Since this year, Blackrock has smoothly promoted the landing of BTC Spot ETF and introduced encrypted assets into traditional finance. Two months later, on March 21, 2024, Blackrock once again partnered with Securitize to launch the first tokenized fund BUIDL “BlackRock USD Institutional Digital Liquidity Fund” on the public blockchain—Ethereum, turning traditional finance into the encrypted market.

The launch of BUIDL fund marks an important milestone in the process of tokenizing RWA assets. The world’s largest asset management company, Blackrock, allows people to witness the future of financial system transformation through the BUIDL fund based on blockchain technology and enables seamless connection between encrypted assets and real-world assets.

Our article last year analyzed the importance of tokenized funds in connecting TradFi and DeFi, and the fund as an asset form, due to (1) its regulation; (2) relatively standardized digital expression, is the best carrier for RWA assets. Reference article: RWA 10,000-word research report: The value, exploration, and practice of fund tokenization. In this article, we’re going to take a deep dive into Blackrock’s tokenized fund, BUIDL, to see how it works and how it’s going to open the door to the crypto world of traditional finance by marrying USDC to DeFi.

1.How does the BUIDL fund operate?

If you invest $1,000 in the stablecoin USDC, the issuer Circle will invest the funds in assets such as government bonds, but the resulting income will be obtained by Circle. However, if you invest $1,000 in Blackrock’s BUIDL fund, the fund promises to provide a stable value of $1 per token while also managing your finances to generate investment returns for you.

This is BUIDL, which looks like a stablecoin but is actually a ‘security.’ Let’s first talk about the ‘security’ attributes of BUIDL, and then discuss its potential to become a liquid stablecoin.

A. Fund Entity

BUIDL Fund is an SPV entity newly established by Blackrock in the BVI. This entity has applied for a securities exemption under Reg D to the SEC in accordance with US securities laws and the Investment Company Act, and is only open to qualified investors.

B. Tokenization and On-chain Logic

Securitize LLC serves as the tokenization platform for the BUIDL Fund, managing the fund’s on-chain operations and converting them into regulatory-compliant data as required. Additionally, Securitize LLC acts as the transfer agent for the fund, overseeing the management of tokenized fund shares and handling subscription, redeem, and distribution matters. Securitize Markets, holding a US Alternative Trading System license and registered as a Broker Dealer with FINRA, serves as the sales agent for the fund, offering the product to qualified investors. Investors have flexible options for custody of their crypto assets, including Anchorage Digital Bank, BitGo, Coinbase, and Fireblocks.

C. Operations of Underlying Assets

BlackRock Financial serves as the fund manager responsible for fund investments; Bank of New York Mellon acts as the custodian and fund administrator for the underlying assets of the fund; PwC has been appointed as the fund’s auditor.

D. Fund Management

100% of the total assets of the BUIDL Fund will be invested in “cash-like” assets denominated in USD (such as cash, short-term US Treasury bonds, and overnight repurchase agreements), ensuring that each BUIDL token maintains a stable value of $1.

BUIDL tokens distribute interest monthly through Rebase, directly “airdropping” the accrued dividends to investors’ wallet accounts in the form of new tokens.

E. 4/7/365 Instant Purchase/Redemption

Securitize offers investors the ability to purchase/redeem funds in USD 24/7/365 (Issuance & Redemption Process), a feature that many traditional financial institutions are eager to achieve: instant settlement and real-time redemption.

（SS&C, Tokenization of Funds - Mapping a Way Forward）

Traditional fund operations are comparatively inefficient due to multiple stakeholders maintaining separate ledgers (such as securities and bank ledgers), resulting in delays of T+3+5+N days in the subscription/redemption process. In contrast, tokenizing funds enables real-time settlement on a unified ledger on the blockchain, significantly reducing transaction costs and improving capital efficiency. This represents a milestone innovation for the financial industry.

Other advantages include:

All parties involved in the fund can access and view data on the blockchain, eliminating the need for multiple reports and reconciliations, greatly simplifying the registration requirements for multiple fund participants.

Subscriptions and redemptions of the fund can settle directly into investors’ accounts (electronic wallets), with transactions having finality in settlement, thus eliminating market and counterparty risks.

Moreover, based on the more efficient atomic settlement of blockchain, real-time pricing and settlement can also be achieved around the clock.

2. Who benefits from BUIDL tokens, the essence of ‘securities’?

2.1 ERC-20 tokens that need permission

Even though the BUIDL token operates on Ethereum’s ERC-20 standard, its classification as a ‘security’ and the strict compliance requirements like KYC/AML/CTF, along with a minimum investment threshold of $5 million, mean that BUIDL tokens can only be traded among pre-approved ‘whitelisted’ investors. Thus, it functions as a permissioned ERC-20 token.

According to Steakhouse’s research report, it’s evident that the majority of projects dealing with US Treasury bond Real World Assets (RWA) opt for issuing permissioned tokens on public blockchains, driven by regulatory compliance concerns.

（Overview of BUIDL, BlackRock USD Institutional Digital Liquidity Fund, Ltd）

2.2Who benefits from the BUIDL token?

he robust regulatory compliance aspect of the BUIDL fund, coupled with the permissioned nature of its ERC-20 token, guarantees ample asset security.

1. Only one counterparty risk exists (Blackrock); SPV bankruptcy isolation and bank-level compliance custody of underlying assets.
2. Security of on-chain assets: Strict KYC admission for permissioned access; SEC-compliant trading market access; Cooperation with institutional-grade encrypted asset custodians.

Without considering traditional financial scenarios, with such strong compliance configuration, BUIDL has built an institutional-level collateral layer for encrypted assets (including becoming any stablecoin issuer, DeFi, L2, etc.), ensuring asset security while generating stable returns.

Assuming that Tether, the issuer of the USDT stablecoin, is able to deploy most of the assets in its vault to the BUIDL fund, then it can solve its biggest compliance problem - the lack of transparency of the underlying assets, and to think that the underlying assets of Circle are also managed by Blackrock, which is at least more credible than the fact that Tether sends out some audit reports all day long. This is at least more credible than Tether sending out audit reports all day long.

Let’s look at the MakerDAO, which previously spent over $1 million on a complex Blackrock US Treasury ETF procurement path, now only needs to open a qualified investor account with Securitize to achieve safe, convenient, and risk-free operations.

3. USDC Liquidity for Tokenized Funds

3.1BUIDL Liquidity via USDC

As mentioned above, due to the “securities” restriction, BUIDL tokens are only limited to the flow between “whitelisted” investors, and thus 24/7/365 subscription/redemption is not enough.

As a result, Blackrock has partnered with Circle to create a smart contract-controlled USDC liquidity pool that enables 24/7/365 real-time conversion of BUIDL:USDC = 1:1.

twitter.com/jerallaire/status/1778416442691428778

Jeremy Allaire, Co-Founder and CEO of Circle, said on April 11th, “Tokenization of real-world assets is a rapidly emerging product category that addresses investor pain points. USDC enables investors to quickly transfer tokenized assets, reducing costs and removing friction. We are excited to offer this feature to BUIDL investors and demonstrate the core benefits of blockchain transactions - speed, transparency and efficiency.”

This is a landmark move that can open up a new world of access to DeFi for RWA assets.

3.2 ONDO Finance’s BUIDL Liquidity Attempts

ONDO Finance, a leading player in RWA US Treasury projects, bolstered its tokenized fund product OUSG with $95 million worth of BUIDL tokens on March 27th. By complementing this with Circle’s USDC liquidity pool for BUIDL, they effectively tackled their users’ primary concern—T+2 fund redemption, enabling 24/7/365 real-time subscription and redemption of Ondo OUSG fund shares.

This also signifies the first significant adoption of BUIDL by a DeFi protocol.

（Introducing Instant, 24/7/365 Subscriptions and Redemptions; Shifting OUSG Funds into BlackRock’s BUIDL）

3.3 The future of BUIDL

Following Circle’s initiative to integrate the BUIDL fund into DeFi, it’s undoubtedly a crucial capital management option for participants in the crypto market. In an interview with Securitize CEO on Bankless, Carlos Domingo noted: Currently, the BUIDL fund is especially well-suited for institutional-grade market participants, such as:

1. Web3 project parties that have received a lot of huge funding. They all have a lot of money stored off-chain and are able to seamlessly connect off-chain through BUIDL, which will be billions of dollars here;
2. Stablecoin issuers. They themselves have an immediate need for capital allocation, such as Circle capital allocation is managed by Blackrock, such as the capital allocation of the ONDO Finance OUSG fund mentioned above, as well as the Mountain Protocol also intends to allocate BUIDL assets, which will be tens of billions of dollars in size;
3. The stablecoins themselves. The current USDC and USDT stablecoins are non-interest-bearing. If these non-interest-bearing stablecoins are replaced with interest-bearing stablecoins that can be circulated after encapsulation, there is a huge room for imagination, and the stablecoin market itself is hundreds of billions of dollars in size.

For instance, ONDO Finance’s USDY stablecoin is exploring these possibilities, with initiatives on both Aptos and Solana blockchains. It aims to ensure asset security while providing stable returns and facilitating circulation.

4. The potential brought by RWA tokenization is huge

Fourth, RWA Tokenization Brings Great Potential

In an exclusive interview with Bloomberg, Blackrock CEO Larry Fink made it clear that asset tokenization will be the next step in Blackrock’s development: “We believe that tokenization of financial assets will be the next trend, which means that every stock and bond will be recorded in a general ledger.”

While Franklin Templeton has long since implemented tokenized funds on the public blockchain, the aircraft carrier that is Blackrock has certainly opened the door for traditional finance to the new world of RWAs. In particular, Circle’s provision of a USDC liquidity pool for BUIDL has opened the door to DeFi portfolios.

The most realistic aspect is that BUIDL has built a Collateral Layer of institutional-grade crypto assets that is safe enough for the assets to be secure and stable enough to generate interest. We can see that this has already been realized in the case of ONDO Finance, which enables 24/7/365 real-time subscription/redemption of fund products on the chain.

（app.rwa.xyz/treasuries）

I’ll end with a quote from the recently released research paper Finternet: the Financial System for the Future by BIS, the Bank for International Settlements:

“While advances in digital technology have transformed lives in recent decades, large parts of the financial system remain stuck in the past. Many transactions still take days to complete and rely on time-consuming clearing, messaging and settlement systems and physical paper records. Improving the functioning of the financial system is therefore an important public policy goal.

This blockchain-based Finternet will be the future of the financial system.”

（Finternet: the Financial System for the Future）

REFERENCE

[1] Securitize, BlackRock Launches Its First Tokenized Fund, BUIDL, on the Ethereum Network

https://securitize.io/learn/press/blackrock-launches-first-tokenized-fund-buidl-on-the-ethereum-network

[2] FT, BlackRock Buidls back better

https://www.ft.com/content/58e3e9a1-ecf2-4a3a-b301-1cd4e6aeb330

[3] SEC, BlackRock Liquidity FundsProspectus

https://www.sec.gov/Archives/edgar/data/97098/000119312521247816/d214273d485apos.htm

[4] SteakhouseFi, Overview of BUIDL, BlackRock USD Institutional DigitalLiquidity Fund, Ltd

https://twitter.com/SteakhouseFi/status/1778433766438097295

[5] ONDO, Introducing Instant, 24/7/365 Subscriptions and Redemptions; Shifting OUSG Funds into BlackRock’s BUIDL

https://blog.ondo.finance/introducing-instant-24-7-365-subscriptions-and-redemptions-shifting-ousg-funds-into-blackrocks-buidl/

[6] Bankless, Blackrock’s $10T Bet on Ethereum | BUIDL Fund

https://www.youtube.com/watch?v=hA5UxV2WFXg&t=148s

[7] BIS, Finternet: the financial system for the future

https://www.bis.org/publ/work1178.htm

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