While the investment management industry has gone about digitizing its operations, the assets it manages have largely remained non-digital. That situation is now changing, as real-world assets such as bonds, equities, currencies and real estate are gradually being tokenized. This is the process of creating unique digital representations of assets — known as security tokens — on a blockchain, to be sold and traded in financial markets.1
That innovation has enabled investment management companies to create a new class of products in the form of tokenized funds. These confer to investors digital forms of ownership in traditional investment vehicles, such as money market or bond funds. To issuers and fund managers, tokenized funds offer the prospect of reduced costs thanks to automation and the reduction of intermediaries. To investors they offer wider accessibility to funds and greater transparency about returns, transaction history and other key details. If tokenization is to make a strong imprint on financial markets, as many experts expect it will, tokenized funds are likely to be a major vehicle for it.
Tokenized funds account for a small portion of financial instruments sold to investors today. To change that, industry stakeholders will need to lay solid foundations for their accelerated growth. Chief among those are technology interoperability, regulatory clarity and a clear path toward blockchain-based settlement of transactions.
With the help of four experts in the field, we detail in this article the nature and types of tokenized funds, the benefits they offer the investment industry, and the challenges that must be met to secure their growth.
1
For an introduction to tokenization, see “The tokenization of finance: Incremental improvement or game changer?” https://www.bakermckenzie.com/en/insight/publications/resources/next-decade-in-fintech-tokenization-of-finance]
Tokenization growth vehicles
Money markets have been the focal point of most tokenized fund activity thus far. In particular, a variety of large, established investment managers like Franklin Templeton and digital-native challengers (such as WisdomTree and Ondo Finance) have issued funds in US treasury bills that are collectively valued in the several billions of dollars.
High liquidity explains the money markets focus. Their short terms and low risk are the main attractions for investors, but tokenized money market funds offer added utility, says John Allan, head of innovation and operations at the Investment Association, a UK industry group.
Allan also observes that large asset managers are now broadening their client base by offering tokenized money market funds to digital native investors, such as those holding cryptocurrencies. “This is a new growth driver, as such investors cannot currently access a yield-bearing product on-chain,” he says.
Stablecoins — cryptocurrency that is typically pegged to the US dollar — possess those attributes but have two significant drawbacks. One is limited transparency of the reserves held by the issuer to back the tokens, which can engender mistrust between payer and payee. The other drawback is stablecoins’ uncertain regulatory status. Within the OECD, only the EU countries, Singapore, and Japan currently have rules that address their use.2
“Tokenized payment mechanisms remove those deficiencies through their programmable, automated functionality, their bypassing of intermediaries, and their use of code-based smart contracts,” says Chia. The latter, which are immutable, document key details of an asset’s ownership and transaction history, enhancing transparency.
Complexity contributes to the slowness and opacity of today’s payment systems. A simple transfer of funds between two different banks typically involves multiple messages, internal checks, and adjustments, and manual interventions are often needed to initiate certain steps. And participants generally cannot track the progress of their payments in real time. The payment process is even more complex in cross-border transactions.
By their nature, CBDCs suffer from no such doubts about the reserves behind them. But earlier momentum behind their development has stalled in much of the world. Reasons include concerns about potential government misuse of people’s personal data and commercial banks’ worries about central bank competition for retail deposits. That uncertainty has delayed legislation that would establish CBDCs as legal tender, and their legal status remains cloudy.3
Tokenized real-world assets in 2025 (millions of US dollars)
Modes of tokenization
Hybrid:
The primary model in use today, in which a digital twin creates a replica of a conventional off-chain fund. Tokens represent fund shares, being issued and redeemed like those in the off-chain fund. Compliance is straightforward, as existing securities market regulation applies to the model.
Disadvantages include a continued need for intermediaries and the need to maintain some duplicate operations.
“Through automation and the resulting cost efficiencies, companies can fractionalize fund ownership to a much greater degree than today, and that will make fund units more accessible to smaller retail investors,” he says.
Putting everything on a chain
Tokenization’s full impact will be achieved when the on-chain model becomes mainstream and funds are fully or mostly on-chain. “That is when tokenization will become transformative for our industry,” says Clarke.
The definition of fully on-chain includes the ability of tokenized funds to invest in tokenized securities. “This means having a portfolio of assets that are themselves tokenized or natively digitally issued and paired with other tokenized securities or funds,” says Allan. “That end-to-end model will really drive efficiency and cost reduction, particularly by reducing the number of entities involved in transactions.”
The above doesn’t preclude a continued role for hybrid on-chain/off-funds. “Without doubt, off-chain solutions will help tokenized funds to scale,” according to Lee. To maximize promised operational expenditure savings, however, it is critical to keep the duplication of administrative processes and infrastructure to a minimum. “Having duplicate systems running serves to increase, not decrease, costs,” says Lee.
Several factors must come together before an on-chain future can take shape. One is interoperability of technology platforms for tokenized assets and funds. Different types of blockchain, for example, are likely to co-exist for some time, but they must operate to common standards to be able to interconnect seamlessly.
Another factor requiring attention is regulation. Hybrid off-chain/on-chain funds are generally governed by existing securities regulation, but fully on-chain funds are not. Jurisdictions are only beginning to grapple with the legal frameworks that will govern these. “The legal gray areas do not appear to be blocking market activity at present,” says Sheikh, “but if not clarified, they will be a drag on tokenization growth.”
Usman Sheikh
Partner, Baker McKenzie
Chair of the Blockchain, AI & Fintech Practice (Canada)
John Allan
Head of Innovation and Operations, The Investment Association
Experts interviewed
The Next Decade in Fintech
Discover how tech will transform the financial sector and meet our Global Fintech experts
Siobhan Clarke
Head of Investment Services, Royal London Asset Management
John Lee
Managing Director and Global Lead Digital Assets, Currencies & Market Infrastructure, Accenture
The Next Decade in Fintech
Discover how tech will transform the financial sector and meet our Global Fintech experts
Yves Mauchle
Partner
Baker McKenzie, Switzerland
Tokenized funds and the future of investment management
The Next Decade in Fintech
“They allow investors to trade those tokens or pledge them as collateral in bilateral, uncleared trades. This isn’t possible with conventional funds."
Source: RWA.xyz. The data in the chart is current as of May, 2025.
There are two main approaches to creating a tokenized fund:
What’s to be gained?
Although tokenization is still in its infancy, it will eventually transform investment management, believes John Lee, managing director and global lead, Digital Assets, Currencies & Market Infrastructure at Accenture. He points to fund administration as one area of certain gains. “For example, the ability to calculate intraday NAVs (net asset values) in real time will completely change the way a fund manager or portfolio manager transacts and trades,” says Lee.
Fund managers will also be able to reach new types of investors, says Usman Sheikh, chair of Baker McKenzie Canada's Blockchain, AI & Fintech Practice.
Regulators get behind tokenization
A handful of regulatory institutions are actively seeking to facilitate the development of markets in tokenized assets and funds. Prominent examples are:
Monetary Authority of Singapore (MAS) Key initiative: Project Guardian, launched 2022 A project bringing together asset managers, banks and other national regulators to develop commercial tokenization use cases and potential regulatory frameworks
Coming up with the cash
Tokenized funds’ long-term growth also hinges on innovation in payments. “Developing a payment medium that supports atomic settlement2 is the key to enabling scale,” says Lee. Regulators and other industry stakeholders are currently considering three forms of payment that could play this role: stablecoins, CBDCs and tokenized commercial bank deposits.
Stablecoins’ weaknesses, including a lack of transparency over the reserves backing them, reduce their appeal as a currency in asset tokenization. CBDCs are under development but it may take some years before they materialize. Tokenized deposits, meanwhile, are emerging as a realistic payments option in the near future.
UK Financial Conduct Authority (FCA) Key initiative: Digital Securities Sandbox (DSS), launched 2024 A joint initiative with the Bank of England to create a regulated environment in which firms can test the viability of use cases for tokenized assets and funds
Hong Kong Monetary Authority (HKMA) Key initiative: Project Ensemble Sandbox, launched 2024 A test environment enabling commercial firms to test tokenization use cases; part of a larger initiative to facilitate interbank settlement of tokenization transactions using a central bank digital currency (CBDC)
Bank for International Settlements (BIS) Key initiative: Project Agorá, launched 2024
A collaborative project, involving central banks and private sector companies, to test the feasibility of creating a unified ledger to facilitate cross-border tokenized payments
Usman Sheikh
Partner, baker McKenzie
Chair of the Blockchain, AI & Fintech Practice (Canada)
USD 12,940
USD 6,860
USD 1,480
USD 459
USD
471
USD
227
Private Credit
US Treasuries
Commodities
Institutional
Funds
Stocks
General Bonds
(excl. US Treasuries)
Those efficiencies, gained through the use of distributed ledger technology (DLT) and code-based smart contracts, are among the biggest benefits that tokenization offers investment companies. “If widely adopted, tokenization should greatly simplify how our industry works,” says Siobhan Clarke, head of investment services at Royal London Asset Management.
One likely source of efficiency gain and cost reduction is reduced workflows, such as in the maintenance of investor registers. Another source is disintermediation. “As transactions increasingly take place on blockchains, the number of third-party firms involved would likely decline in the future through the power of disintermediation,” says Sheikh. “Transactions typically involve several parties, and in some cases the number can exceed a dozen, so there are clear efficiencies to be gained,” he says.
Tokenization also makes possible the creation of secondary markets for many types of assets, which should bring funds added liquidity. Faster settlement, reduced risk of fraud (thanks to greater transparency of transaction and investor data) and the potential to create new revenue models are other potential benefits. A prime example of the latter is the aforementioned use of tokenized money market funds as collateral in lending.
2
This refers to the instantaneous settlement of transactions (delivery versus payment).
“What would really increase efficiency is doing away with clearing houses,” says Mauchle. “But for technical and regulatory reasons, it is not easy to make tokenized deposits transferable between financial institutions. So the benefits of implementation for any one financial institution will be limited until more institutions push into this space, while the cost of such implementation is significant given compliance and security requirements.”
Tokenization growth vehicles
Tokenization growth vehicles
Money markets have been the focal point of most tokenized fund activity thus far. In particular, a variety of large, established investment managers like Franklin Templeton and digital-native challengers (such as WisdomTree and Ondo Finance) have issued funds in US treasury bills that are collectively valued in the several billions of dollars.
High liquidity explains the money markets focus. Their short terms and low risk are the main attractions for investors, but tokenized money market funds offer added utility, says John Allan, head of innovation and operations at the Investment Association, a UK industry group.
Allan also observes that large asset managers are now broadening their client base by offering tokenized money market funds to digital native investors, such as those holding cryptocurrencies.
“This is a new growth driver, as such investors cannot currently access a yieldbearing product on-chain,” he says.
Modes of tokenization
Money markets have been the focal point of most tokenized fund activity thus far. In particular, a variety of large, established investment managers like Franklin Templeton and digital-native challengers (such as WisdomTree and Ondo Finance) have issued funds in US treasury bills that are collectively valued in the several billions of dollars.
High liquidity explains the money markets focus. Their short terms and low risk are the main attractions for investors, but tokenized money market funds offer added utility, says John Allan, head of innovation and operations at the Investment Association, a UK industry group.
Allan also observes that large asset managers are now broadening their client base by offering tokenized money market funds to digital native investors, such as those holding cryptocurrencies.
“This is a new growth driver, as such investors cannot currently access a yieldbearing product on-chain,” he says.
“They allow investors to trade those tokens or pledge them as collateral in bilateral, uncleared trades. This isn’t possible with conventional funds.”
What's to be gained
What's to be gained
Money markets have been the focal point of most tokenized fund activity thus far. In particular, a variety of large, established investment managers like Franklin Templeton and digital-native challengers (such as WisdomTree and Ondo Finance) have issued funds in US treasury bills that are collectively valued in the several billions of dollars.
High liquidity explains the money markets focus. Their short terms and low risk are the main attractions for investors, but tokenized money market funds offer added utility, says John Allan, head of innovation and operations at the Investment Association, a UK industry group.
Allan also observes that large asset managers are now broadening their client base by offering tokenized money market funds to digital native investors, such as those holding cryptocurrencies.
“This is a new growth driver, as such investors cannot currently access a yieldbearing product on-chain,” he says.
Putting everything on a chain
Tokenization’s full impact will be achieved when the on-chain model becomes mainstream and funds are fully or mostly on-chain. “That is when tokenization will become transformative for our industry” says Clarke. The definition of fully on-chain includes the ability of tokenized funds to invest in tokenized securities. “This means having a portfolio of assets that are themselves tokenized or natively digitally issued and paired with other tokenized securities or funds,” says Allan. “That end-to-end model will really drive efficiency and cost reduction, particularly by reducing the number of entities involved in transactions.
The above doesn’t preclude a continued role for hybrid on-chain/off-funds. “Without doubt, off-chain solutions will help tokenized funds to scale,” according to Lee. To maximize promised operational expenditure savings, however, it is critical to keep the duplication of administrative processes and infrastructure to a minimum.
“Having duplicate systems running serves to increase, not decrease, costs,” says Lee.
Several factors must come together before an on-chain future can take shape. One is interoperability of technology platforms for tokenized assets and funds. Different types of blockchain, for example, are likely to co-exist for some time, but they must operate to common standards to be able to interconnect seamlessly.
Another factor requiring attention is regulation. Hybrid off-chain/on-chain funds are generally governed by existing securities regulation, but fully on-chain funds are not. Jurisdictions are only beginning to grapple with the legal frameworks that will govern these. “The legal gray areas do not appear to be blocking market activity at present,” says Sheikh, “but if not clarified, they will be a drag on tokenization growth.”
On-chain:
The future. A new fund is created in a native blockchain environment. All the fund’s transactions, reporting and governance are managed on-chain.
This model ultimately offers the full extent of speed, efficiency and transparency gains that tokenization has to offer.
Two current disadvantages are a limited pool of digital native investors and some uncertainty around its regulatory status.
