Alpha from the Chain: Should Your Fund Be Tokenized?

• Tokenized funds could exceed $400 billion by 2026, up from $36 billion today, driven by stablecoins and real-world asset tokenization.
• Major institutions like BlackRock and JPMorgan have launched tokenized funds, signaling growing adoption.
• Tokenization promises enhanced liquidity, transparency, and investor access but faces complex regulatory, technological, and market infrastructure challenges.
• The integration of tokenized assets requires significant technical investment and coordination across stakeholders to ensure compliance and operational efficiency.
• Strategic alignment with market demand, clear vision, and phased implementation are critical for asset managers to capitalize on tokenization opportunities.

Tokenisation of fund shares has moved from whitepaper territory into genuine institutional practice, and the question asset managers are now wrestling with is no longer ‘is this real?’ but rather ‘is it right for us, and can we actually pull it off?’

The core idea is straightforward enough. By representing fund shares as digital tokens on a blockchain network, managers can in theory enable faster settlement, fractional ownership, round-the-clock trading, and a more transparent audit trail than anything traditional fund administration can offer. In practice, of course, it is considerably more involved than that.

Industry projections — from BCG, Deloitte, and others — suggest tokenised real-world assets could grow from roughly $36 billion today to somewhere north of $400 billion by 2026. Even allowing for a fair degree of analyst optimism in those numbers, the direction of travel is hard to argue with.

This article works through the main challenges an asset manager will face: product strategy, fund structuring, regulatory compliance, technology integration, market infrastructure, liquidity, stakeholder coordination, and investor experience. None of these are trivial. But none of them are insurmountable, either — provided you go in with realistic expectations and a properly sequenced plan.

Product Strategy and Positioning: Starting with the Right Question

Before anyone writes a line of smart contract code, the most important conversation is a deceptively simple one: why are you doing this?

Tokenisation for its own sake — because it sounds innovative, or because a competitor announced something — is a reliable route to expensive disappointment. The strategic rationale needs to be grounded in something concrete: accessing investor segments you cannot currently reach, reducing friction in your settlement and reporting stack, enabling genuine fractional ownership of an asset class that has traditionally been closed off to smaller allocators. These are real use cases. ‘We want to be in the blockchain space’ is not.

Where the Demand Actually Is

The fastest-growing segments for tokenised funds are, perhaps unsurprisingly, those where traditional fund structures have historically been most cumbersome. Real estate and private equity — with their illiquid structures, high minimums, and slow settlement — stand out as obvious candidates. Tokenised money market funds have already surpassed $1 billion in total value and are attracting institutional interest precisely because they can offer intraday liquidity and on-chain yield in a way that traditional money funds cannot easily replicate.

BlackRock’s BUIDL fund is the most visible institutional proof point, offering instantaneous settlement and cross-platform transfers to a predominantly institutional investor base. It demonstrates that the demand is there — but it also demonstrates that the barriers to entry are high enough that not every fund house is going to be able to replicate that model quickly.

Competitive Differentiation: What Tokenisation Can and Cannot Do

Tokenisation can create genuine alpha — faster settlement, lower administrative overhead, new liquidity mechanisms. But the competitive edge is not automatic. A tokenised fund that adds blockchain complexity on top of a poorly run operation has not solved anything; it has added a new layer of risk.

The funds that will differentiate themselves are those that use tokenisation to do something they genuinely could not do before: reach a previously inaccessible investor base, offer secondary liquidity in a historically illiquid product, or provide a level of real-time portfolio transparency that traditional reporting simply cannot match.

Building a Phased Roadmap

Almost every credible implementation in this space has started with a pilot. A hybrid model — combining on-chain issuance with off-chain fund operations — is typically the most pragmatic starting point. It allows a manager to learn the technology, stress-test the regulatory approach, and build operational muscle without betting the entire platform on a first attempt.

Fund Structuring and Tokenisation Design: Getting the Architecture Right

Assuming the strategic case is sound, the next challenge is building a fund structure that actually works in an on-chain environment. This is where things get genuinely technical — and where cutting corners has consequences.

Token Standards and Smart Contract Risk

The choice of token standard matters more than many people initially appreciate. ERC-20 is the most widely supported standard, but it offers minimal built-in compliance functionality. ERC-1400 — designed specifically for security tokens — provides features like transfer restrictions, forced transfers, and document management that are far more relevant for a regulated fund product. Choosing the wrong standard early creates expensive rework later.

Smart contracts are powerful precisely because they automate so much: issuance, transfers, compliance checks, dividend distribution, investor rights. But that automation cuts both ways. A vulnerability in a smart contract does not result in a customer complaint — it can result in material financial loss at scale and very quickly. The DAO hack in 2016 remains the cautionary tale that everyone in this space is obliged to mention, and the lesson has not dated. Formal verification and multi-signature controls are not optional extras; they are table stakes.

Hybrid Models and Issuance Platforms

For most asset managers, building smart contract infrastructure from scratch is neither practical nor sensible. White-label issuance platforms — Polymath, Securitize, and their competitors — offer a more realistic path. They handle much of the compliance logic and provide integrations with custody and transfer agency systems. The trade-off is vendor dependency and the need to ensure the platform’s approach aligns with your specific regulatory environment.

Hybrid models — bridging on-chain token issuance with off-chain fund accounting and administration — remain the dominant approach. They are less elegant than a fully on-chain solution, but they are considerably more compatible with the regulatory frameworks that currently exist.

Regulatory and Legal Compliance: The Landscape Is Fragmented, and That Is the Point

Anyone who tells you the regulatory picture for tokenised funds is clear is either very optimistic or working in one of the handful of jurisdictions where things are actually relatively settled. For most asset managers operating across multiple markets, the reality is a patchwork of securities laws, digital asset frameworks, and AML/KYC requirements that do not always play nicely together.

Securities Classification: Nothing Has Changed, and Everything Has Changed

In most jurisdictions, a tokenised fund share is still a security. The SEC’s position has been consistent on this point: the fact that something is represented as a digital token does not alter its underlying legal nature. The Howey Test applies regardless of the blockchain it sits on. This means registration requirements, prospectus obligations, and broker-dealer rules all remain in play — and pretending otherwise is how firms end up in enforcement actions.

Europe’s MiCA framework, now in force, provides more explicit guidance for certain categories of crypto-assets but does not eliminate the need for compliance with existing securities regulation for products that clearly qualify as financial instruments. Singapore’s Project Guardian and Switzerland’s DLT Act represent the more progressive end of the regulatory spectrum, with genuine effort to create legal clarity for tokenised securities — and both are worth studying closely.

AML/KYC: The Wallet Problem

Embedding AML/KYC requirements into a blockchain-based distribution model introduces a set of challenges that are easy to underestimate. Verifying beneficial ownership, screening against sanctions lists, and maintaining travel rule compliance across jurisdictions — all of this has to work with blockchain wallet infrastructure that was not originally designed with financial services compliance in mind. Getting this right requires close coordination between compliance, technology, and your KYC/AML service providers from the very beginning of the project, not as an afterthought.

Technology Integration: The Hardest Bit Nobody Talks About Enough

The blockchain infrastructure is, in a sense, the easy part. The hard part is connecting it to the systems that have been running fund operations for decades — and doing so without creating data integrity problems, reporting gaps, or compliance blind spots.

Blockchain Infrastructure and Interoperability

The choice of blockchain platform — Ethereum, Solana, a permissioned chain, or something purpose-built for financial services — involves genuine trade-offs between decentralisation, throughput, cost, and regulatory acceptability. There is no universally correct answer. What matters is that the choice is made deliberately, with a clear understanding of the long-term implications, rather than by defaulting to whichever platform is most fashionable at the time of implementation.

Oracle networks — Chainlink being the most widely deployed — are essential for bringing real-world data (NAV, pricing, corporate actions) on-chain reliably. Their failure modes deserve serious attention in any risk assessment.

Custody: A Non-Negotiable Priority

Custody in a tokenised fund context means safeguarding cryptographic keys, and the stakes are high. Multi-party computation (MPC) has become the dominant approach for institutional digital asset custody — it distributes key management across multiple parties in a way that eliminates single points of failure without requiring the physical hardware security modules that earlier solutions relied upon. Fireblocks and Hextrust are among the established players, though the market is maturing quickly.

Legacy System Integration: Where Projects Actually Stall

In practice, many tokenisation projects slow down or fail entirely not because of the blockchain layer but because of the integration with existing fund administration, transfer agency, and reporting systems. These are complex, often ageing platforms that were never designed to reconcile on-chain transactions with off-chain records in real time. Budget for this. It will take longer than expected.

Market Infrastructure and Ecosystem Development: You Cannot Build This Alone

One of the more sobering aspects of tokenised fund development is how dependent the ultimate success of any individual product is on an ecosystem that does not yet fully exist. You can issue the most elegantly structured tokenised fund in the world, but if there is nowhere compliant to trade it, no institutional custodian willing to hold it, and no reporting infrastructure capable of handling it, the product is less useful than it ought to be.

The ecosystem is developing — faster than sceptics predicted, more slowly than enthusiasts promised. Digital custodians like Fireblocks and Hextrust have developed sophisticated custody and collateral management capabilities. Trading venues like SIX Digital Exchange (SDX) and certain regulated DeFi platforms are providing the beginnings of a secondary market infrastructure. Token issuance platforms are handling an increasing volume of real-world asset tokenisation.

The GENIUS Act (2025) and the anticipated Clarity Act (2026) in the United States represent meaningful steps towards the regulatory certainty that institutional adoption requires. Europe’s DLT Pilot Regime is serving a similar function in providing a sandbox for market infrastructure experimentation. These are encouraging signs, but they do not eliminate the need for asset managers to engage proactively with regulators rather than simply waiting for clarity to arrive.

Liquidity and Distribution: The Promise Versus the Reality

Enhanced liquidity is one of the most frequently cited benefits of tokenisation, and it is also one of the most frequently overstated. The theoretical case is compelling: 24/7 trading, fractional ownership enabling smaller ticket sizes, programmable transfer mechanisms that can settle instantly. The practical reality is that liquidity requires buyers and sellers, and in most tokenised fund markets today, both are in short supply.

The secondary market infrastructure for tokenised securities is still genuinely limited. Fragmented liquidity across multiple platforms, a limited pool of compliant buyers in any given jurisdiction, and the absence of market makers with appetite for most tokenised products mean that many tokenised funds trade infrequently and at spreads that would disappoint anyone who expected DeFi-style efficiency from the outset.

The more realistic near-term liquidity story is institutional OTC channels — DigiFT’s partnership with GSR Markets being a notable example — and hybrid AMM models that provide some level of continuous liquidity within a regulated framework. Progress is being made, but it is worth being honest with investors about what secondary liquidity actually looks like today rather than what it might look like in five years.

Distribution is a more straightforwardly positive story. Tokenisation genuinely does enable asset managers to reach investor segments — global retail allocators, family offices in markets that were previously too costly to service — that traditional distribution models exclude. The digital channel economics are better, the minimum ticket sizes can be lower, and the reporting and servicing can be more automated. This is where some of the most convincing near-term value creation lies.

Stakeholder Coordination: The People Problem

Perhaps the most underestimated challenge in any tokenisation project is not the technology, not the regulatory navigation, and not even the liquidity question. It is getting the right people aligned, internally and externally, and keeping them aligned as the project evolves.

Tokenisation projects cut across functions in ways that most fund management operations are not structured to handle well. Legal, compliance, technology, operations, distribution, and finance all have legitimate stakes in key decisions — and they often have genuinely different views about how those decisions should go. A clear governance structure with defined decision rights and a RACI matrix is not a bureaucratic nicety; it is a practical necessity.

Externally, the coordination requirements are equally demanding. Custodians need to understand and support the token architecture. Transfer agents need to be capable of handling on-chain records. Auditors need to be equipped to sign off on smart contract-governed fund operations. Regulators need to be engaged early and kept informed. None of this happens automatically.

Change management deserves more attention than it typically receives. The teams that will operate a tokenised fund day-to-day are often the ones most resistant to change, not because they are obstructive, but because they understand the operational complexity better than anyone and have legitimate concerns about what happens when something goes wrong in a system they do not yet fully understand.

Investor Experience and Transparency: Where the Technology Actually Earns Its Keep

After working through all the complexity above, it is worth remembering what tokenisation is actually for: a better experience for the people putting their money into these funds.

On this dimension, the technology does genuinely deliver — provided the implementation is done properly. Digital onboarding, when designed well, is materially faster and less friction-heavy than traditional KYC processes. Real-time portfolio transparency — enabled by the blockchain’s immutable ledger — reduces the information asymmetry between fund managers and investors that has historically been one of the more frustrating aspects of investing in alternative assets. Near-instantaneous settlement, particularly valuable for cross-border transactions and investors operating across time zones, removes one of the structural inefficiencies that has always made traditional fund investing feel slower than it should be.

The caveat — and there is always a caveat — is that these benefits are only realised if the investor-facing systems are genuinely well built. A blockchain back-end feeding into a poorly designed investor portal delivers none of these advantages. The investor experience needs to be designed holistically, not bolted on at the end.

Conclusion:
The Path Forward — Methodical, Not Rushed

Tokenised funds represent a genuinely transformative opportunity for asset managers. The projected growth to $400 billion by 2026, the institutional adoption already underway, and the gradual but real improvement in regulatory clarity all point in the same direction. This is not a technology trend that is going to reverse.

But the opportunity is not equally available to all, and it will not be captured by those who move quickly without moving thoughtfully. The managers who will do this well are those who start with a clear-eyed view of why tokenisation serves their specific strategy, who choose a hybrid model that respects current regulatory realities rather than betting on regulatory evolution, and who invest seriously in the technology integration and stakeholder coordination that determine whether a tokenised fund actually works in practice. A phased approach — pilot programme, learn, iterate, scale — is not timidity. It is the approach that the complexity of the problem actually demands. White-label issuance platforms can accelerate the initial build; regulatory engagement can reduce the compliance