An Undeniable Niche in the RWA Field: The Value, Exploration, and Practice of Fund Tokenization

1. Fund Tokenization

Tokenization usually refers to the process of digitizing assets and representing them on the blockchain, utilizing distributed ledger technology for accounting and settlement. It can be applied to financial instruments such as stocks, bonds, and funds, and can also include tangible assets like real estate, as well as intangible assets like music copyrights. The tokens generated after asset tokenization serve as carriers of asset value and proof of rights.

This innovation also applies to funds. Tokenized funds refer to the recording of fund shares in the form of tokens on a blockchain distributed ledger, and these tokens can be traded on the secondary market. This is different from crypto funds that only invest in the primary and secondary markets.

The global asset management industry faces numerous challenges. Despite overall growth in scale with the rising market, management fees are being compressed due to competition and a shift towards passive strategies. In addition to investment pressures, there is an increasing market demand for the digital capabilities of funds to meet online distribution, asset reporting, regulatory compliance, and personalization needs. The growth rate of fund management costs is outpacing revenue, leading to squeezed profit margins.

For private equity funds, due to poor liquidity and high thresholds, investors are long limited to a few institutions. There is an urgent need to lower the threshold and launch alternative products that meet the needs of small and medium-sized institutions, family offices, and high-net-worth individuals.

Fund tokenization can solve many problems in the global asset management industry. Supporters believe that blockchain-based funds can not only increase management scale and invest in a wider range of asset classes in the future; they can also attract new types of investors, improve experiences; help win in the digital competition, while significantly reducing operational and marketing costs.

2. The Profound Impact of Tokenization on the Fund Market

2.1 Promote the Digitization of the Fund Market

Currently, there are many intermediaries between funds and investors, including financial advisors on the distribution side, fund platforms, order routing networks, as well as payment agents, custodians, accountants, etc. on the service side. Transfer agents are responsible for coordinating both ends, conducting KYC, AML, and CFT verifications, and handling subscription and redemption settlements.

Inefficient operation of traditional funds: frequent establishment and cancellation of shares; pricing based on net asset value rather than buy and sell; centralized handling of orders and settlements by transfer agents; risks exist three days before settlement; funds need to retain cash to respond to redemptions.

In contrast, tokenization can significantly simplify the process: subscriptions and redemptions are settled directly to the investors' wallets, eliminating risk; ownership changes are automatically recorded, requiring no centralized registration; intermediaries can access blockchain data directly, without the need for multiple party reconciliation reports.

Tokenization will also enhance the digital interaction level between funds and investors: integrating KYC and other verifications to accelerate account opening; achieving real-time pricing and settlement around the clock; allowing multiple parties to directly access shared data; and funds can obtain richer investor and transaction information.

2.2 On-chain fund issuance and fundraising platform of Solv Protocol

Solv Protocol is committed to providing blockchain-based financial tools and asset management infrastructure. Its latest product, Solv V3, sets a new standard for on-chain fund issuance, enabling on-chain fundraising, issuance, subscription, redemption, trading, and settlement of funds, thereby improving capital circulation efficiency.

Solv Protocol has implemented the issuance and fundraising of 74 tokenized funds including open-end and closed-end (, serving over 25,000 investors and managing over 160 million dollars in assets.

Its core mechanism allows fund managers to create on-chain funds, depositing the raised capital into smart contracts to generate NFT/SFT certificates representing shares for investors. Managers can use the raised funds for investment allocation.

The Blockin GMX Delta Neutral Pool manages approximately $2.6 million in assets; RWA: Generate Yield On Your Stable Coins invests in US Treasury RWA assets, providing returns for stablecoin holders.

The full-chain tokenization fund structure of Solv Protocol maximizes the advantages of tokenization: managers face investors directly to obtain more data; eliminates intermediaries to reduce costs; the entire process is efficient and transparent based on blockchain; NAV is updated in real-time, and subscription and redemption are available 24/7.

Solv Protocol states that currently, most crypto asset management services come from CeFi institutions, and the lack of transparency in the process creates trust issues. Decentralized solutions can provide a transparent and secure experience, helping asset management companies gain trust and liquidity. Solv is building the infrastructure and ecosystem to offer comprehensive services, reduce the entry barrier for Web3 participation, and promote the maturity of the crypto market.

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3. Settlement of Tokenization Funds

) 3.1 Tokenization Fund Settlement Method

Currently, funds are usually priced based on net asset value and settle through the bank system T+3. Tokenized funds will enable multiple pricing and "automatic" settlement via blockchain, replacing traditional methods.

This blockchain-based settlement is called atomic settlement, where cash equivalents are directly associated with shares for exchange. The prerequisite for settlement is that both parties' wallets have sufficient assets; otherwise, the transaction will not occur. This eliminates counterparty risk, achieves real-time settlement, and significantly improves efficiency.

Atomic settlement can be applied to cross-border payments, addressing issues such as high costs and low efficiency in traditional methods. It can also be used for ETF settlement, simplifying the process by tokenizing the underlying securities.

3.2 Tokenization Fund Settlement Case

This settlement method has been approved by the U.S. SEC and is applied to the Franklin OnChain U.S. Government Money Fund. The Monetary Authority of Singapore also has a pilot for the UBS tokenized fund. Although it is not a purely on-chain fund, it utilizes the advantages of blockchain to construct a tokenization model.

3.2.1 Franklin OnChain U.S. Government Money Fund

Franklin Templeton launched the fund in 2021, making it the first tokenized fund in the U.S. approved by the SEC to use the Stellar blockchain for processing transactions and recording ownership. This year, it expanded to Polygon, and it may issue on Avalanche, Aptos, and Arbitrum in the future.

Currently managing over $310 million in assets, with an annualized return of 5.19%. 1 share is represented by 1 BENJI Token, and it has not yet interacted with DeFi. Investors need to verify their entry into the whitelist through the App or website.

Franklin stated that blockchain technology is expected to reshape the asset management industry, providing higher transparency and lower costs. Tokenized assets will ultimately interoperate with the crypto ecosystem. The total cost of the fund is only 1/10 of that of traditional funds.

3.2.2 Compound Founder's Superstate Fund

Compound founder Robert Leshner established Superstate in June 2023 to bring regulated financial products on-chain.

Superstate will establish an off-chain SEC compliant fund to invest in short-term US Treasury bonds, using Ethereum for bookkeeping and settlement, tracking ownership shares. A whitelist system will be implemented, and the fund's tokens will not be usable in DeFi for the time being.

Although there is no mention of DeFi composability, it can be imagined that in the future, fund Tokens could be staked on Compound to lend stablecoins and build DeFi Legos.

3.2.3 UBS's Tokenization Fund Pilot

In October 2023, UBS Asset Management launched a pilot for tokenization funds. Through the internal service UBS Tokenize, fund tokens appear on Ethereum in the form of smart contracts, representing the underlying money market fund rights, which can enhance the issuance, distribution, subscription, and redemption processes.

This is part of the Project Guardian initiative by the Monetary Authority of Singapore, aimed at tokenizing real-world assets. For UBS, it is a part of its global distributed ledger technology strategy, focusing on leveraging both public and private chains to enhance fund issuance and distribution.

The project leader stated that this is a key milestone in understanding the tokenization of funds. Through exploratory initiatives, they will collaborate with traditional financial institutions and fintech to understand how to improve market liquidity and customer access.

3.3 Technical barriers to tokenization fund settlement

The atomic settlement method brings technical challenges: blockchain wallets must have sufficient funds before settlement; otherwise, the transaction will not occur. This imposes additional costs on issuers and investors, requiring them to maintain an excess balance.

Can cope with it by reducing costs, including: using shared data ledgers to replace multilateral reporting reconciliation; no need for transfer agents; using distributed ledgers to replace centralized ledgers; using smart contracts to ensure timely access to rights.

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4. The Issuance of Tokenization Funds

The issuance of tokenized funds is only applicable to new funds. Tokenizing existing funds would incur duplicate registration costs, and conflicts would arise between original holders and tokenized share holders.

It is better to add a tokenization asset class to the existing fund or provide a tokenized version of the existing asset class.

) 4.1 Tokenization of Money Market Funds

Apart from stablecoins, the largest RWA projects currently are money market funds. The top three are: Franklin Templeton $312 million ### government bonds (; Centrifuge $247 million ) asset-backed (; Ondo Finance $183 million ) government bonds (.

Franklin Templeton is fully a tokenized fund, Ondo Finance has two tokenized funds, and Centrifuge has also established a tokenized fund in its RWA project in collaboration with Aave. This demonstrates the importance of tokenized funds in connecting TradFi and DeFi.

)# 4.1.1 Ondo Finance OUSG / OMMF

Ondo Finance launched a tokenized fund in January 2023, providing institutional-grade products for on-chain professional investors, bringing risk-free/low-risk interest rate funds on-chain, allowing stablecoin holders to invest in government bonds and U.S. Treasuries. The underlying assets of the two funds, OUSG and OMMF, are the BlackRock short-term U.S. Treasury ETF and the money market fund.

Investors must sign subscription documents after completing KYC and AML verification. Ondo Finance handles deposits and withdrawals through Coinbase Custody and then executes U.S. Treasury ETF trades via Clear Street.

For compliance reasons, investment is only open to qualified purchasers.

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)# 4.1.2 Centrifuge & Aave Treasury RWA Allocation

Centrifuge's RWA solution designed for Aave helps capture US Treasury yields for the Aave treasury assets. The solution utilizes tokenized funds:

1. Anemoy Liquid Treasury Fund is registered in the BVI and tokenizes the fund through the Centrifuge protocol.
2. Aave invests the treasury funds into the Centrifuge Pool corresponding to the Anemoy tokenization fund, obtaining fund token certificates.
3. The Centrifuge Pool allocates assets to the Anemoy fund.
4. Anemoy Fund achieves on-chain US Treasury yield by depositing and withdrawing funds, custody, and purchasing US Treasuries through brokers.

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) 4.2 Tokenization of Private Equity Funds

Private equity funds have a high investment threshold, and the market is limited to large institutions and ultra-high-net-worth individuals. The goal of the asset management market is to increase retail investor allocation. Tokenization may be the solution.

Private equity funds can achieve partial tokenization of shares through a master feeder structure by tokenizing the upper layer Feeder Fund. The Feeder Fund raises funds from various investors to invest in the Master Fund, where investors invest at the Feeder Fund level and pay fees, while the Master Fund conducts trading and investment.

4.2.1 Hamilton Lane

Hamilton Lane manages $82.39 billion in assets and has tokenized a portion of its fund shares on Polygon, opening them to investors through Securitize. Securitize Capital manages the tokenized Feeder Fund ### SEC Reg D 506 (c ( filing ).

This provides individual investors with the opportunity to participate in top private equity funds at "par", with the minimum threshold reduced from $5 million to $20,000, but still requires verification as an accredited investor through Securitize.

)# 4.2.2 KKR

In October 2022, KKR partnered with Securitize to tokenize a portion of the Health Care Strategic Growth Fund II through a Feeder Fund on Avalanche.

Tokenization brings advantages to private equity funds: providing real-time liquidity; achieving LP diversification and flexibility in funding sources. It may solve the issue of projects being unable to exit in the current environment during periods of high valuation.

For investors,提