What Tokenization Could Mean for Funds and Their Investors

Tokenization could change how securities and fund shares are issued, held, transferred, and traded. Yet much of the policy discussion has focused on the technology and the markets broadly, without fully examining what these changes could mean for regulated funds and their investors. Done responsibly, the emergence of tokenized funds could expand choices for investors, allow funds to trade and operate more efficiently, and deepen liquidity in the capital markets. Realizing that potential will require an appropriate and adaptable regulatory framework that protects investors and promotes choice and competition.

To inform this discussion, ICI’s white paper Tokenization: An Asset Management Perspective analyzes emerging models for tokenization of funds and securities, identifying potential benefits and concerns. The paper examines both the tokenization of fund shares and the tokenization of the assets in which funds invest, while offering recommendations for policymakers to support responsible innovation. 

By bringing the asset management industry’s perspective to this emerging policy debate, ICI’s analysis helps evaluate fund tokenization through the lens that matters most: its impact on fund investors. 

New Opportunities for Funds and Investors

For regulated funds, tokenization is more than a new way to record ownership on a blockchain. It has the potential to reshape how funds are designed, distributed, and used by investors. As the technology matures, this could enable faster settlement, around-the-clock trading, new product features, and more seamless integration with digital wallets and other emerging financial platforms. These developments could make regulated funds more accessible and more useful for a broader range of investors.

The benefits extend beyond improving existing products. Tokenization could support new distribution channels, lower investment minimums through greater use of fractional shares, and allow regulated funds to better serve investors who increasingly manage their financial lives through digital platforms. At the same time, the growth of tokenized funds and securities raises important questions about market structure, custody, settlement, and how different tokenization models may affect investors and the financial system.

Tokenized Does Not Mean Unprotected

Changing technology should not weaken investor protections. As SEC Commissioner Hester Peirce and others have noted, a security does not stop being a security because it is represented on a blockchain. A fund share does not lose its essential character because it is issued, recorded, transferred, or settled using distributed ledger technology.

Tokenization can change the functionality and investor experience of funds and other financial products. It does not eliminate the need for the foundational protections that have supported investor confidence in regulated funds for decades.

Regulated Funds Should Be a Significant Voice in the Conversation About Tokenization

Regulated funds have helped millions of Americans participate in the capital markets by making professional investment management more accessible. They have also begun to explore tokenization models consistent with developments elsewhere in the markets, and fund managers should continue to lead the conversation around integration of tokenization models into capital markets. 

As tokenization develops, policymakers should ensure that regulated funds and asset managers have a meaningful role in shaping the rules that will govern its integration into the financial system. The white paper recommends a set of principles intended to help policymakers support innovation while protecting investors and preserving competition.

Building the Next Generation of Investor Choice

The asset management industry has benefited from decades of technological and product innovation, from mutual funds to money market funds to ETFs. Each step expanded access and strengthened the ability of Americans to participate in the capital markets. Thoughtful regulation, developed with input from industry participants, has been an important component in each of these steps.

Tokenization may represent another important step in that evolution. If developed responsibly, it could help regulated funds reach investors in new ways and leverage the advantages of blockchain and other emerging digital technologies.

That future should be built on the principles that have long supported the success of regulated funds: innovation, competition, informed choice, clear disclosure, strong investor protections, and regulation that evolves with the markets.

In drafting the white paper, ICI benefited from the assistance of former SEC Commissioner Troy Paredes and Dechert law firm partner Brenden Carroll, both leaders in this area.

For a more detailed discussion of these principles, see ICI's white paper Tokenization: An Asset Management Perspective.