Analysis of Blackrock's tokenized fund BUIDL, opening up a brave new world of DeFi for RWA assets
Since Blackrock successfully promoted the launch of BTC Spot ETF this year and introduced crypto assets into traditional finance, two months later on March 21, 2024, Blackrock teamed up with Securitize to launch the first tokenized fund BUIDL "BlackRock USD Institutional Digital Liquidity Fund" on the public blockchain - Ethereum, introducing traditional finance into the crypto market.
The launch of the BUIDL Fund marks an important milestone in the tokenization of RWA assets. Through the BUIDL Fund, Blackrock, the world's largest asset management company, allows people to witness the future of blockchain technology transforming the financial system and achieve seamless connection between crypto assets and real-world assets.
Last year, we analyzed the importance of tokenized funds in connecting TradFi and DeFi. In addition, funds as an asset form are the best carrier of RWA assets because (1) they are regulated and (2) they are relatively standardized digital expressions. (Reference article: RWA 10,000-word research report: the value, exploration and practice of fund tokenization)
This article will deeply analyze Blackrock’s tokenized fund BUIDL to see how it works and how to graft DeFi through USDC to open the door from traditional finance to the crypto world.
1. How does the BUIDL Fund work?
If you put $1,000 into the stablecoin USDC, USDC issuer Circle will invest the funds in assets such as government bonds, but the income generated will be obtained by Circle. If you put $1,000 into Blackrock's BUIDL fund, the fund will help you manage your money while promising to provide a stable value of $1 per token, allowing you to get the income of your investment.
This is BUIDL, which looks like a stablecoin, but is actually a "security."
Let’s first talk about BUIDL’s “security” attributes, and then talk about its possibility of becoming a liquid stablecoin.
A. Fund Entity
The BUIDL Fund is a new SPV entity established by Blackrock in BVI. In accordance with the provisions of the U.S. Securities Act and the Investment Company Act, the entity has applied to the SEC for the Reg D securities exemption and is only open to qualified investors.
B. Tokenization and on-chain logic
As the tokenization platform of the BUIDL Fund, Securitize LLC is responsible for the on-chain logic of the fund and converts the on-chain logic of the fund into document data required for supervision to meet regulatory requirements;
At the same time, Securitize LLC acts as the fund’s transfer agent, managing tokenized fund shares and reporting on fund subscriptions, redemptions and distributions;
Securitize Markets (which holds a US Alternative Trading System license and is registered as a broker dealer with FINRA) will act as the fund sales agent and provide the product to qualified investors;
Flexible crypto custody options for investors: Anchorage Digital Bank, BitGo, Coinbase, Fireblocks.
C. Operation of underlying assets
BlackRock Financial, as the fund manager, is responsible for the fund’s investments;
Bank of New York Mellon serves as the custodian of the fund’s underlying assets and the fund administrator;
PwC has been appointed as the fund’s auditor.
D. Fund Management
100% of the BUIDL Fund’s total assets will be invested in “quasi-” USD cash assets (such as cash, short-term U.S. Treasuries, and overnight repurchase agreements), allowing each BUIDL token to maintain a stable value of $1.
BUIDL tokens distribute interest on a monthly basis ( Paid Monthly) through Rebase, which means that the daily accrued dividends are directly "airdropped" into the investor's wallet account in the form of new tokens.
E. 24/7/365 instant subscription/redemption
Securitize provides investors with 24/7/365 fund subscription/redemption (Issuance & Redemption Process) in fiat currency USD. This instant settlement and real-time redemption function is something that many traditional financial institutions are very eager to achieve.
The operating process of traditional funds is inefficient in comparison. Many participants have their own ledgers (such as securities ledgers and bank ledgers), so there is often a delay of T+3+5+N days in the subscription/redemption process.
In contrast, since tokenized funds can achieve real-time settlement of a unified ledger on the chain, transaction costs are greatly reduced and capital efficiency is improved, which is a milestone innovation for the financial industry. Other advantages include:
All fund participants can access and view data on the blockchain, so there is no need for multi-party reporting and reconciliation, which greatly simplifies the registration requirements of multiple fund participants;
In addition, the subscription and redemption of the fund can be directly settled and enter the investor's account (electronic wallet), and the transaction has settlement finality, thus eliminating market and counterparty risks;
In addition, more efficient atomic settlement based on blockchain can also achieve real-time pricing and settlement around the clock.
2. Who is the BUIDL token, which is essentially a "security", suitable for?
2.1 Permissioned ERC-20 Tokens
Although the BUIDL token is an ERC-20 token issued on Ethereum, due to its "securities" nature, KYC/AML/CTF compliance requirements, and a minimum investment limit of US$5 million, the BUIDL token can only be circulated among verified "whitelisted" investors and is a permissioned ERC-20 token.
According to Steakhouse’s research report, we can also see that most U.S. Treasury RWA projects, for regulatory compliance reasons, have chosen to issue permissioned tokens on public blockchains.
2.2 Who is BUIDL token suitable for?
The strong compliance "securities" nature of the BUIDL Fund, coupled with the permissioned ERC-20 token features, can ensure sufficient security of assets:
(1) Security of underlying assets: There is only one counterparty risk (Blackrock); bankruptcy isolation of the SPV and bank-level compliant custody of the underlying assets.
(2) Security of on-chain assets: strict KYC access with permission; access to SEC-compliant trading markets; cooperation with institutional-level crypto asset custodians.
Without considering traditional financial scenarios for the moment, under such a strong compliance configuration, BUIDL has built an institutional-level (including becoming the treasury of any stablecoin issuer, DeFi, L2 and other project parties) collateral layer (Collateral Layer) of encrypted assets, ensuring that assets are sufficiently secure while generating stable interest.
Assuming that Tether, the issuer of the USDT stablecoin, can deploy most of the assets in its treasury in the BUIDL fund, it can solve its biggest compliance problem - the opacity of the underlying assets. If Circle's underlying assets are also managed by Blackrock, this is at least more credible than Tether issuing audit reports all day long.
Let’s take a look at the complex Blackrock U.S. Treasury ETF procurement path that MakerDAO previously spent more than 1 million U.S. dollars to build. Now, it can be achieved by simply asking MakerDAO to open a qualified investor account at Securitize. It is safe, convenient and risk-free.
3. USDC Liquidity for Tokenized Funds
3.1 BUIDL liquidity through USDC
As mentioned earlier, due to the "securities" restriction, BUIDL tokens are limited to circulation between "whitelisted" investors, so 24/7/365 subscription/redemption is far from enough.
As a result, Blackrock worked with Circle to establish a USDC liquidity pool controlled by a smart contract, realizing 24/7365 real-time exchange of BUIDL: USDC = 1:1.
“The tokenization of real-world assets is a rapidly emerging product category that solves investor pain points,” said Circle co-founder and CEO Jeremy Allaire on April 11. “USDC helps investors quickly move tokenized assets, reducing costs and eliminating friction. We are excited to offer this capability to BUIDL investors and showcase the core benefits of blockchain transactions — speed, transparency, and efficiency.”
This is a landmark move that could open up a new world of DeFi for RWA assets.
3.2 ONDO Finance’s BUIDL Liquidity Attempt
ONDO Finance, the leader of the RWA U.S. Treasury bond project, added $95 million in BUIDL tokens to its tokenized fund product OUSG on March 27. Combined with the USDC liquidity pool provided by Circle for BUIDL, this move solved the biggest pain point for its users - T+2 fund redemption, and achieved 24/7/365 real-time subscription/redemption of Ondo OUSG fund shares.
This also marks the first large-scale adoption of BUIDL by a DeFi protocol.
3.3 The Future of BUIDL
After Circle opened the door to DeFi for the BUIDL fund, it undoubtedly provided an important fund management option for participants in the crypto market.
In Bankless’ interview with Securitize CEO Carlos Domingo, he said: Currently, the BUIDL fund is particularly suitable for institutional market participants, such as:
(1) Web3 project parties that have received a large amount of financing. They all have a large amount of funds stored off-chain and can achieve seamless connection between on-chain and off-chain through BUIDL. The scale here will be billions of dollars;
(2) Stablecoin issuers. They have a rigid demand for capital allocation. For example, Circle’s capital allocation is managed by Blackrock, as is the capital allocation of the aforementioned ONDO Finance OUSG fund, and Mountain Protocol also plans to allocate BUIDL assets. The scale here will be tens of billions of dollars;
(3) Stablecoins themselves. The current USDC and USDT stablecoins are non-interest bearing. If these non-interest bearing stablecoins are replaced with interest bearing stablecoins and can be circulated after packaging, there is huge room for imagination. The stablecoin market itself is worth hundreds of billions of dollars.
For example, we see that ONDO Finance's USDY stablecoin is making such attempts, with deployments in both Aptos and Solana, ensuring that assets are sufficiently secure while generating stable interest and circulation.
4. RWA tokenization brings huge potential
Blackrock CEO Larry Fink made it clear in an interview with Bloomberg that asset tokenization will be the next development direction of Blackrock: "We believe that the tokenization of financial assets will be the next trend, which means that every stock and bond will be recorded on a general ledger."
Although Franklin Templeton has already realized tokenized funds on public blockchains, Blackrock, as an aircraft carrier, has undoubtedly opened the door for traditional finance to enter the new world of RWA. In particular, after Circle provided BUIDL with a USDC liquidity pool, it undoubtedly opened the door to DeFi composability.
The most realistic thing is that BUIDL has built a collateral layer for institutional-level crypto assets, which ensures that assets are sufficiently secure while generating stable interest. We have seen this being achieved in the case of ONDO Finance, which enables 24/7/365 real-time subscription/redemption of on-chain fund products.
Finally, I would like to end with a recent research report by the Bank for International Settlements (BIS): Finternet: the Financial System for the Future.
“While advances in digital technology have transformed people’s 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.”
End of article
This article is for learning and reference only. We hope it is helpful to you. It does not constitute any legal or investment advice. Not your lawyer, DYOR.
