated stablecoins), tokenized deposits, and central bank digital currencies (CBDC) projects.
In this report, we provide an overview of the emerging market of fund tokenization for industry professionals, focusing on the potential of this technology in real-world applications, the incentives for end investors and financial institutions, the potential tipping points for its adoption, and how fund managers can seize this opportunity.
To begin, fund tokenization refers to the use of blockchain-based digital tokens to represent fund ownership, functioning similarly to the current method of transferring ownership records of fund shares. Early examples of tokenization show that some companies manage assets like real estate through Special Purpose Vehicles (SPVs). Likewise, fund tokenization can be realized through existing unit trust or fund company entities, meaning asset managers should not face significant resistance during the process.
Once launched, tokenized funds provide investors with several advantages, including round-the-clock secondary transfers and share liquidity, lower investment thresholds, and instant collateralization when regulatory frameworks are in place. If all global mutual funds were tokenized, we estimate that mutual fund investors could achieve an additional $100 billion in investment returns annually, while mature investors might gain up to $400 billion by capitalizing on intraday value fluctuations.
For financial institutions like asset management and wealth management firms, fund tokenization presents opportunities to develop new investor groups, protect existing ones, and enhance business offerings. Indeed, as regulated on-chain currencies (such as stablecoins, tokenized deposits, and CBDCs) become more widespread, the demand for tokenized funds will significantly increase. We estimate that virtual asset holders represent a potential tokenized fund demand of about $290 billion, with further trillions in demand likely to emerge as traditional financial institutions increase their adoption of on-chain currencies. Additionally, secondary tokenization brokerage and embedded investment will create innovative fund distribution opportunities. Managers can also leverage smart contracts to optimize distribution models, customize fund portfolios, and create highly personalized investment combinations.

Drawing lessons from the development of Exchange Traded Funds (ETFs), the “second revolution” in asset management, the AUM of tokenized funds could reach 1% of global mutual funds and ETFs in just seven years. This implies that by 2030, the AUM of tokenized funds could exceed $600 billion. If regulators allow the conversion of existing mutual funds and ETFs into tokenized funds, the AUM could even reach trillions of dollars.
We believe that fund tokenization could reach a tipping point in the next 12 to 18 months, as on-chain currency innovations create a flywheel effect driven by early adopters (such as virtual asset holders) using stablecoins. Subsequently, with the introduction of tokenized deposits and CBDCs, we may witness rapid expansion. Among asset managers, companies that act first could gain significant market share, occupying priority gaps in the market and building brand recognition and economies of scale through simple products. In contrast, companies that follow may need to innovate in niche areas.

To fully unlock the potential of fund tokenization, the industry must first establish a solid foundation, including clear regulatory frameworks, global operational standards, and technical interoperability. On this foundation, financial institutions will benefit from six core capabilities: a strategic tokenized fund vision, use case roadmap, on-chain compliance, blockchain technology and operational setup, cross-chain interoperability management capabilities, and a center of excellence to coordinate their efforts. Successfully executing these building blocks will open the door to long-term effective adoption and competitive dynamics.

Fund Tokenization

A Transformative Blockchain Application in Financial Services As proof of concept succeeds, the adoption of blockchain technology has become increasingly attractive to financial institutions already on a digitalization path. The ability to store immutable data from multiple parties builds trust and significantly improves efficiency, effectively connecting companies to business opportunities and paving the way for collaborative innovation. Through the process of tokenization, digital ownership representations of real-world assets can be created on the blockchain, making instant delivery and payment (DVP) easier to execute than ever before.
Tokenization’s Growing Presence in Various Market Conditions Interest in tokenization has steadily risen in recent years, with financial institutions leading and regulators supporting the launch of production-grade projects. As tokenized asset trading volume increases and asset types diversify, we see the foundation for tokenized finance solidifying. With the widespread availability of on-chain currencies, this field may reach a key turning point (see Figure 1).
Fund tokenization is not just an innovative attempt by a few asset managers but an industry-wide movement encompassing numerous global asset managers. Franklin Templeton launched the first blockchain-based fund registered in the U.S. (Franklin OnChain U.S. Government Money Fund, FOBXX) in 2021, while BlackRock launched the BlackRockUSD Institutional Digital Liquidity Fund (BUIDL) in 2024, quickly reaching over $500 million in market value in just a few months.

Fund Tokenization’s Scalability and Impact
We view fund tokenization as a two-step transformation process. The first step involves registering fund shares on the blockchain to enable instant ownership transfers. The second step is using tokenized funds to invest in other tokenized assets, such as tokenized bonds. Completing the first step unlocks significant value and paves the way for scenarios where tokenized funds directly hold tokenized assets in the future. \
Tokenization typically involves using Special Purpose Vehicles (SPVs) to hold underlying assets (such as real estate) and issue tokens representing shares. This is similar to the current structure and operation of funds. For instance, asset managers use unit trusts to hold assets like stocks and bonds and transfer agents to manage investor records. However, unlike other asset types, fund tokenization does not require the use of SPVs. Secondary transfers can be conducted through authorized participants and market makers who set the price, ensuring compliance with regulatory standards. This makes tokenized funds more similar to Exchange Traded Funds (ETFs)[see Figure 2].

Tokenized Funds Can Compete with Exchange-Traded Funds (ETFs) Tokenized funds have the potential to become the third evolution in the asset management industry, following the $58 trillion mutual fund industry established under the Investment Company Act of 1940 and the revolution sparked by ETFs.
From both the investor and manager perspectives, tokenized funds share many similarities with ETFs. Both offer high price transparency, superior liquidity, and simplified collateral management compared to mutual funds, among other advantages. (See Figure 3)

There are three main methods for fund tokenization, each with its unique advantages and challenges. The first method is to create a digital twin, typically achieved through Security Token Offerings (STOs), similar to a master-feeder structure. This method is quick to implement but incurs additional costs due to managing dual operations. The second method is to develop native tokenized fund tools. While execution is relatively simple, it requires attracting new investor groups. The final method is converting existing funds into tokenized funds. This method is scalable but needs careful handling to avoid operational disruptions.

“Through an innovation called fund tokenization, the many advantages of distributed ledger technology have found new applications in the asset management field, enhancing value creation, increasing transparency, and simplifying transaction processes.”

How Tokenized Funds Create Value for Investors and Financial Institutions

Tokenized funds offer virtual asset investors the opportunity to access professionally managed products that invest in real-world assets capable of generating stable, long-term returns. At the same time, tokenized funds provide traditional investors with advantages such as quicker access to returns. Wealth and asset management companies are expected to benefit from enhanced connections with investors, lower operating costs, the ability to offer 24/7 investment services, and the creation of new business opportunities.

Fund Investors Can Benefit from Value-Added Services
The managed assets of mutual funds are approximately $58 trillion, with a 10-year average annual return of 7.1%. However, the current settlement process is inefficient, with a T+2/3 settlement cycle that locks up capital and poses operational challenges when providing innovative financial products to end investors. \
Our initial estimates suggest that by addressing these issues, fund tokenization could bring mutual fund investors about 17 basis points of additional annual return, roughly equivalent to $100 billion. We particularly see four key benefits for investors. First, instant settlement will release the productivity of locked-up capital, potentially adding about $50 billion to investors’ portfolios each year. Second, trading fees could approach the average ETF fee of 0.09%. We estimate this will save investors around $33 billion annually, as some mutual fund subscriptions and redemptions can be managed through the secondary market. Third, tokenized mutual funds are easier to lend than ETFs and similar funds, generating about $12 billion in interest income. Finally, tokenized mutual funds allow for intraday trading, enabling mature investors to capture fluctuations in the intraday Net Asset Value (NAV) of the fund, which we believe could create value of $80 billion to $400 billion annually.

Revenue Growth Incentives for Wealth and Asset Managers
Wealth and asset managers have opportunities to commercialize tokenized fund services in five key activity areas. We believe that both individual and collective active participation will help increase sales and revenue margins.

Below, we will discuss each of the five business opportunities in more detail:

#1: Meeting the $290 billion existing on-chain investment demand

In the global cryptocurrency market, which is valued at approximately $2.5 trillion, we estimate there is a $290 billion demand for tokenized fund investments. (See Figure 6) This area includes holders of stablecoins, tokenized real-world assets (RWA), and decentralized finance (DeFi) protocols, and it is growing rapidly. The scale of DeFi protocols (excluding stablecoins) is larger, with a market capitalization of about $120 billion and an average annual growth rate of 56% over the past two years. The market for tokenized real-world assets (RWA) has reached a market value of approximately $12 billion, with a growth rate of 85% over the past two years.

As on-chain collective investment tools, tokenized funds can effectively meet investment demand and fill the gap left by current on-chain products, primarily based on DeFi protocols. By leveraging the mature investment strategies that asset managers have used over the past decades to manage trillions in assets, these funds offer more robust investment options. Additionally, they provide access to real-world investment opportunities, allowing portfolios to achieve better diversification in response to changing market dynamics. (See Figure 7)

#2: Protecting Existing Investor Base in the Rise of Regulated On-Chain Currencies

Traditional financial capital is rapidly moving onto the blockchain through the development of regulated on-chain currencies, including regulated stablecoins, tokenized deposits, and central bank digital currencies (CBDCs) driven by regulators and financial institutions. (See Figure 8) On-chain currencies differ from non-physical currencies in two important ways—programmability and atomic settlement with tokenized assets. Programmability will make it possible to develop programmable currencies and purpose-specific currencies, allowing users to specify the usage of the currency across financial institutions and jurisdictions through programmable logic. Atomic settlement with tokenized assets will enable true simultaneous delivery versus payment (DvP), meaning on-chain assets can be exchanged synchronously with on-chain currencies. As regulated on-chain currencies are gradually adopted, net fund inflows will be affected in a chain reaction. If only 10% of investable funds are on-chain, the demand for tokenized funds will also reach billions of dollars.

#3: Enhancing Fund Distribution through Instant 24/7 and Fractionalized Transfers

Once mutual funds are tokenized, investors will be able to transfer their mutual fund shares to other investors. BlackRock’s BUIDL and Franklin Templeton’s FOBXX have already enabled secondary transfers within their managed distribution channels. If the secondary market for tokenized mutual funds develops similarly to ETFs, the turnover rate of North American ETFs relative to assets under management (340%) could result in an annual turnover of approximately $200 trillion. (See Figure 9) Even if the market only achieves 10% of its potential, it is foreseeable that wealth management firms will be able to serve around $2 trillion in trading turnover.

Tokenized funds can also enable innovative fund distribution methods (or investment approaches for investors), leveraging fractionalization and instant 24/7 execution to significantly lower investment thresholds. For example, micro-investing is a rapidly growing area for fintech companies. (See Figure 10) To keep up, wealth management firms can use tokenized funds to enhance their products. If wealth management firms can improve the customer experience, they have the potential to attract younger investors and help them develop investment habits early on.

#4: Providing Hyper-Personalized Portfolio Management through Smart Contracts

Hyper-personalized portfolios can significantly enhance client experience and retention. While the degree of personalization is limited in the mass market, it is increasingly seen as a must-have option among high-net-worth investors. With the help of smart contracts and tokenized funds, personalized services can be offered to all investors. For example, investors can track the disclosed holdings of their tokenized funds in real-time and use rebalancing smart contracts to regularly execute long or short positions for optimal risk exposure. At the same time, for financial institutions, personalized services can unlock a range of revenue streams and lay the foundation for better meeting investor needs. (See Figure 11)

#5: Increasing Asset Utility and Releasing Liquidity through More Efficient Risk

Management Loans collateralized by mutual funds are a well-established financial product in multiple markets, especially in high-interest environments. However, due to operational complexities and the 3-5 day collateralization process, fund-backed lending has become relatively complex. Through tokenized funds, this process can be simplified, reducing collateralization time to less than a day. Additionally, loan terms can be pre-programmed, allowing lenders to reduce credit risk and offer more tailored financing rates. “In the next 12 to 18 months, we are approaching a key inflection point, and wealth and asset managers must act quickly to seize the opportunity. While early movers have achieved some success, establishing regulatory guidelines, global standards, and technical support will be key to building a frictionless, globally interconnected industry.” Adoption and More Active Industry

Participation Opportunities in the Next 12 to 18 Months

Against the backdrop of rapidly evolving regulatory frameworks for on-chain currencies and assets, the financial services industry is approaching a pivotal moment. The growth flywheel effect of tokenized funds suggests significant potential and is driving development through various adoption paths. Furthermore, the entire tokenized finance ecosystem is advancing rapidly, and effective coordination can reduce adoption costs. The Tokenized Finance Inflection Point Could Be Reached in the Next 12 to 18 Months We anticipate that in the next 12 to 18 months, as regulated on-chain currencies (such as regulated stablecoins, tokenized deposits, and central bank digital currencies (CBDCs)) gradually establish themselves in key international financial centers, the momentum in certain markets will accelerate. For example, in Hong Kong, multiple regulatory initiatives are underway, including the stablecoin sandbox, e-HKD+ project, and Ensemble project. Meanwhile, the development in markets like Singapore, Japan, Taiwan, the UK, and the Middle East is also progressing, bringing the future of finance closer than ever. (See Figure 12)

The Growth Flywheel of Tokenized Funds is Triggered

We estimate that the current investment demand for tokenized funds from virtual asset holders is approximately $290 billion. As traditional financial institutions (TradFi) increase their adoption of on-chain currencies, this will bring trillions of dollars in additional demand. The growing adoption of stablecoins and the increased demand from virtual asset holders (such as crypto foundations) will drive the flywheel effect in the short term. (See Figure 13)

With characteristics similar to ETFs, tokenized funds could lead the next revolution in global investment. Since the launch of the first ETF in 1993, exchange-traded funds (ETFs) reached approximately 1% of total assets under management (AUM) within seven years. With characteristics comparable to ETFs, tokenized funds could also reach 1% of total AUM by 2030, which would mean an AUM of over $600 billion. If a clear and low-friction conversion path (i.e., tokenization) is provided for existing mutual funds and ETFs, the size of tokenized funds could be even larger. We see two potential growth paths. First, managers can launch new tools to access new investor groups. Meanwhile, regulators and private sector participants can explore paths to upgrade existing tools. (See Figure 14)

The successful development of tokenized funds will rely on ecosystem coordination, with one key element being the definition of a clear vision for universally accessible financial services. This vision should cover foundational capabilities, application scenarios, factors that reduce transition friction, and coordinators that accelerate positive outcomes. (See Figure 15) The current moment is similar to the early development of ETFs, where stakeholders need to develop their products, adapt technologies and operations, and identify ecosystem partners, such as market makers.

Global collaboration is crucial to ensuring consistent standards
Standards are essential, and the tokenized fund ecosystem will require globally recognized standards to ensure legitimacy and interoperability across different infrastructures and regions. Standards will also foster collaboration throughout the value chain. Priority areas include:

1. Regulatory clarity for tokenized funds to promote smooth development, including Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT), Know Your Customer (KYC), security/custody guidelines for digital assets, operational requirements for tokenized funds, and secondary transfer rules.
2. Unified operational standards for tokenized assets to ensure interoperability, including digital asset data standards for intercompany operations and processes for handling on-chain and off-chain records.
3. Technological interoperability to promote innovation, including interoperability between databases/chains and the cost-effective, risk-managed adoption on public chains. Global protocols are crucial for achieving cross-chain and cross-border interoperability and composability.
   Key to global collaboration
   Clarity on regulatory aspects of tokenized funds
4. Reusing existing fund tools: What kind of setup is needed to allow tokenized funds to reuse existing fund structures? Funds can be directly converted into tokenized forms without creating new structures, which reduces costs and adoption impact.
5. Allowing secondary transfers: What protective measures should be in place to safeguard investor interests? Possible solutions may include KYC-compliant wallets, management of buy-sell spreads, and qualification requirements for tokenized fund brokers.
6. Qualifications for operating tokenized funds: What are the requirements for operating tokenized funds, covering fund management, asset custody, transfer agents, and fund managers? What tokenized currencies should be accepted (e.g., stablecoins issued by licensed entities to manage issuer risk)?
   Universal tokenized operational standards
7. Global tokenized fund passport: How should tokenized funds be designed to support cross-jurisdiction distribution, including utilizing existing fund recognition arrangements?
8. Universal controls for all parties to adhere to: What common protocols should be used for automated controls? Possible control levels could be defined by specific regulators, asset managers, distributors, and projects.
9. Tokenized asset operations: If managers decide to manage tokenized underlying assets through tokenized funds and smart contracts, what setup should be in place?
   Technological interoperability
   1.Blockchain interoperability: What common cross-chain interfaces should exist to ensure that functions embedded into funds via smart contracts (such as secondary transfer controls and collateral management) remain effective in a multi-chain environment?
10. Risk-based security standards: What data management and cybersecurity principles should be applied to protect the privacy and security of tokenized funds?

Blueprint for the new capability ecosystem

Financial institutions in the wealth and asset management value chain are facing a critical moment, with some institutions poised to thrive in the new era of tokenized funds, while others may be left behind. Technology will play a key role in driving tokenization but will need rapid upgrades in the early stages of development. For example, there are already over 1,000 independent chains in the blockchain space, and their number is rapidly increasing.
Cost-effective path forward: Modular technology stack
Given the complexities involved with different forms of tokenized assets, business solutions, and permissioning controls, developing solutions for everyday applications may face challenges. In light of this complexity, financial institutions can benefit from designing a modular technology stack composed of four basic layers: asset layer for managing types of tokenized assets; solution layer for business needs; permission control layer to meet various compliance requirements; and infrastructure layer to ensure security and scalability.

Below, we delve into two key considerations that reflect the need to balance compliance requirements with business cost factors:
In-depth Exploration #1: Permission Controls for Compliance Requirements
One of the key tasks for any tokenized fund initiative is to address risks related to data privacy and other regulatory requirements (such as cybersecurity). Below are some of the key issues we often encounter in industry discussions.

Select Specific Issues
Security and Encryption

1. How resilient is the blockchain security model in addressing network threats (including hacking, fraud, and unauthorized access)? Can we ensure that tokens/assets on the blockchain are only transferred to authorized parties (such as through KYC-compliant wallets)?
2. Can we design the system to only allow verified participants to validate transactions?
3. What is the process for making changes or updates to the blockchain? Are there security measures in place to prevent malicious behavior from network participants?
   Data Privacy and Confidentiality
4. How does the blockchain ensure data privacy at the asset, transaction, and wallet levels, such as using strong encryption methods to protect sensitive financial data and transactions?
5. Does the platform support advanced encryption technologies (such as zero-knowledge proofs and multi-signature) to ensure the integrity and confidentiality of data?
   Disaster Recovery and Continuity

6. Is there a clear continuity plan that meets institutional uptime and operational resilience requirements, including during blockchain functionality upgrades?

7. How does the platform recover from network failures without compromising data integrity or transaction records?
   Many financial institutions have explored private or consortium-led blockchains to achieve the above compliance goals but have found the development costs to be high. While public blockchains are known for their cost-efficiency, some believe their permissioning mechanisms are insufficient, thus forming a clear adoption barrier. However, it is worth noting that the evolving “permissioned” settings within public blockchains have provided financial institutions with a way to significantly reduce costs while maintaining control. (See Figure 17)

In recent years, many financial institutions have utilized Ethereum (a public blockchain) for tokenization experiments—for example, BlackRock launched BUIDL on Ethereum in May 2024. ABN AMRO has used public blockchains for bond tokenization, while UBS introduced Hong Kong’s first tokenized warrant on a public blockchain. Other institutions, including JPMorgan and Franklin Templeton, have also taken steps to tokenize funds and digital assets on platforms like Avalanche. Aptos Labs (a co-author of this report) has supported various tokenized asset initiatives, including the September 2024 launches of Brevan Howard’s flagship fund, Hamilton Lane’s Senior Credit Opportunities Fund, BlackRock’s ICS Money Market Fund, and Franklin Templeton’s On-Chain Money Market Fund on the Aptos network.
In-depth Exploration #2: Blockchain Scalability For investors, subscription and redemption fees can be as low as approximately 10 basis points, leaving little room for increased transaction costs. Gas fees, which are the costs of executing transactions or smart contracts on public blockchains, can range from less than $0.001 to up to $2 per transaction, depending on the blockchain. (See Figure 18)
The secondary transfer of a single fund may involve multiple transactions. For instance, additional steps can occur when market participants execute smart contracts to validate specific use-case conditions for funds. To maintain cost efficiency, total transaction costs (including gas fees for all on-chain transactions) must be significantly below $0.10 per transaction.

Urgent Action Required**

**With the growth of tokenized currencies, the financial services industry is on the cusp of a tokenization transformation. We believe tokenized funds will be a key driver of tokenized underlying assets.
In our baseline scenario, tokenized funds could deliver approximately $100 billion in investment returns for end investors and open $400 billion in underlying asset opportunities, while enabling financial institutions to create value across various operational areas. Under multiple scenarios, the assets under management (AUM) of tokenized funds could reach trillions of dollars by 2030.
Over the next 12 to 18 months, as we approach a critical turning point, wealth and asset managers must act swiftly to seize the opportunity. While early adopters have achieved some success, establishing regulatory guidelines, global standards, and technological support will be key to building a seamless and globally interconnected industry.
As a first step, firms need to understand how to leverage permissioning capabilities and adhere to security and data privacy requirements. Looking ahead, the doors to cost efficiency and significant competitive advantages are wide open.
Finally, we propose six key questions to help decision-makers formulate strategies and prepare to lead during the upcoming transformation. (See Figure 19) By addressing vision, compliance, interoperability, application scenario roadmaps, centers of excellence (CoE), and foundational technical and operational capabilities, financial institutions can turn this emerging growth area into a financial powerhouse that meets modern needs.

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