Tokenized Fund

Traditional financial institutions are launching tokenized versions of exchange-traded funds on public networks. Franklin Templeton's BENJI token is a share in a U.S. Treasury money market fund on Stellar and Polygon. This model features:

• 24/7 Trading on secondary markets, unlike traditional market hours.
• Direct blockchain settlement, reducing intermediary layers.
• Regulated issuance where the fund itself is the registered issuer.

The primary challenge is determining whether a tokenized fund constitutes a security, a commodity, or another regulated instrument, which varies by jurisdiction (e.g., SEC in the US, MiCA in the EU). This classification dictates requirements for KYC/AML procedures, investor accreditation, disclosure obligations, and licensing for fund managers and token issuers. Navigating this fragmented global landscape is complex and costly.

Tokenizing a fund requires a robust legal structure that defines and enforces investor rights on-chain. Key questions include:

• How are ownership rights and economic benefits (like dividends) legally encoded and distributed via the token?
• What is the legal process for voting on fund decisions?
• How are redemption rights executed? The token must be a legally recognized representation of shares in an underlying Special Purpose Vehicle (SPV) or fund entity.

Safeguarding the underlying assets is critical. Regulators require clear custody solutions that prove segregation from the issuer's assets. For digital-native assets, this involves secure multi-signature wallets or regulated custodians. For tokenized real-world assets (RWAs), it requires a verifiable link to the physical or legal asset holder. The oracle problem—securely bringing off-chain custody attestations on-chain—adds a layer of technical risk.

The global nature of blockchain networks conflicts with nationally bounded securities laws. Offering tokens to investors in multiple jurisdictions triggers a patchwork of local licensing requirements and public offering rules. Furthermore, the tax treatment of tokenized fund shares—for income, capital gains, and stamp duties—is often unclear, creating uncertainty for investors and fund administrators.

The lack of universal technical standards hinders scalability. Challenges include:

• Blockchain choice: Selecting a network that balances decentralization, cost, and regulatory acceptance.
• Token standards: Using frameworks like ERC-3643 or ERC-1400 for securities, which must interact with wallets, exchanges, and tax reporting systems.
• Cross-chain transfers: Moving fund tokens between different blockchains while maintaining compliance and audit trails is a significant technical hurdle.

While tokenization aims to enhance liquidity, regulatory restrictions often limit secondary trading. Tokens classified as securities can typically only trade on licensed Alternative Trading Systems (ATS) or regulated exchanges, not on permissionless DEXs. Establishing these compliant secondary markets requires integrating with traditional financial infrastructure, which can negate some efficiency benefits. The liquidity of the fund's underlying assets also remains a fundamental constraint.

A security token is a digital representation of a traditional financial security, such as a stock, bond, or fund share, issued on a blockchain. It derives its value from an external, tradable asset and is subject to securities regulations.

• Key Feature: Represents ownership or a financial claim, with rights (e.g., dividends, voting) embedded in code.
• Contrast with Tokenized Funds: A tokenized fund's shares are a specific type of security token, representing a fractionalized interest in a pooled investment vehicle.

A decentralized exchange (DEX) is a peer-to-peer marketplace where users can trade cryptocurrencies directly from their self-custody wallets without an intermediary. Trades are executed via smart contracts.

• Role for Tokenized Funds: DEXs provide a secondary market for trading tokenized fund shares (e.g., as ERC-20 tokens), enabling liquidity and price discovery without traditional brokers.
• Examples: Uniswap (Automated Market Maker) and dYdX (order book).

Asset tokenization is the broader process of converting rights to a real-world or financial asset into a digital token on a blockchain. It is the foundational technology enabling tokenized funds.

• Process: Involves the legal and technical steps to digitally represent ownership, often using a tokenization platform or service provider.
• Asset Classes: Includes real estate, private equity, commodities, and intellectual property, which can all be pooled into a tokenized fund structure.

A smart contract is self-executing code deployed on a blockchain that automatically enforces the terms of an agreement when predefined conditions are met.

• Core Mechanism: For tokenized funds, smart contracts automate fund operations like:
  • Issuing and redeeming shares.
  • Enforcing investor eligibility (KYC/AML).
  • Distributing dividends or profits.
  • Managing the fund's governance rules.

A traditional Exchange-Traded Fund (ETF) is a regulated investment fund, traded on stock exchanges, that holds assets like stocks, bonds, or commodities. It offers diversified exposure similar to a mutual fund but trades like a stock.

• Analogy: A tokenized fund is the blockchain-native equivalent of an ETF, offering similar benefits of diversification and tradability but with the operational efficiencies of blockchain (24/7 settlement, fractional ownership, programmable compliance).

The regulatory framework for tokenized funds involves the complex overlay of securities laws, anti-money laundering rules, and custody requirements that govern their issuance and operation.

• Key Considerations: Jurisdictional compliance (e.g., SEC in the US, MiCA in the EU), investor accreditation, and custody of underlying assets.
• Enforcement via Code: Regulations are often embedded into the fund's smart contracts and token logic, a concept known as Regulatory Technology (RegTech) or Compliance by Design.