Tokenized Funds: The Third Revolution of Asset Management

In this report, we provide industry practitioners with an overview of the emerging market of fund tokenization, focusing on the potential of this technology in practical applications, incentive measures for end investors and Financial Institutions, potential tipping points for promotion, and how fund managers can seize this opportunity.

Authored by: Boston Consulting Group (BCG)

Compiled by: Yue Xiaoyu

Execution Summary

In the wave of generative AI, the follow-up of Distributed Ledger Technology (DLT) seems to have weakened in recent months. However, in the Financial Service industry, solutions based on DLT have attracted more and more attention. Through an innovative technology called fund tokenization, the many advantages of this technology have found new applications in the field of asset management, enhancing value creation, increasing transparency, and simplifying transaction processing. When DLT is combined with Smart Contracts that automatically execute business logic, it is not difficult to understand why market participants are eager to participate.

With the increasing application scenarios of DLT, banks are accelerating the efficiency improvement in various markets from cross-border payments to fixed income. However, the tokenization of funds, which we call the third revolution of asset management, has the potential to create billions of dollars in value for Financial Institutions and end investors. By the end of 2024, the managed assets under tokenized funds (AUM) have exceeded 2 billion US dollars, with one manager raising a large amount of funds in a few months and charging higher than average fees. This reflects the increasingly rising trend of investor demand, especially from virtual asset holders (such as the Cryptocurrency Foundation). In the coming period, we expect the demand to continue to rise, especially in the case of regulated on-chain currencies (such as regulated stablecoins), tokenized deposits, and the implementation of Central Bank Digital Money (CBDC) projects.

In this report, we provide industry practitioners with an overview of the emerging market of fund tokenization, focusing on the potential of this technology in practical applications, incentive measures for end investors and Financial Institutions, potential tipping points for promotion, and how fund managers can seize this opportunity.

First of all, a brief introduction: Fund tokenization refers to the use of blockchain-based digital tokens to represent fund ownership, which functions similarly to the current transfer agent record of fund shares. Early tokenization applications show that some companies manage assets such as real estate through special purpose vehicles (SPVs). Similarly, fund tokenization can be achieved through existing unit trusts or fund company entities, which means that asset managers should not encounter too much resistance in the operation process.

Once launched, tokenized funds offer investors many advantages, including 24/7 secondary transfer and securitization, lower investment thresholds, and instant collateral when the regulatory framework is in place. If all mutual funds worldwide are tokenized, we estimate that mutual fund investors could achieve an additional investment return of about $100 billion per year, while sophisticated investors could potentially earn up to $400 billion by capitalizing on intraday value Fluctuation.

For Financial Institutions such as asset management companies and wealth management companies, fund tokenization provides an opportunity to develop new investor groups, protect existing investor groups, and enhance business products. Indeed, as regulated on-chain currencies (such as stablecoins, tokenized deposits, and Central Bank Digital Money) become more popular, the demand for tokenized funds will increase significantly. We estimate that virtual asset holders represent a potential demand of about 290 billion US dollars for tokenized funds, and as traditional Financial Institutions adopt on-chain currencies, it may bring demand of trillions of dollars. In addition, there will be innovative fund distribution opportunities through secondary tokenization brokers and embedded investments. Managers can also use Smart Contracts to optimize distribution models, customize fund portfolios, and create highly personalized investment portfolios.

Drawing lessons from the development of exchange-traded funds (ETFs), the assets under management (AUM) of tokenized funds could reach 1% of the global mutual funds and ETFs AUM in just seven years. This means that by 2030, the AUM of tokenized funds could exceed $600 billion. If regulatory agencies allow the conversion of existing mutual funds and ETFs into tokenized funds, the AUM could even reach trillions of dollars.

We believe that tokenized funds may reach an inflection point in the next 12 to 18 months, as on-chain currency innovation has formed a flywheel effect driven by early adopters such as virtual asset holders using stablecoins. Subsequently, with the introduction of tokenized deposits and Central Bank Digital Money (CBDC), we may see rapid expansion. Among asset managers, companies that take action first may gain significant market share, occupy priority blank markets, and help them establish brand awareness and economies of scale through simple products. In contrast, companies that follow may need to innovate in segmented areas.

In order to fully tap into the potential of fund tokenization, the industry must first establish a solid foundation, including clear regulatory provisions, global operational standards, and technological interoperability. Based on this foundation, Financial Institutions will benefit from six core capabilities: a strategic vision for tokenized funds, a use case roadmap, on-chain Compliance, blockchain technology and operational settings, Cross-Chain Interaction interoperability management capabilities, and a center of excellence to coordinate their efforts. Successfully implementing these building blocks will open the door to long-term effective adoption and competitive drive.

Tokenization of funds

The revolutionary blockchain application in Financial Service

With the success of concept verification, the adoption of Blockchain technology is becoming increasingly attractive to Financial Institutions that have been on the digitalization path. Being able to store immutable data from multiple participants not only establishes trust but also significantly enhances efficiency, effectively connecting companies with business opportunities and paving the way for collaborative innovation. Through tokenization, digital ownership representations of real assets can be created on-chain, making instant delivery and payment (DVP) easier to execute than ever before.

Tokenization continues to rise under various market conditions.

In recent years, there has been a steady rise in interest in tokenization. Over the past five years, specific projects supported by financial institutions and regulatory bodies have been continuously launched at a production-level scale. As the volume of tokenized assets increases and the types of assets become more diverse, we see a solid foundation for tokenized finance. With the widespread availability of on-chain currencies, this field may reach a critical turning point. (See Figure 1)

The tokenization of funds is not only an innovative attempt by a few asset managers, but also an industry movement covering numerous global asset managers. In 2021, Franklin Templeton launched the first U.S.-registered fund (Franklin OnChain U.S Government Money Fund, FOBXX) using blockchain, while BlackRock introduced the BlackRockUSD Institutional Digital Liquidity Fund (BUIDL) in 2024, achieving a market cap of over 500 million USD within a few months.

Tokenization of funds has scalability and impact.

We consider it as a two-step transformation process. The first step is to register the fund shares on-chain to achieve instant ownership transfer. The second step is to invest the tokenized fund in other tokenized assets, such as tokenized bonds. Completing the first step can release significant value and pave the way for the future scenario where tokenized funds directly hold tokenized assets.

Tokenization typically involves using special purpose vehicles (SPVs) to hold underlying assets (such as real estate) and issuance representing tokens of ownership. This is similar to the structure and operation of current funds. For example, asset managers use unit trusts to hold assets such as stocks and bonds, and transfer agents manage investor records. However, unlike other types of assets, fund tokenization does not require the use of SPVs. Secondary transfers can be carried out by authorized participants and market makers setting prices, ensuring compliance with regulatory standards. This makes tokenized funds more similar to exchange-traded funds (ETFs) (see Figure 2).

Tokenized funds can rival exchange-traded funds (ETFs)

Tokenized funds have the potential to become the third evolution of the asset management industry, following the $5.8 trillion mutual fund industry established under the Investment Company Act of 1940 and the revolution sparked by ETFs.

From the perspective of investors and managers, tokenized funds have many similarities with ETFs. Both provide high price transparency, superior Liquidity, and simplified collateral management compared to mutual funds, among other advantages. (See Figure 3)

There are three main methods of fund tokenization, each with its unique benefits and challenges. The first is creating a digital twin, usually achieved through security token issuance (STOs), similar to a master-slave structure. This method is fast to implement but involves additional costs of managing dual operations. The second method is developing native tokenized fund tools. While relatively easy to execute, it requires attracting new investor groups. The final method is converting existing funds into tokenized funds, which has scalability but requires careful handling to avoid operational disruptions.

"Through an innovation called fund tokenization, many advantages of Distributed Ledger technology have found new applications in the asset management field, which can enhance value creation, increase transparency, and simplify transaction processing."

How does tokenized fund create value for investors and Financial Institution

Tokenized funds provide virtual asset investors with the opportunity to access real-world assets and professional management products that can generate stable long-term returns. At the same time, tokenized funds can also offer advantages to traditional investors in terms of faster profit acquisition. Wealth management and asset management companies are expected to benefit from advantages such as strengthening connections with investors, reducing operating costs, providing all-weather investment services, and creating new business opportunities.

Fund investors can benefit from value-added services

The managed assets of mutual funds are about 58 trillion dollars, with an average annual return of 7.1% over 10 years. However, the current Settlement process is inefficient, and the T+2/3 Settlement cycle locks up funds, posing operational challenges when providing innovative financial products to end investors.

Our initial estimates suggest that by addressing these issues, the tokenization of mutual funds could provide mutual fund investors with an additional annual return of about 17 basis points, equivalent to approximately 100 billion US dollars. We particularly see benefits for investors in four areas. (See Figure 4) First, immediate Settlement will unleash the productivity of locked-up capital, potentially adding about 50 billion US dollars to investors' portfolios annually. Second, Money Laundering could approach an average cost of 0.09% of ETFs. We estimate this could save investors about 33 billion US dollars 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 other funds, generating about 12 billion US dollars in Interest income. Finally, tokenized mutual funds trade intraday, allowing sophisticated investors to capture the Fluctuation of intraday fund net asset value (NAV), which we believe could create annual value ranging from 80 billion to 400 billion US dollars.

Income rise incentives for wealth and asset managers

We believe that wealth and asset managers have the opportunity to commercialize tokenized fund services in five key areas. (See Figure 5) We believe that individual and collective participation will help increase sales and profit margins.

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

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

In the global Cryptocurrency market (with a market capitalization of about $2.5 trillion), we estimate a demand for tokenized fund investment of about $290 billion (see Figure 6). This area includes stablecoins, tokenization of real-world assets (RWA), and holders of Decentralized Finance (DeFi) protocols, and this area is rising rapidly. The scale of Decentralized Finance protocols (excluding stablecoins) is larger, with a Market Cap of about $120 billion, and an average rise rate of 56% over the past two years. The Market Cap of the tokenization of real-world assets (RWA) market has reached about $12 billion, with a rise rate of 85% in the past two years.

As on-chain investment vehicles, tokenized funds can effectively meet investment needs and fill the gap in on-chain products that are currently dominated by Decentralized Finance protocols. By leveraging the mature investment strategies that asset managers have used to manage trillions of assets over the past few decades, these funds provide more robust investment choices. In addition, they provide a pathway to real-world investment opportunities, allowing portfolios to achieve better diversification in the face of market dynamics. (See Figure 7)

#2: Protecting existing investor groups in the context of the rise of regulated on-chain currencies

Funds from TradFi are being transferred to the blockchain through rapidly growing regulated on-chain currencies, including regulated stablecoins, tokenized deposits, and Central Bank Digital Money (CBDC) driven by regulatory agencies and financial institutions (see Figure 8)

There are two important differences between on-chain currency and non-physical currency - Programmability and atomic Settlement with tokenized assets. Programmability will make it possible to develop programmable currencies and currencies for specific purposes, allowing users to specify the use of currency between Financial Institutions and jurisdictions through programmed logic. The atomic Settlement of tokenized assets will achieve real-time settlement (DvP), allowing on-chain assets and on-chain currency to be exchanged synchronously.

As regulated on-chain currencies are gradually adopted, the net fund inflow 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 Real-time 24/7 and Fractional Transfer

Once the mutual fund is tokenized, investors can transfer their mutual fund shares to other investors. BlackRock's BUIDL and Franklin Templeton's FOBXX have already allowed secondary transfers within their managed distribution channels.

If the Secondary Market of tokenized mutual funds can develop as ETFs do, then based on the Turnover Rate of ETFs in North America (340%) and the proportion of managed assets, the annual trading turnover may reach approximately 200 trillion US dollars. (See Figure 9) Even if the market only realizes 10% of its potential, it can be foreseen that wealth management companies will be able to serve a trading turnover of approximately 20 trillion US dollars.

Tokenized funds can also realize innovative fund distribution methods (or investment methods provided to investors), using shareization and instant 24/7 execution, greatly reducing the investment threshold. For example, micro-investment is a rapidly rising field for financial technology companies. (See Figure 10) To catch up, wealth management companies can use tokenized funds to enhance their products. If wealth management companies can improve the customer experience, they may attract younger investors and help them develop investment habits earlier.

#4: Provide super personalized investment portfolio management through Smart Contract

A highly personalized investment portfolio can significantly enhance customer experience and customer 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 perform long or short operations to achieve optimal risk exposure.

At the same time, for Financial Institution, personalized services can open up a series of revenue sources and lay the foundation for better meeting investor needs. (See Figure 11)

#5: Improve asset utility by releasing liquidity through more efficient Risk Management

Loans secured by mutual funds are mature financial products in multiple markets, especially in high Intrerest Rate markets. However, due to the complexity of operations and the collateral period of three to five working days, borrowing against funds becomes more complicated. Through tokenizing funds, this process can be simplified, shortening the collateral time to less than a day. In addition, loan terms can be pre-programmed, allowing lenders to mitigate credit risks and provide more customized financing Intrerest Rates.

"In the next 12 to 18 months, we will be approaching a critical turning 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 technological support will be crucial to building a solid foundation for a frictionless, globally interconnected industry."

Opportunities for adoption and more active industry participation in the next 12 to 18 months

In the context of rapid development of on-chain currencies and asset regulation, the Financial Service industry is approaching a critical moment. The rise of tokenized funds signifies tremendous potential and is driving development through various adoption paths. In addition, the entire tokenized financial ecosystem is progressing rapidly, and effective coordination can reduce adoption costs.

The inflection point of tokenized finance may be reached within the next 12 to 18 months.

We anticipate that over the next 12 to 18 months, with the gradual establishment of regulated on-chain currencies (such as regulated stablecoins, tokenized deposits, and Central Bank Digital Money (CBDC)) in key international financial centers, momentum in some markets will accelerate. Taking Hong Kong as an example, there are currently several regulatory initiatives underway, including stablecoin sandboxes, the e-HKD+ project, and the Ensemble project. Meanwhile, developments in markets such as Singapore, Japan, Taiwan, the UK, and the Middle East are also progressing, bringing the future of finance closer to us than ever before. (See Figure 12)

The rise flywheel of the tokenized fund has been triggered.

We estimate the existing investment demand from virtual asset holders for tokenized funds to be about 2900 billion US dollars, and as traditional Financial Institutions (TradFi) adopt on-chain currency coins, it will also bring tens of trillions of dollars in demand. The increasing adoption of Stablecoins and the growing demand from virtual asset holders (such as encryption foundations) will drive a flywheel effect in the short term. (See Figure 13)

Tokenized funds, with features similar to ETFs, may 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 7 years. With characteristics comparable to ETFs, tokenized funds could also reach 1% of total AUM by 2030, implying AUM will exceed $600 billion. If a clear and low-friction conversion path (i.e., tokenization) is provided for existing mutual funds and ETFs, the scale of tokenized funds could be even higher.

We see two potential rise paths. First, managers can introduce new tools to reach new groups of investors. At the same time, regulators and participants from the private sector can explore paths to upgrade existing tools. (See Figure 14)

Financial Institutions need to collaborate to drive the frictionless third industry revolution.

The successful development of fund tokenization will be based on the coordination of the ecosystem, with one important element being the definition of a clear vision for universally accessible Financial Services, covering foundational capabilities, application scenarios, the drop to reduce friction, and the coordinator to 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 to technology and operations, and identify ecosystem partners such as market makers.

Global collaboration is crucial to ensure consistency of standards

Standards are crucial, and the tokenized fund ecosystem will require globally recognized standards to ensure legitimacy and interoperability among different infrastructures and regions. Standards will also promote collaboration across the entire value chain. Priority themes to follow include:

1. The clarity of regulatory supervision of tokenized funds to promote stable development, including Anti-Money Laundering (AML)/ Combatting the Financing of Terrorism (CFT), Know Your Customer (KYC), the security/custody guidelines for digital assets, operational requirements for tokenized funds, and secondary transfers.

2. Unified tokenization operation standards to ensure interoperability, including ensuring digital asset data standards for intercompany operations and processes for handling on-chain/off-chain records.

3. Technical interoperability to promote innovation, including interoperability between databases/chains and cost-effective and risk management adoption in the public on-chain. Global protocols are essential for achieving cross-chain interaction and cross-border interoperability and composability.

Key to global collaboration

Clarity of the regulation of tokenized funds

1. Reusing existing fund tools: What kind of settings are needed to allow the tokenization of funds to reuse existing fund structures? Funds can be directly converted into tokenized form without the need to create new structures, to drop costs and adoption impacts.

2. Allow secondary transfers: What protective measures should be set up to protect the interests of investors? Possible solutions may include KYC-verified Wallet, buy-sell spread management, and qualification requirements for tokenized fund brokers.

3. Qualifications for operating tokenized funds: What are the requirements for operating tokenized funds, covering fund management, asset custody, transfer agency, and fund managers? What types of tokenized currencies should be accepted (e.g., stablecoins issued by licensed institutions for managing issuer risk)?

Universal Tokenization Operation Standard

1. Global tokenized fund passport: How should tokenized funds be designed to support cross-jurisdictional distribution, including the use of existing fund recognition arrangements.

2. All parties shall abide by the general control measures: ** What are the general protocols for implementing automated control? Possible control levels can be defined by specific regulatory agencies, asset managers, distributors, and projects.

3. Operation of tokenized underlying assets: What settings should be in place if the manager decides to manage tokenized underlying assets through tokenized funds and smart contracts?

Technical interoperability

1. Block chain interoperability: What are the common Cross-Chain Interaction interfaces that should be available to ensure that the functionalities embedded in the fund through Smart Contracts, such as secondary transfer control and mortgage management, remain effective in a multi-chain environment?

2. Risk-based security standards: What data management and network security principles should be in place 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, where some institutions will thrive in the new era of tokenized funds while others may be left behind. Technology will play a key role in driving tokenization, but rapid upgrades are needed in the early stages of development. Take blockchain as an example, there are currently over 1000 independent chains, and the number is rapidly increasing.

Cost-effective path forward: modular technology stack

Given the variables of different forms of tokenized assets, business solutions, and permission controls, developing solutions for daily use may be challenging. Given this complexity, Financial Institutions can benefit from designing a modular technology stack consisting of four basic layers: the asset layer, which manages the types of tokenized assets; the solution layer, which caters to business requirements; the permission control layer, which meets different compliance requirements; and the infrastructure layer, which ensures security and scalability. (see Figure 16)

Below, we delve into two key considerations that reflect the need to strike a balance between compliance and commercial cost factors:

In-depth discussion #1: Permission control for Compliance requirements

One of the key tasks of any tokenized fund project is to address the risks related to data privacy and other regulatory requirements (such as cybersecurity). Here are some key issues that we often see in industry discussions.

Select specific issue

Security and encryption

1. How strong is the security model of the blockchain in dealing with network threats (including Hacker attacks, fraud, and unauthorized access)? Can we ensure that tokens/assets in the blockchain can only be transferred to authorized parties (such as Wallets verified through KYC)?

2. Can we design it so that only verified participants can validate transactions?

What is the process for modifying or updating the blockchain? Are there security measures in place to prevent malicious behavior by network participants?

Data privacy and confidentiality

How does blockchain ensure data privacy at the asset, transaction, and Wallet levels, for example, by using powerful encryption methods to protect sensitive financial data and transactions?

Does the platform support advanced encryption technologies (such as zk-SNARKs, multisignature) to ensure the integrity and confidentiality of data?

Disaster Recovery and Continuity

1. Is there a clear continuity plan that meets the normal operating hours and operational flexibility requirements of institutions, including during the Block chain functionality upgrade period?

2. How does the platform recover in the event of a network failure without compromising data integrity or transaction records?

Many Financial Institutions have explored private or consortium-led Blockchains to achieve the Compliance goals mentioned above, but found that the development cost is high. While public Blockchains are known for cost-effectiveness, some believe that their lack of permission control has created significant adoption barriers. However, it is worth noting that the evolving 'permission' settings in public Blockchains have provided Financial Institutions with a significant way to reduce costs while maintaining control. (See Figure 17)

In recent years, many Financial Institutions have used ETH network (a public Blockchain) for tokenization experiments. For example, BlackRock launched BUIDL on the ETH network in May 2024. ABN AMRO used a public Blockchain for bond tokenization, while UBS launched Hong Kong's first tokenized warrant on a public Blockchain. Other institutions, including JPMorgan and Franklin Templeton, have also taken steps to launch fund tokenization and digital assets on platforms like Avalanche. Aptos Labs (a co-author of this report) has also been involved in supporting various tokenized asset initiatives, including Brevan Howard's flagship fund launched on the Aptos network in September 2024, Hamilton Lane's senior credit opportunities fund, BlackRock's ICS money market fund, and Franklin Templeton's on-chain money market fund.

In-depth Exploration #2: Scalability of Blockchain

For investors, subscription and redemption costs may be as low as about 10 basis points, leaving very little room for the increase in Transaction Cost. Gas fees refer to the cost of executing transactions or smart contracts on the public blockchain, ranging from less than $0.001 to as high as $2 per transaction, depending on the blockchain. (See Figure 18)

The secondary transfer of a single fund may involve multiple transactions, for example, when market participants execute Smart Contracts to verify specific usage conditions of funds, it will add extra steps. To maintain economic efficiency, the total Transaction Cost (including all on-chain transaction gas fees) must be significantly lower than $0.10 per transaction.

Need to act quickly

With the rise of tokenized currency, the Financial Service industry is on the edge of tokenization transformation. We believe that tokenized funds will be an important driver for tokenized underlying assets.

In our Benchmark scenario, tokenized funds can bring about $100 billion in investment returns and $400 billion in underlying asset opportunities to retail investors, while Financial Institutions can create value in multiple aspects of operation. In various scenarios, the assets under management of tokenized funds may reach trillions of dollars by 2030.

In the next 12 to 18 months, as we approach a critical turning point, wealth and asset managers must act quickly to seize opportunities. While early adopters have achieved some success, establishing regulatory guidelines, global standards, and technical support will be key to building a solid foundation for a frictionless, globally interconnected industry.

As a first step, companies need to understand how to use permission functions and comply with security and data privacy requirements. Looking to the future, the doors to cost efficiency and significant competitive advantage have opened for them. Finally, we propose six key questions to help decision-makers develop strategies and prepare for the upcoming transformation by taking a leadership role. (See Figure 19) Through vision, compliance, interoperability, application scenario roadmap, Centers of Excellence (CoE), and basic technology and operational capabilities, Financial Institutions can transform a rising field into a financial power that meets modern needs.