In this report, we provide industry practitioners with an overview of the emerging market of fund tokenization, highlighting the potential of this technology in practical applications, incentives for end investors and financial institutions, potential tipping points for promotion, and how fund managers can seize this opportunity.
Written by: Boston Consulting Group (BCG)
Compiled by: Yue Xiaoyu
Executive summary
Amid the wave of generative AI, attention to distributed ledger technology (DLT) seems to have waned in recent months. However, in the financial services industry, DLT-based solutions have attracted increasing attention. Through an innovative technology called fund tokenization, many of its advantages have found new applications in the asset management field, capable of enhancing value creation, increasing transparency, and simplifying transaction processing. When DLT is combined with smart contracts that execute business logic automatically, it is easy to understand why market participants are eager to participate.
As DLT applications continue to expand, banks are accelerating efforts to enhance efficiency across various markets, from cross-border payments to fixed income. However, we refer to fund tokenization as the third revolution in asset management, with the potential to create billions of dollars in value for financial institutions and end investors. By the end of 2024, the assets under management (AUM) of tokenized funds will exceed $2 billion, with one manager raising substantial funds in just a few months and charging above-average fees. This reflects the growing trend of investor demand, especially from virtual asset holders (such as cryptocurrency foundations). In the coming period, we expect demand to continue rising, particularly with the realization of regulated on-chain currencies (such as regulated stablecoins), tokenized deposits, and central bank digital currency (CBDC) projects.
In this report, we provide industry practitioners with an overview of the emerging market of fund tokenization, highlighting the potential of this technology in practical applications, incentives for end investors and financial institutions, potential tipping points for promotion, and how fund managers can seize this opportunity.
First, a brief introduction: Fund tokenization refers to the use of blockchain-based digital tokens to represent ownership of funds, functioning similarly to the way transfer agents currently record fund shares. Early tokenization case studies show that some companies manage assets like real estate through special purpose vehicles (SPVs). Similarly, fund tokenization can be achieved through existing unit trusts or fund company entities, meaning that asset managers should not encounter too much resistance in the operational process.
Once operational, tokenized funds offer investors numerous advantages, including around-the-clock secondary transfers and fractionalization, lower investment thresholds, and instant collateralization when regulatory frameworks are in place. If all mutual funds worldwide achieve tokenization, we estimate that mutual fund investors could realize an additional approximately $100 billion in investment returns annually, while mature investors could capture up to $400 billion in gains by taking advantage of intraday value fluctuations.
For financial institutions such as asset management companies and wealth management firms, fund tokenization offers opportunities to develop new investor segments, protect existing investor segments, and enhance business products. Indeed, as regulated on-chain currencies (such as stablecoins, tokenized deposits, and central bank digital currencies) become more prevalent, demand for tokenized funds will increase significantly. We estimate that virtual asset holders represent a potential demand for tokenized funds of approximately $290 billion, and as traditional financial institutions adopt on-chain currencies, this could bring about trillions of dollars in demand. Additionally, innovative fund distribution opportunities will arise through secondary tokenized brokerage and embedded investment. Managers can also leverage smart contracts to optimize distribution models, customize fund portfolios, and create hyper-personalized investment options.
Drawing lessons from the development of exchange-traded funds (ETFs) as the 'second revolution' in asset management, the assets under management (AUM) of tokenized funds may reach 1% of the global mutual fund and ETF assets in just seven years. This means that by 2030, the assets under management of tokenized funds could exceed $600 billion. If regulators allow existing mutual funds and ETFs to be converted into tokenized funds, then assets under management could even reach trillions of dollars.
We believe that tokenized funds may reach a turning point in the next 12 to 18 months, as innovation in on-chain currencies creates a flywheel effect driven by early adopters (such as virtual asset holders) using stablecoins. Subsequently, with the launch of tokenized deposits and central bank digital currencies (CBDCs), we may see rapid expansion. Among asset managers, companies that act first may gain significant market share, occupying priority gaps in the market, helping them build brand recognition and economies of scale through simple products. In contrast, companies that follow may need to innovate in niche areas.
To fully unlock the potential of fund tokenization, the industry must first establish a solid foundation, including clear regulatory guidelines, global operational standards, and technical interoperability. On this basis, financial institutions will benefit from six core capabilities: a strategic vision for tokenized funds, a use case roadmap, on-chain compliance, blockchain technology and operational settings, cross-chain interoperability management capabilities, and a center of excellence to coordinate their efforts. Successfully executing these building blocks will open the door to effective long-term adoption and competitive dynamics.
Fund tokenization
Transformative blockchain applications in financial services
With the successful proof of concept, the adoption of blockchain technology has become increasingly attractive for financial institutions that have been on a digitalization path. The ability to store immutable data from multiple participants not only builds trust but also significantly enhances efficiency, effectively connecting companies with business opportunities and paving the way for collaborative innovation. Through tokenization, digital representations of ownership of real assets can be created on the blockchain, making instant delivery versus payment (DVP) easier to execute than ever before.
Tokenization is continuously growing under various market conditions
In recent years, interest in tokenization has steadily increased, with numerous production-level projects led by financial institutions and supported by regulatory agencies launched over the past five years. As trading volumes of tokenized assets increase and asset types diversify, we see the foundation of tokenized finance becoming more solid, and with the widespread availability of on-chain currencies, this field may reach a critical turning point. (See Figure 1)
Fund tokenization is not just an innovative attempt by a few asset managers, but an industry-wide movement covering numerous global asset managers. Franklin Templeton launched the first fund registered in the United States (Franklin OnChain U.S. Government Money Fund, FOBXX) using blockchain in 2021, while BlackRock launched the BlackRockUSD Institutional Digital Liquidity Fund (BUIDL) in 2024, rapidly achieving a market value of over $500 million within months.
Fund tokenization has scalability and impact
We view this as a two-step transformation process. The first step is to register fund shares on the blockchain to enable instant ownership transfer. The second step is to use tokenized funds to invest in other tokenized assets, such as tokenized bonds. Completing the first step can unlock significant value and pave the way for future scenarios where tokenized funds directly hold tokenized assets.
Tokenization typically involves using special purpose vehicles (SPVs) to hold underlying assets (such as real estate) and issue tokens representing shares. This is similar to the current structure and operation of funds. For example, asset managers use unit trusts to hold assets like stocks and bonds, and transfer agents manage investor records. However, unlike other asset types, fund tokenization does not require the use of SPVs. Secondary transfers can be conducted through authorized participants and market makers setting prices, ensuring compliance with regulatory standards. This makes tokenized funds more similar to exchange-traded funds (ETFs). (See Figure 2)
Tokenized funds can rival exchange-traded funds (ETFs)
Tokenized funds have the potential to be the third evolution of the asset management industry, following the $58 trillion mutual fund industry established under the Investment Company Act of 1940 and the subsequent revolution triggered by ETFs.
From the perspective of investors and managers, tokenized funds have many similarities with ETFs. Both offer high price transparency, superior liquidity, and various advantages such as simplified collateral management compared to mutual funds. (See Figure 3)
There are three main approaches to fund tokenization, each with its unique advantages and challenges. The first is to create a digital twin, usually achieved through security token offerings (STOs), resembling a master-slave structure. This approach has a fast implementation speed but involves additional costs of managing dual operations. The second approach is to develop native tokenized fund tools. While execution is relatively simple, it requires attracting new investor segments. The last approach is to convert existing funds into tokenized funds, which has scalability but needs careful handling to avoid operational disruptions.
Through an innovation called fund tokenization, many advantages of distributed ledger technology have found new applications in the asset management field, enhancing value creation, increasing transparency, and simplifying transaction processing.
How tokenized funds create value for investors and financial institutions
Tokenized funds offer virtual asset investors the opportunity to access professionally managed products by engaging with real-world assets that can generate stable long-term returns. At the same time, tokenized funds can provide traditional investors with advantages such as faster access to returns. Wealth and asset management companies are expected to gain benefits such as strengthening connections with investors, reducing operational costs, providing around-the-clock investment services, and creating new business opportunities.
Fund investors can benefit from value-added services
Mutual funds manage approximately $58 trillion in assets, with a 10-year average annual return of 7.1%. However, the current settlement process is inefficient, with T+2/3 settlement cycles locking up capital and posing operational challenges in providing innovative financial products to end investors.
Our preliminary estimates suggest that by addressing these issues, fund tokenization could provide mutual fund investors with an additional annual return of about 17 basis points, approximately equivalent to $100 billion. We specifically see that investors can benefit in four areas. (See Figure 4) First, instant settlement will unlock the productivity of locked capital, potentially adding about $50 billion to investors' portfolios annually. Second, transaction costs could approach the average fee of 0.09% for ETFs. We estimate this will save investors about $33 billion annually, as some mutual fund subscriptions and redemptions can be managed through secondary markets. Third, tokenized mutual funds are easier to lend out than funds like ETFs, potentially generating about $12 billion in interest income. Finally, tokenized mutual funds enable intraday trading, allowing mature investors to capture fluctuations in daily net asset values (NAV), and we believe this could generate between $80 billion and $400 billion in value annually.
Incentives for revenue growth for wealth and asset managers
Wealth and asset managers have the opportunity to commercialize tokenized fund services across five key activity areas. (See Figure 5) We believe that both individual and collective active participation will help improve sales and revenue margins.
Below we will discuss each of the five business opportunities in more detail:
#1: Meet existing on-chain investment demand of $290 billion
In the global cryptocurrency market (valued at approximately $2.5 trillion), we estimate that there is about $290 billion in demand for tokenized fund investments. (See Figure 6) This area includes stablecoins, tokenization of real-world assets (RWA), and holders of decentralized finance (DeFi) protocols, and it is growing rapidly. The DeFi protocol market (excluding stablecoins) is larger, with a market capitalization of approximately $120 billion and an average growth rate of 56% over two years. The market for tokenization of real-world assets (RWA) has reached a market value of about $12 billion, with a growth rate of 85% over the past two years.
As on-chain collective investment tools, tokenized funds can effectively meet investment needs, filling the current void in on-chain products dominated by DeFi protocols. By leveraging mature investment strategies used by asset managers over the past decades to manage trillions of dollars in assets, these funds provide more robust investment options. In addition, they offer a pathway to real-world investment opportunities, allowing portfolios to achieve better diversification across changing market dynamics. (See Figure 7)
#2: Protect existing investor segments against the rise of regulated on-chain currencies
Funds from traditional finance are moving on-chain through rapidly evolving regulated on-chain currencies (including regulated stablecoins, tokenized deposits, and central bank digital currencies (CBDCs) driven by regulators and financial institutions). (See Figure 8)
On-chain currencies differ from non-physical currencies in two important ways—programmability and atomic settlement with tokenized assets. Programmability will allow for the development of programmable currencies and purpose-specific currencies, enabling users to specify the use of currencies across financial institutions and jurisdictions through programming logic. Atomic settlement with tokenized assets will enable true synchronized delivery versus payment (DvP), where on-chain assets can be exchanged concurrently with on-chain currencies.
As the adoption of regulated on-chain currencies gradually increases, net fund inflows will be interconnected. If only 10% of investable funds are on-chain, demand for tokenized funds could reach billions.
#3: Enhance fund distribution through instant 24/7 and fractional transfers
Once mutual funds achieve tokenization, investors can transfer their mutual fund shares to other investors. BlackRock's BUIDL and Franklin Templeton's FOBXX have already allowed for secondary transfers within their managed distribution channels.
If the secondary market for tokenized mutual funds can develop like ETFs, the turnover ratio based on North American ETFs (340%) could lead to an annual trading turnover of approximately $200 trillion. (See Figure 9) Even if the market only realizes 10% of its potential, it is foreseeable that wealth management firms will be able to service approximately $20 trillion in trading turnover.
Tokenized funds can also enable innovative fund distribution methods (or investment methods offered to investors), leveraging fractionalization and instant 24/7 execution, significantly lowering investment barriers. For example, micro-investing is a rapidly growing area for fintech companies. (See Figure 10) To catch up, wealth management firms can use tokenized funds to enhance their products. If wealth management firms can improve customer experiences, they may attract younger investors, helping them develop investment habits earlier.
#4: Provide hyper-personalized portfolio management through smart contracts
Hyper-personalized portfolios can significantly enhance customer experience and retention rates. While personalization is limited in the mass market, it is increasingly viewed as a must-have among high-net-worth investors.
With the help of smart contracts and tokenized funds, personalized services can be offered to all investors. For example, investors can track their disclosed positions in tokenized funds in real-time and use rebalancing smart contracts to periodically perform long or short operations to achieve optimal risk exposure.
Meanwhile, for financial institutions, personalized services can open up a range of revenue sources and lay the foundation for better meeting investor needs. (See Figure 11)
#5: Enhance asset utility and unlock liquidity through more efficient risk management
Loans secured by mutual funds are a mature financial product in multiple markets, particularly in high-interest rate markets. However, due to operational complexity and a collateral cycle of three to five business days, fund-backed lending becomes quite complex. Through tokenized funds, this process can be simplified, reducing the collateral time to less than a day. Additionally, loan terms can be pre-programmed, allowing lenders to reduce credit risk and provide more customized financing rates.
In the next 12 to 18 months, we will approach a critical turning point, and wealth and asset managers must act quickly to seize opportunities. While early movers have achieved some success, establishing regulatory guidelines, global standards, and technical support will be key to building a solid foundation for a frictionless, globally interconnected industry.
Adoption and more active industry participation opportunities in the next 12 to 18 months
In the context of the rapid development of regulations for on-chain currencies and assets, the financial services industry is approaching a critical moment. The growth flywheel effect of tokenized funds indicates immense potential and drives development through various adoption pathways. Additionally, the entire tokenized finance ecosystem is advancing rapidly, and effective coordination can lower adoption costs.
The turning point for tokenized finance may be reached in the next 12 to 18 months
We expect that in the next 12 to 18 months, with the gradual establishment of regulated on-chain currencies (such as regulated stablecoins, tokenized deposits, and central bank digital currencies (CBDCs)) in key international financial centers, the momentum in some markets will accelerate. Taking Hong Kong as an example, several regulatory initiatives are underway, including a stablecoin sandbox, the e-HKD+ project, and the Ensemble project. Meanwhile, developments in markets such as Singapore, Japan, Taiwan, the UK, and the Middle East are also advancing, bringing the future of finance closer than ever. (See Figure 12)
The growth flywheel of tokenized funds has been triggered
We estimate existing investment demand for tokenized funds from virtual asset holders to be approximately $290 billion, and as traditional financial institutions (TradFi) increase their adoption of on-chain currencies, this could bring trillions of dollars in demand. The increasing adoption of stablecoins and the rising demand from virtual asset holders (such as crypto foundations) will drive the flywheel effect in the short term. (See Figure 13)
With characteristics similar to ETFs, tokenized funds may lead the next revolution in global investing. Since the launch of the first ETF in 1993, exchange-traded funds (ETFs) reached about 1% of total assets under management (AUM) within seven years. With ETF-like features, tokenized funds could also reach 1% of total AUM by 2030, implying that AUM could exceed $600 billion. If a clear and low-friction conversion path (i.e., tokenization) is provided for existing mutual funds and ETFs, the scale of tokenized funds could be even higher.
We see two potential growth paths. First, managers can launch new tools to enter new investor segments. At the same time, regulators and private sector participants can explore upgrading existing tools. (See Figure 14)
Financial institutions need to collaborate to drive a frictionless third industry revolution
The successful development of fund tokenization will be based on ecosystem coordination, one important element of which is defining a clear vision of universally accessible financial services, covering foundational capabilities, application scenarios, factors to reduce transitional friction, and coordinators of positive outcomes. (See Figure 15) The current moment is similar to the early development of ETFs, where stakeholders need to develop their products, adapt technologies and operations, and identify ecosystem partners such as market makers.
Global collaboration is crucial to ensure consistent standards
Standards are critical; the tokenized fund ecosystem will require globally recognized standards to ensure legitimacy and interoperability between different infrastructures and regions. Standards will also facilitate collaboration across the entire value chain. Priority themes include:
1. Clarity in the regulation of tokenized funds to facilitate smooth development, including anti-money laundering (AML)/countering the financing of terrorism (CFT), know your customer (KYC), security/custody guidelines for digital assets, operational requirements for tokenized funds, and secondary transfers.
2. Unified tokenization operation standards to ensure interoperability, including ensuring data standards for digital assets in inter-company operations and processes for handling on-chain/off-chain records.
3. Technical interoperability to promote innovation, including interoperability between databases/chains and cost-effective and risk-managed adoption on public chains. Global protocols are crucial for achieving cross-chain and cross-border interoperability and composability.
The key to global collaboration
Clarity in the regulation of tokenized funds
1. Reusing existing fund tools: What kind of setup is needed to allow tokenized funds to reuse existing fund structures? Funds can be converted directly into tokenized forms without creating new structures to reduce costs and adoption impact.
2. Allowing secondary transfers: What protective measures should be in place to safeguard investor interests? Solutions may include KYC-certified wallets, management of buy-sell spreads, and qualification requirements for tokenized fund brokers.
3. Operations qualification for tokenized funds: What are the requirements for operating tokenized funds, covering fund management, asset custody, transfer agents, and fund managers? What tokenized currencies should be accepted (e.g., stablecoins issued by licensed entities to manage issuer risk)?
General tokenization operation standards
1. Global tokenized fund passport: How should tokenized funds be designed to support cross-jurisdictional distribution, including the use of existing mutual recognition arrangements?
2. General control measures that all parties must comply with: ** What general protocols should be in place to implement automated controls? Possible control levels can be defined by specific regulatory agencies, asset managers, distributors, and projects.
3. Operations of tokenized underlying assets: What setup should be in place if managers decide to manage tokenized underlying assets through tokenized funds and smart contracts?
Technical interoperability
1. Blockchain interoperability: What common cross-chain interfaces should be in place to ensure that functions embedded in funds through smart contracts (such as secondary transfer control, collateral management) remain effective in a multi-chain environment?
2. Risk-based security standards: What data management and cybersecurity principles should be in place to protect the privacy and security of tokenized funds?
Blueprint for a new capability ecosystem
Financial institutions in the value chain of wealth and asset management are facing a critical moment, where some institutions will thrive in the new era of tokenized funds, while others may be left behind. Technology will play a key role in advancing tokenization, but rapid upgrades are needed in the early development stages. For example, there are currently over 1,000 independent chains, and the number is rapidly increasing.
Cost-effective pathways forward: Modular technology stacks
Considering variables such as different forms of tokenized assets, business solutions, and permission controls, developing solutions for everyday applications may face challenges. Based on this complexity, financial institutions can benefit from designing a modular technology stack composed of four basic layers: asset layer, for managing types of tokenized assets; solution layer, for business needs; permission control layer, to meet various compliance requirements; and infrastructure layer, to ensure security and scalability. (See Figure 16)
Below we delve into two key considerations that reflect the need to strike a balance between compliance and commercial cost factors:
In-depth exploration #1: Permission controls for compliance needs
One of the key tasks of any tokenized fund program is to address risks related to data privacy and other regulatory requirements (such as cybersecurity). Below are some key issues we frequently see in industry discussions.
Select specific issues
Security and encryption
1. How resilient is the blockchain's security model in addressing cyber threats (including hacking, fraud, and unauthorized access)? Can we ensure that tokens/assets in the blockchain can only be transferred to authorized parties (e.g., through KYC-certified wallets)?
2. Can we design it to only allow verified participants to validate transactions?
3. What is the process for making changes or updates to the blockchain? Are there security measures in place to guard against malicious behavior by network participants?
Data privacy and confidentiality
1. How can blockchain ensure data privacy at the asset, transaction, and wallet levels, for example, by using robust encryption methods to protect sensitive financial data and transactions?
2. Does the platform support advanced encryption technologies (e.g., zero-knowledge proofs, multi-signatures) to ensure data integrity and confidentiality?
Disaster recovery and continuity
1. Is there a clear continuity plan that meets institutional operational uptime and resilience requirements, including during blockchain functionality upgrades?
2. In the event of network failures, how does the platform recover without compromising data integrity or transaction records?
Many financial institutions have explored private or consortium-led blockchains to achieve the above compliance goals but found their development costs to be high. Although public blockchains are known for cost efficiency, some believe their permission controls are inadequate, thus forming a significant adoption barrier. However, it is worth noting that the evolving 'permissioned' settings within public blockchains have provided financial institutions with a way to significantly lower costs while maintaining control. (See Figure 17)
In recent years, many financial institutions have made tokenization attempts using Ethereum (a public blockchain)—for example, BlackRock launched BUIDL on Ethereum in May 2024. ABN AMRO used public blockchain for bond tokenization, while UBS launched Hong Kong's first tokenized warrants on a public blockchain. Other institutions, including JPMorgan and Franklin Templeton, have also taken steps to launch fund tokenization and digital assets on platforms like Avalanche. Aptos Labs (co-author of this report) has also supported multiple tokenization asset initiatives, including Brevan Howard's master fund launched on the Aptos network in September 2024, Hamilton Lane's senior credit opportunities fund, BlackRock's ICS money market fund, and Franklin Templeton's on-chain money market fund.
In-depth exploration #2: Scalability of blockchain
For investors, subscription and redemption fees may be as low as about 10 basis points, leaving little room for increased transaction costs. Gas fees refer to the costs required to execute transactions or smart contracts on public blockchains, ranging from less than $0.001 to as high as $2 per transaction, depending on the blockchain. (See Figure 18)
Secondary transfers of a single fund may involve multiple transactions; for instance, when market participants execute smart contracts to verify specific use case conditions for the funds, additional steps are introduced. To maintain economic efficiency, total transaction costs (including all on-chain transaction gas fees) must be significantly less than $0.10 per transaction.
Need for swift action
With the growth of tokenized currencies, the financial services industry is on the verge of a tokenization transformation. We believe that tokenized funds will become an important driving force for tokenized underlying assets.
In our benchmark scenario, tokenized funds could provide end investors with approximately $100 billion in investment returns and $400 billion in underlying asset opportunities, while financial institutions can create value across multiple operational aspects. In various scenarios, the assets under management of tokenized funds may reach trillions of dollars by 2030.
In the next 12 to 18 months, as we approach a critical turning point, wealth and asset managers must act swiftly to seize opportunities. While early movers have seen some success, establishing regulatory guidelines, global standards, and technical support will be key to building a solid foundation for a frictionless, globally interconnected industry.
As a first step, companies need to understand how to leverage permission features and comply with security and data privacy requirements. Looking ahead, the door to cost efficiency and significant competitive advantages has been opened to them. Finally, we pose six key questions to help decision-makers formulate strategies and prepare for leadership in the upcoming transformation. (See Figure 19) Through vision, compliance, interoperability, application scenario roadmaps, centers of excellence (CoE), and foundational technology and operational capabilities, financial institutions can transform an emerging growth area into a financial powerhouse that meets modern demands.
