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Introduction
Tokenization is the process of creating an asset, or a digital record of an asset, by issuing a blockchain-based token. It is gaining momentum at institutional and governmental levels1 by transforming access to public and private investments in a manner expected to benefit all industry participants. As the financial services industry embraces digital transformation, tokenization gives private fund managers new tools to streamline operations, reach wider investor bases, and create value beyond what legacy processes allow.2
With the SEC, Nasdaq, and leading asset managers like Hamilton Lane, Franklin Templeton, and KKR focusing on scalable blockchain infrastructure, tokenization is now widely viewed as a lever for growth, investor engagement, and operational agility.
Tokenization in the Context of Funds
Tokenization has uses in all industries, but it has been adopted first and foremost in finance. In the context of funds, the technology addresses major pain points inherent to traditional structures, as we explain in "The Business Case for Fund Tokenization" below.
Not all tokenized assets are securities. For example, Bitcoin is a tokenized asset that is not a security, but it is currently market-valued at more than $100,000 per unit. That said, there are two types of tokenized securities: (i) a digital representation of a traditionally issued security and (ii) a natively issued digital asset which is the security where permitted by applicable law.3 In the first case, the token is an on-chain record of a security created (and whose ownership is recorded and transfers of which are recorded) off-chain. In the second case, the token itself is the security.
In the context of tokenized private funds, fund interests typically are the first type of tokenized security. They are issued pursuant to a private placement memorandum using Securities Act of 1933 registration exemptions. They are subsequently: (1) custodied through the traditional intermediated broker-dealer, exchange, clearing agency, and transfer agent system, or (2) self-custodied directly by the investor in a non-intermediated manner.4 Tokenization transforms fund interests into digitally transferable tokens recorded on a secure blockchain, potentially enhancing the fund's ability to facilitate trading in its securities directly on a peer-to-peer basis. It is the use of blockchain technology that facilitates secure, speedy, peer-to-peer transfer.
In practice, tokenized fund interests are converted into unique digital tokens recorded on a blockchain such as Stellar, Ethereum, or Avalanche. Each token serves as a digital stand-in for a traditional fund unit and carries the same legal and economic rights, including claims on distributions, voting rights, and any relevant restrictions or compliance rules. Rather than handling investor records through traditional spreadsheets or paper processes, blockchain technology manages ownership and transaction data on a secure ledger visible to authorized parties. These immediate advantages of tokenized securities have significantly contributed to the swift adoption of tokenization within the fund industry.
Why now? The technology is ready, the regulatory landscape is following, and the business upside is tangible. Financial institutions and investors want faster, easier onboarding, seamless digital user experiences, and the potential for broader participation in alternative assets. The benefits of tokenization in capital markets are expected to increase exponentially with the increasing number of institutional participants.5 At the same time, blockchain technology's ability to support demand for transparency, accurate recordkeeping, and faster settlement are earning positive marks from the investment community and regulators.6
The Business Case for Fund Tokenization
The existing and immediately anticipated business uses of tokenization include the following:
1. Operational Efficiency and Cost Savings
A direct digital ledger can reduce administrative overhead. Capital calls can be facilitated through programmable smart contracts, enabling instantaneous post-trade reconciliation.7 This translates to agile fund launches, quick investor funding and a favorable impact on the bottom line. When blockchain networks are used to maintain ownership records, the securities can serve as collateral in derivatives transactions, eliminating the need for investors to redeem the securities and then post cash as collateral.8
2. Investor Experience and Broader Access
Digital onboarding, incorporating AML/KYC protocols where applicable, enables managers to access a growing pool of investors seeking a streamlined, app-like experience. Tokenized feeder funds from Hamilton Lane and KKR/Securitize, for instance, are already drawing investors that would have been closed out of institutional private market strategies just a few years ago.9
Under appropriate circumstances, tokens also allow for lower minimum investments, fractionalized interests, and programmatic enforcement of eligibility. This provides the opportunity for a larger funnel for global capital, especially as alternative trading systems and tokenized platforms continue to mature.
3. Transparency, Real-Time Reporting and Auditability
Tokenized assets allow fund managers to get real-time insights into investor activity and a built-in audit trail for all transactions. LPs can check positions at any time. Stakeholders can monitor fund performance and operations with real-time access to data that previously required extensive reporting, scheduled calls, and manual administrative work.
4. Speedy Settlement
Tokenized securities can serve as a means of settlement for transactions involving other digital assets, including other tokenized assets, across peer-to-peer and broader on-chain transactions. This capability facilitates faster trade settlement and contributes to greater market efficiency. Where these assets are on the same network, near-instant and simultaneous settlement is possible.10 Instead of the current settlement cycle of "T+1," tokenization can move us to instant settlement or "T+0," potentially also reducing counterparty risk because the trades are pre-funded.11
Commercial Use Cases
Multiple examples of institutional adoption include the following:
- Hamilton Lane and Securitize: Due to the ability to maintain fractionalized interests, tokenized Hamilton Lane funds allow for potentially lowered barriers for accredited investors to access private credit, private equity, and secondaries, while leveraging programmatic fund administration and digital compliance for efficiency.12
- KKR, Securitize, and Avalanche: This was the first U.S. digital access to a KKR healthcare growth fund, using tokenized interests to offer institutional-quality products via digital interface.13
- Franklin Templeton: This is a blockchain-enabled money market fund that demonstrates that digital ownership and transferability can operate seamlessly within a traditional mutual fund structure. In this fund, the transfer agent's blockchain-integrated system is distinguishable from distributed ledgers/blockchains that lack access controls and other restrictions on which permissionless tokens are issued and transferred. Unlike permissionless tokens, this fund's shares recorded on the transfer agent's blockchain-integrated system are designed to be under the unilateral control of the transfer agent. The transfer agent is responsible for maintaining the accuracy of share ownership on any blockchain network used by the blockchain-integrated system and can correct errors and unauthorized transactions in, and limit the transferability of, shares.14
- Nasdaq: The exchange is working with the SEC to permit tokenized versions of listed securities and products to trade and settle on blockchain, allowing greater liquidity, faster settlement and standardized market access.15
- Stablecoins: This is the first application of tokenization to achieve scale, demonstrating the efficiency and accessibility improvements that can arise from the use of blockchain-based networks.16
The developments mentioned above are only the beginning of what lies ahead for tokenization. In his "Keynote Address at the Crypto Task Force Roundtable on Tokenization," SEC Chairman Paul Atkins compared the migration to on-chain securities with its potential to remodel aspects of the securities market by enabling entirely new methods of issuing, trading, owning, and using securities to the transition of audio recordings from analog vinyl records to cassette tapes to digital software decades ago. "For example, on-chain securities can utilize smart contracts to transparently distribute dividends to shareholders on a regular cadence. Tokenization can also enhance capital formation by transforming relatively illiquid assets into liquid investment opportunities. Blockchain technology holds the promise to allow for a broad swath of novel use cases for securities, fostering new kinds of market activities that many of the Commission's legacy rules and regulations do not contemplate today."17
Risk and Regulatory Realities
No innovation comes without risk. Regulatory compliance remains non-negotiable. During his tenure as head of the SEC during the last administration, Gary Gensler adopted an aggressive "regulation-by-enforcement" approach towards the crypto industry by insisting that most digital tokens are unregistered securities and that crypto exchanges should be regulated under existing securities laws. This view was borne out by a surge of enforcement actions, which have been dismissed or settled on industry-favorable terms in the new administration. While uncertain regulatory treatment of many tokenized assets continues, the current administration and the agencies have signaled openness and enthusiasm for digital asset innovation, adding momentum but also drawing greater regulatory focus.18 Today's environment is defined less by roadblocks and more by this search for clarity in that the SEC and FINRA have made it clear that blockchain technology is permitted so long as offerings comply with securities laws when those laws apply.19 This is also true in the area of tokenized securities.
The enactment of the GENIUS Act and progress on the CLARITY Act have begun to establish a comprehensive and definite regulatory framework for digital assets as work continues on Capitol Hill.20
Even without legislation, there have been helpful regulatory developments specifically relating to tokenization, including answers to Frequently Asked Questions related to blockchain issues clarifying that a registered transfer agent may utilize distributed ledger technology as its official Master Securityholder File, as defined under Exchange Act Rule 17Ad-9(b), without the need to maintain a duplicate or "digital twin" of its master securityholder file exclusively off-chain.21 Similarly helpful is the SEC's withdrawal of the Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities.22 Further enhancement to regulatory clarity in the area of tokenization includes the recently stated view of the SEC Division of Trading and Markets that a registered transfer agent may utilize distributed ledger technology as its official Master Securityholder File in satisfaction of the transfer agent rules23 and that a broker-dealer can establish possession or control of a crypto asset security (including a tokenized security) in satisfaction of the Broker-Dealer Customer Protection Rule.24
While further regulatory improvements are welcome and are expected, including in the area of custody and trading, the integration of the already existing compliance frameworks into digital processes should continue to enable managers to expand the opportunities already available to them. On the other hand, issuers looking to innovate are expected to ensure that tokens accurately reflect compliant ownership interests, disclosures are thorough, and operational risks such as cybersecurity, custody, and data reconciliation are effectively managed.
How Fund Managers Can Get Started
While the benefits are numerous and many yet unknown, and the costs are undoubtedly significant even with the improving regulatory environment, steps that fund managers can consider to better align themselves with industry leaders in the area of tokenization include these:
- Educate and Assess: Run team training sessions on tokenization and review which existing fund processes (like subscriptions and redemptions) could benefit from going digital.
- Pilot a Tokenized Vehicle: Select an existing fund or launch a new feeder fund, select a blockchain provider with financial experience, and work with a transfer agent to execute investor onboarding and token issuance.
- Expand with Market Readiness: Track tokenized secondary market developments, prepare to digitize legacy investor records, and set clear steps for rolling out tokenization to other fund vehicles as infrastructure matures.
- Stay Ahead Internationally: If targeting investors in Europe, understand and plan for MiCAR requirements and cross-border digital compliance early.
We can help fund managers tokenize fund interests using transfer agents, broker-dealers, ATSs (such as Securitize), custodian banks, payment banks, and other market participants that are active in this domain, some of which are our clients.
Conclusion
Tokenization does more than update back-office systems for fund managers. It enables access to new markets, strengthens investor relationships and positions fund managers' business for real, scalable international growth. While compliance remains essential, the real impact is on how business leaders can adopt secure, regulatory-friendly digital models to boost efficiency, expand their clientele, and stay competitive as the industry evolves. For teams ready to take a practical, test-and-learn approach, the age of tokenized funds has already begun. We expect to see continued regulatory focus on making the participants in these endeavors feel confident that the United States is a safe environment in which to launch and build blockchain-enabled financial services solutions for the long term.25
Footnotes
1. World Economic Forum, Dec 10, 2024, Financial and Monetary Systems
2. How tokenization is transforming global finance and investment (WEF, 2024).
3. SEC No-Action Letter, Clifford Chance US LLP (July 23, 2025).
4. Id.
5. WEF, 2024.
6. Joint Statement from the Chairman of the SEC and Acting Chairman of the CFTC, Sept 5, 2025.
7. World Economic Forum, 2016; FINRA DLT Report, 2017.
9. KKR/Securitize/Avalanche, 2022.
11. Id.
12. Hamilton Lane/Securitize, 2022.
13. KKR/Securitize/Avalanche, 2022.
15. JD Supra, 2025.
18. SEC "Framework for 'Investment Contract' Analysis of Digital Assets" (2019); CoinJournal "SEC's New Crypto Playbook: What Paul Atkins' Agenda Means for Digital Assets in 2025" (2024).
19. SEC, 2019; FINRA, 2017.
20. "SEC Crypto 2.0: Acting Chairman Uyeda Announces Formation of New Crypto Task Force," U.S. Securities and Exchange Commission, press release, January 21, 2025.
21. Division of Trading and Markets: Frequently Asked Questions Relating to Crypto Asset Activities and Distributed Ledger Technology, FAQ #10 (May 15, 2025) https://www.sec.gov/rules-regulations/staff-guidance/trading-markets-frequently-asked-questions/frequently-asked-questions-relating-crypto-asset-activities-distributed-ledger-technology
22. Discussion of Trading and Markets, U.S. Sec. & Exch. Comm'n, Withdrawal of Joint Statement on Broker-Dealer Custody of Digital Asset Securities (May 15, 2025) https://www.sec.gov/newsroom/speeches-statements/withdrawal-joint-staff-statement-broker-dealer-custody-digital-asset-securities.
23. Division of Trading and Markets: Frequently Asked Questions Relating to Crypto Asset Activities and Distributed Ledger Technology, FAQ #10 (May 15, 2025) https://www.sec.gov/rules-regulations/staff-guidance/trading-markets-frequently-asked-questions/frequently-asked-questions-relating-crypto-asset-activities-distributed-ledger-technology.
24. Id. at FAQ #2.
25. See https://www.sec.gov/files/tdc-tokenized-securities-submission-072325.pdf.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
