Summary

• Introduction: On March 20, 2024, BlackRock, a leading asset management firm, launched the BUIDL tokenized fund (BlackRock USD Institutional Digital Liquidity Fund) with U.S.-based tokenization platform Securitize, expanding its Web3 influence. This followed the approval of its Bitcoin spot ETF, marking significant progress in mainstream crypto investment. BUIDL exemplifies how traditional institutions use blockchain technology to boost operational and capital efficiency, signalling the broader adoption of blockchain.
• How Tokenized Funds Address Efficiency Issues: Unlike traditional public funds, tokenized funds like BUIDL operate entirely on public blockchains. This approach eliminates the need for centralized registration and minimizes inefficiencies caused by separate databases. Tokenized funds offer real-time, traceable transactions and atomic settlements, significantly improving capital utilization and offering potentially higher returns. Smart contracts also allow tokenized funds to support other features, like staking and lending.
• Public Blockchain Entry by Large Institutions: Blockchain’s potential for decentralized finance (DeFi) is promising, but transitioning traditional finance into Web3 has been challenging. Tokenized funds with compliant controls (like KYC and AML) show how mainstream institutions are exploring DeFi. Examples include Franklin Templeton’s FOBXX and WisdomTree’s WTSYX, which use blockchain as a support tool. BlackRock’s BUIDL, which uses a public blockchain for primary accounting and partners with Securitize for regulatory transfer services, represents a new step forward.
• Design and Performance of BUIDL: Issued as an ERC20 token on Ethereum, BUIDL enables on-chain transfers in real time for whitelisted users. It allows USDC redemption through Circle in real-time. As of July 9, 2024, BUIDL’s managed assets reached $502.8 million, held by 17 investors, including institutional players like Ondo Finance. BUIDL aids in integrating stable, real-world yield streams into DeFi.
• Challenges and Future Prospects: Despite BUIDL’s success, it faces regulatory and compliance hurdles. Asset tokenization remains subject to restrictive global regulations, limiting investment to qualified investors. However, initiatives like those from BlackRock and Franklin Templeton are drawing attention to blockchain’s efficiency for transactions and promoting new standards and laws for adoption.

On March 20, 2024, asset management giant BlackRock, following the issuance of its Bitcoin spot ETF, further expanded into Web3 by collaborating with the U.S.-based tokenization platform Securitize to launch the tokenized fund BUIDL (BlackRock USD Institutional Digital Liquidity Fund). While the Bitcoin spot ETF can bring cryptocurrency into the investment field of compliant funds, acknowledging it as a new asset type, the greater significance of the tokenized fund lies in traditional institutions’ attempts to leverage public blockchain as an underlying technology to enhance operational and capital efficiency, signalling blockchain’s acceptance and adoption.

What Issues Do Tokenized Funds Address Compared to Traditional Funds?

Funds widely accessible to investors, generally public funds, have low entry barriers, broad coverage, and large capital volumes. For example, money market funds are subject to strict regulation. In the absence of specific regulations, fund operations typically involve coordination across multiple institutions, with each responsible for part of the fund’s processes. This structure boosts efficiency through operational specialization while preventing excessive power concentration in a single entity, reducing the risk of misconduct. The full process generally involves distribution channels (banks, brokerages, financial advisors), fund administration, transfer agents, fund audits, fund custody, and exchanges.

However, discrepancies across databases in these processes cause significant friction and costs. Each subscription and redemption of a fund involves multiple institutions in this chain. Orders are relayed through manual or automated means, followed by settlements via a system, meaning it often takes several days to clear a fund subscription.

Through tokenization, fund shares are issued and traded on the public blockchain in the form of tokens, directly entering investors’ wallets. Tokenized fund shares and net asset values can be publicly viewed on-chain, with all transaction records accessible and real-time, eliminating the need for centralized registration and avoiding the costs of cross-verification among parties.

In tokenization, distribution platforms can achieve real-time atomic settlement between fund share tokens and payment tokens (like stablecoins) via smart contracts, reducing investors’ wait time. If the fund token achieves secondary market functionality on-chain, investors can enter and exit directly in real-time, reducing the reserve capital that funds typically hold for redemptions, thus enhancing capital use efficiency and yielding higher returns. Investors can experience high-efficiency transactions through real-time settlement on the secondary market, avoiding subscription and redemption wait times.

Additionally, tokenized funds can support broader application scenarios, such as staking and lending through smart contracts, meeting more diverse user needs.

Institutions Entering Public Blockchains: From Auxiliary Tools to Primary Ledgers

Blockchain’s strengths are clearly showcased in DeFi, but shifting substantial assets from the well-established Web2 financial systems to new Web3-based systems faces considerable resistance. Moving forward will require incremental steps, overcoming challenges, and trying out new practical solutions.

Unlike standard cryptocurrencies, fund tokens often employ whitelists to meet compliance requirements, such as KYC and AML. Each whitelisted address belongs to a KYC-approved user through the fund platform, restricting transactions outside these addresses. Until risk control measures are in place, concerns like free transfers, lost funds, and transaction monitoring will remain obstacles.

That said, mainstream asset managers are actively exploring DeFi and are trying to adapt blockchain features into their products. Their design evolution highlights this transition.

In 2021, Franklin Templeton launched its Franklin Onchain U.S. Government Money Fund (FOBXX), a tokenized fund. Initially, token records were kept on a private database by a transfer agent, with Stellar and Polygon serving as secondary records. In cases of conflicting records, the centralized database would take precedence. Investors could buy and sell tokens via Franklin’s app, where each user received an on-chain address, though tokens couldn’t be transferred out. In 2022, WisdomTree introduced a similar tokenized fund, WTSYX, on the Stellar blockchain, focusing on short-term U.S. Treasury investments.

FOBXX and WTSYX primarily use blockchain as a support tool for recording shares but don’t derive significant blockchain-specific benefits.

In March 2024, BlackRock’s collaboration with Securitize to launch the BlackRock USD Institutional Digital Liquidity Fund (BUIDL) marked a substantial breakthrough. The key differentiator is that Securitize, recognized by regulators as a transfer agent, uses a public blockchain as the primary ledger to record asset ownership and transactions.

BUIDL’s Key Details and Enhancements

The core information about BUIDL issuance is as follows:

• Issuer: BlackRock USD Institutional Digital Liquidity Fund Ltd. (established in 2023 in the British Virgin Islands)
• Registration Exemption: SEC Reg D Rule 506(c), Section 3(c)(7) for qualified investors
• Fund Type: Pooled Investment Fund
• Investment Threshold: Qualified Purchasers
• Minimum Investment: $5 million for individuals; $25 million for institutions
• Issuance Scale: No limit

At the time of issuance, Securitize Markets, LLC, an SEC-registered broker, was the only distribution channel. Additionally, Securitize, LLC, an SEC-registered transfer agent, could record ownership of securities on the blockchain.

It’s noteworthy that BlackRock issued this fund through a newly registered BVI entity rather than its regular issuing entity, likely to manage compliance risks. The SEC registration lists four key individuals: Ian Pilgrim in Bermuda, Jennifer Collins in the Cayman Islands, W. William Woods in Canada, and Noëlle L’Heureux in California. Only Noëlle L’Heureux, BlackRock’s Managing Director with a 32-year tenure, works directly for BlackRock; the others are likely third-party representatives.

BUIDL Product Design

• Currencies: USD and USDC
• Subscriptions & Redemptions: Daily
• Investment Strategy: Primarily in short-term Treasury securities
• Net Asset Value per Share: 1 BUIDL = 1 USD
• Token Standard: ERC20 with whitelist restrictions, prohibiting transfers outside approved addresses
• Earnings Calculation: Updated daily based on holdings; monthly payout via BUIDL token issuance
• Redemption Rules: Daily redemption at 1 BUIDL = 1 USD; redemption through Securitize requires token transfer to a designated address, followed by token destruction and USD redemption at 3:00 p.m. ET, typically T+0

As an ERC20 token on Ethereum, BUIDL enables free transfers within the whitelist and can interact with whitelisted smart contracts, while transactions outside the whitelist fail. Although simple for DeFi users, this marks a significant breakthrough for traditional finance, indicating large institutions’ acknowledgment of public blockchains as a ledger tool for recording asset ownership and transactions, thereby enjoying transparency, efficiency, and traceability.

Through open transfer functionality, BUIDL benefits from blockchain-based settlement systems. Circle has provided an option to redeem BUIDL for USDC in real time, backed by a $100 million reserve.

This redemption option provided by Circle is essentially an OTC transaction: Circle provides a redemption contract, which, upon user deposit, triggers the transfer of USDC from another EOA account to the user. Each step is an on-chain transaction, ensuring atomic settlement.

Figure 1: Circle’s Redemption Process for USDC

At its establishment, the EOA account held $100 million in USDC. BUIDL tokens accumulate daily interest through centralized accounting. If users redeem USDC through Circle’s contract, BlackRock views it as a transfer, and daily accrued interest between the last payout and this transfer will be paid on the next distribution date. After BUIDL redemption, Circle holds the tokens, and subsequent actions are determined by Circle. On-chain data shows that Circle periodically redeems BUIDL through Securitize, exchanges it for USD, mints new USDC, and replenishes the reserve.

BUIDL’s Status After Three Months

On May 15, 2024, BUIDL’s AUM (Assets Under Management) exceeded Franklin Templeton’s tokenized Treasury fund, FOBXX, becoming the largest tokenized fund project. As of October 17, 2024, its total AUM reached $557 million. However, compared to traditional markets valued in the trillions, tokenized Treasury fund products total only $2.35 billion, leaving ample room for growth (Data Source: RWA.XYZ, October 17, 2024).

Currently, BUIDL is held across 27 addresses, with the following distribution:

Figure 2: Distribution of BlackRock BUIDL Tokens by Address (Data as of October 17, 2024)

Securitize allows each customer to link up to 10 on-chain whitelisted addresses. Of these 27 addresses, two belong to Ondo Finance, which is the largest holder with a combined 216 million BUIDL, valued at $216 million. These two addresses—0x72 (holding approximately 164 million BUIDL) and 0x28 (holding about 51 million BUIDL)—serve as the underlying assets for Ondo’s tokenized Treasury product, OUSG, with a total AUM of $216 million. The original underlying asset, BlackRock’s iShares Short Treasury ETF, has been fully converted to BUIDL since its launch, and OUSG now uses Circle’s redemption contract for real-time USDC redemptions.

Additionally, as BUIDL collaborates with several crypto custody providers, multiple addresses on-chain appear as EOA accounts with no transaction history. These may belong to traditional institutions invited by BlackRock and Securitize to test the purchasing and custody of tokenized funds.

Circle’s USDC redemption pool currently has an $80.03 million balance, with Ondo Finance as the primary redeemer. The Circle address (0xcf) also holds around 19.96 million BUIDL.

Figure 3: USDC Balance in BUIDL Redemption Contract, Data as of October 17, 2024

The Path of Financial Institutions to DeFi

Due to BUIDL’s high investment thresholds, it is challenging for regular users to acquire it directly. However, BlackRock’s issuance of a blockchain-based money market fund with stable returns and secure assets allows other institutions to use BUIDL as a base ingredient to introduce real-world stable yields into DeFi.

A prime example of this is Ondo Finance. As the largest BUIDL holder, Ondo Finance leverages BUIDL and Circle’s redemption contract to enable fast subscription and redemption of its OUSG money fund product via USDC, lowering the user threshold from a $5 million minimum investment to $5,000. Ondo can also collaborate with other DeFi protocols to deliver these yields further into the DeFi ecosystem. For instance, it could use a DeFi lending platform like Flux Finance, enabling anonymous DeFi users to earn real-world returns. This multi-layered structure channels traditional institutional returns into the DeFi world.

Widespread Institutional Entry? Facing Multiple Challenges

Products like BUIDL that integrate on-chain and off-chain design enhance the liquidity management efficiency of money market funds and provide a channel for on-chain investors to access real-world returns. Through tokenization and collaboration with Web3 entities like Securitize, Circle, and Ondo Finance, BlackRock enables Web3 institutions to obtain real-world returns in token form on public blockchains, bypassing complex capital flow processes, and expanding application scenarios and capital efficiency via smart contracts.

In essence, BUIDL facilitates direct on-chain transfers without relying on centralized institutions. However, behind this seemingly simple function lie substantial regulatory and legal costs. In traditional financial platforms, transferring assets between different accounts is often challenging, even among accounts under the same name; platforms typically permit only trades, subscriptions, and redemptions. One month after BlackRock introduced the transfer feature, Franklin Templeton’s FOBXX followed suit, acknowledging public blockchains as a ledger and marking a product-level breakthrough. (Unlike BUIDL, FOBXX holders lack control over private keys, so transfers occur only within the platform, not truly on-chain).

Globally, regulations around asset tokenization remain conservative. The U.S. lacks clear legislation, so issuers rely on exemptions, as BlackRock did by creating a BVI SPV to avoid affecting its compliance entity. In other regions, like Singapore, tokenized assets are restricted to whitelisted qualified investors only. These constraints and uncertainties hinder further Web3 expansion for users and institutions.

Optimistically, BlackRock and Franklin Templeton’s exploration into tokenization has drawn significant attention from the finance sector, providing real-case evidence of blockchain’s transaction efficiency and promoting regulatory advancements to establish new laws and standards.

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