The introduction of the Virtual Asset (Service Providers) (Amendment) Bill, 2025 amends the definition of “virtual asset issuance” for entities that issue equity interests and fall under the Mutual Funds Act (2025 Revision), the Private Funds Act (2025 Revision) and Securities Investment Business Act (2020 Revision).
The amendment excludes the tokenisation of fund interests from the definition of a virtual asset issuance. It effectively means that a tokenised fund does not have to register under the Virtual Asset (Service Providers) Act, resulting in an easier and faster process for tokenised funds to be registered in the Cayman Islands.
Tokenised funds are supervised by the Cayman Islands Monetary Authority under the applicable funds laws.
In this Q&A we explain what tokenised funds are and why they can be beneficial.
What are tokenised funds?
A tokenised fund is an investment fund whose ownership interests, such as shares or units, are represented digitally as tokens on a blockchain or other distributed ledger technology (DLT).
These tokens act as a digital representation of an investor’s stake in the fund, allowing for more efficient issuance, transfer and management of fund interests.
The underlying assets of the fund – like stocks, bonds or other financial instruments – are not themselves tokenised; rather, it is the investor’s stake in the fund that is represented digitally.
Unlike traditional funds which typically maintain a central shareholder register, the DLT ledger records transactions in multiple places simultaneously among different participants, and can be decentralised with no central authority.
The legal structure of fund tokenisation requires two elements: the digital token issued on a DLT network and the attachment of rights to the token, giving the holder an enforceable legal interest in the fund.
In some structures, the token primarily serves as an operational tool that enhances, but does not replace, the conventional fund structure. For example, a fund might maintain a traditional, off-chain shareholder register while minting tokens representing each investor’s shareholding on a DLT network. In this model, ownership is determined by the off-chain register entries, not the token control.
Other implementations aim to replace the core holding structure entirely with a DLT-based alternative.
Essentially, tokens act as digital representations of ownership, and aside from how ownership is recorded, there is little difference between investing in a traditional and a tokenised fund.
The value of a tokenised fund is still determined by its net asset value (NAV) on a ‘NAV per token’ basis.
Why are they beneficial?
Tokenised funds can offer several advantages for investors, fund managers and potentially regulators.
For investors, tokenisation can convert funds into smaller, tradable tokens on the blockchain. This could potentially allow lower minimum investment amounts for traditionally high-cost alternative investments like private equity, hedge funds and venture capital.
Fractional ownership can also help fund illiquid assets, such as real estate. While this is not a new concept, maintaining the information on the blockchain makes the management of fractional ownership more efficient and secure.
Enhanced liquidity is another significant benefit, as depending on the type of tokens and associated regulatory requirements, tokens can be traded in secondary markets. This will allow investors to buy and sell tokenised fund units more easily, particularly in traditionally less liquid assets. It could provide investors with more freedom to exit positions and faster settlement.
For fund managers, tokenisation provides better investor reach, potentially through licensed marketplaces.
A major driver is increased operational efficiency and cost reduction. By automating laborious processes like the creation, issuance and management of securities using smart contracts, errors and costs can be reduced.
Eliminating intermediaries and utilising smart contracts can lead to faster and more accurate transaction settlement. The blockchain acting as a single source of truth reduces the need for constant reconciliation between different service providers, including transfer agents, custodians, depositaries or fund accountants, who all have direct access to the DLT records via their own network node. The immutable and real-time nature of DLT ensures data integrity across participants and reduces the need for duplicative record-keeping.
Smart contracts can also automate processes like dividend distribution and asset management, which could reduce fees. Launching new funds is expected to be quicker and less expensive.
DLT also allows for labour-intensive AML and KYC processes to be automated and hardwired into the blockchain, improving efficiency and compliance.
From a regulatory perspective, DLT can enhance transparency and efficiency. Tracking the movement of tokens becomes easier and more reliable.
Regulators may benefit from programmable features, where smart contracts could automatically notify them when programmed regulatory restrictions are breached.
What are the regulatory challenges?
The regulatory environment for tokenised funds remains dynamic and presents significant challenges. While regulators often adopt a “technology-neutral” view, meaning tokenised funds are subject to similar regulatory standards as traditional funds, applying existing rules to novel DLT-based structures can create friction.
One main challenge is the legal uncertainty surrounding the status of tokenised assets within the established framework. Although many jurisdictions recognise cryptoassets as property and smart contracts as enforceable under the law, issues regarding the validity, interpretation and remedies for defective smart contracts remain.
A key area of uncertainty is whether DLT records of crypto assets are capable of amounting to a legally recognised “register” for evidencing or transferring title to certain types of securities under private law. This is particularly relevant for digitally native funds where no conventional off-chain register is maintained in parallel.
Existing legislation may require fund managers or depositaries to maintain registers compliant with certain standards, and it is not readily apparent that DLT systems comply without specific adaptation or override functions.
Operational resilience and business continuity also pose challenges due to increased reliance on technology. Tokenised funds have a different risk profile than traditional funds, and firms must demonstrate the ability to manage operational and technological risks.
The novelty of tokenised funds means many potential operational risks are primarily theoretical, making adherence to new operational resilience frameworks challenging.
The potential for defective code within a DLT network is also a concern, raising questions about liability if code is wrongly executed. Regulators may also be uncomfortable with the lack of recovery mechanisms for lost keys in a decentralised system, which could lead to investors permanently losing access to their assets.
Different national regulatory frameworks in operation also complicate matters and may require a global standard.
Are there any examples of tokenised funds?
Despite the challenges, tokenised funds have been launched in recent years, particularly in major fund jurisdictions globally.
Notably, BlackRock launched the BlackRock USD Institutional Digital Liquidity Fund (BUIDL) on the Ethereum network. BUIDL has attracted almost $2 billion in assets under management. This fund offers benefits by enabling the issuance and trading of ownership on a blockchain, providing instantaneous settlement, and allowing transfers across platforms. BNY Mellon enables interoperability for the fund between digital and traditional markets, and Securitize acts as the transfer agent and tokenisation platform.
Franklin Templeton launched its first US-registered fund, the Franklin OnChain US Government Money Fund (FOBXX), using a blockchain in 2021. This fund had more than $760 million in assets under management as of June 2025.
