Important Sub-sectors in RWA: The Value and Exploration of Fund Tokenization

1. Fund Tokenization

Tokenization usually refers to the digitization of assets expressed on the blockchain, applying distributed ledger technology for accounting and settlement. Tokenized assets can include financial instruments such as stocks, bonds, and funds, as well as tangible assets like real estate and intangible assets like music copyrights. The tokens generated after asset tokenization serve as carriers of asset value and proof of rights.

After tokenization of the fund, a tokenized fund (Tokenized Fund) is formed, which means that the fund shares are recorded in a digital form of tokens on the blockchain distributed ledger, and the tokens can be traded on the secondary market. This tokenized fund is different from crypto funds that only invest in the primary and secondary markets (Token Fund).

The global asset management industry is facing numerous challenges. Although the overall asset management scale of the industry has grown with the market rise, fund management fees are being compressed due to peer competition and a shift towards passive investment strategies. The market demands higher digital capabilities from funds to meet the increasingly growing online distribution, asset reporting, regulatory compliance, and personalization needs of investors. The growth rate of fund management costs is outpacing revenue, leading to squeezed profit margins.

For private equity funds, due to poor liquidity and high investment thresholds, investors are long limited to a small number of institutional investors. The private equity fund market urgently needs to lower investment thresholds and launch alternative products that meet the investment needs of non-institutional clients such as small and medium-sized institutions, family offices, and high-net-worth individuals.

The tokenization of funds can address many issues currently facing the global asset management industry. Advocates of tokenized funds believe that funds based on blockchain and distributed ledger technology can not only increase the scale of asset management and invest in a wider range of asset classes, but also attract new types of investors, improve user investment experience, and help funds excel in the digital upgrade of the industry, while significantly reducing operational and marketing costs.

2. The Profound Impact of Tokenization on the Fund Market

2.1 Promote the digitization of the fund market

Currently, funds and investors are separated by a large number of intermediaries. The fund distribution side includes financial advisors, fund platforms, and order routing networks; the service side includes payment agents, custodians, and fund accountants. Transfer agents assist funds by coordinating both sides, responsible for KYC, AML, CFT, and other verifications, as well as fund subscriptions, redemption settlements, reporting to managers, and maintaining investor registration records.

Inefficiency in the traditional fund operation process: ( Fund shares are established to meet subscriptions and are canceled to meet redemptions; ) Fund pricing is not based on buying and selling, but on the net asset value set by the fund accountant; ( Transfer agents price based on net asset value by receiving and integrating orders, and settle orders through bookkeeping in the centralized register, then reconcile the orders with the cash positions of the investors and the fund; ) Three days before the settlement of fund shares and cash, both the fund and investors face market volatility and counterparty risk; ( Fund liquidity forces fund managers to retain cash positions to bear the costs of rebalancing the fund's net asset value.

In contrast, tokenization can significantly simplify the above process: ) Tokenized funds are issued and traded on the blockchain, with subscriptions and redemptions settled directly with fund tokens and payment tokens, entering investors' accounts. Transactions have settlement finality, eliminating market and counterparty risks; ( all transaction records are on the blockchain's distributed ledger, ownership changes are automatically recorded, eliminating the need for centralized registration; ) all intermediaries can access and view data on the blockchain without the need for multiple reports and reconciliations.

At the same time, tokenization will help fund managers and investors achieve digital interaction: ( integrating KYC, AML, CFT and other verifications, speeding up investor account opening; ) efficient atomic settlement based on blockchain, achieving real-time pricing and settlement around the clock; ( unified multi-party ledger access, enabling real-time data sharing, allowing investors to directly access fund data and trade; ) fund managers will gain richer investor information and trading information.

( 2.2 Solv Protocol's on-chain fund issuance and fundraising platform

Solv Protocol is committed to providing blockchain-based financial tools and diversified asset management infrastructure for the crypto industry, recently completing a financing round of 6 million USD. The latest product from Solv Protocol, Solv V3, sets a new standard for on-chain fund issuance. The tokenized funds created through Solv Protocol enable on-chain fundraising, issuance, subscription, redemption, trading, and settlement of funds, achieving efficient capital flow for tokenized funds.

According to official website data, Solv Protocol has successfully issued and raised 74 tokenized funds, including open-end and closed-end funds ), serving over 25,000 investors and managing over $160 million in assets.

The core mechanism of the Solv Protocol allows fund managers to create on-chain funds, depositing raised funds of ( stablecoins, BTC, ETH, etc. into the Solv protocol smart contract, and generating NFTs/SFTs that represent fund share certificates for investors, enabling fund managers to invest based on their investment strategies using the raised funds.

For example, the Blockin GMX Delta Neutral Pool is an open-end fund managing approximately $2.6 million in assets, based on the Blockin investment strategy; another open-end fund RWA: Generate Yield On Your Stable Coins is initiated by Solv RWA, raising USDT and investing in RWA assets of U.S. Treasury bonds, providing U.S. Treasury yields for stablecoin holders.

Open-end funds refer to funds where the total scale of fund units or shares is not fixed at the time of establishment by the fund manager, allowing for the issuance of shares at any time and allowing investors to redeem periodically. Fund managers typically use an open-ended structure for high liquidity investment portfolios.

The fully on-chain tokenized fund issued by Solv Protocol raises funds from BTC/ETH/stablecoins, and the investment assets are also native crypto assets or tokenized assets like US Treasuries RWA). This fully on-chain architecture maximizes the enjoyment of tokenized value. For example,( fund managers can directly face investors, obtaining more investor data and transaction information;) eliminates many intermediary frictions in fund services, reducing costs;( fundraising, issuance, trading, and settlement are all achieved and recorded on the blockchain in a distributed ledger, ensuring efficiency and transparency;) fund net value is updated in real-time, and fund share subscriptions/redemptions are available anytime and anywhere 7/24, etc.

Solv Protocol states: Currently, most crypto asset management services come from CeFi institutions, which have opaque asset creation and fund management processes, leading to trust issues. Better decentralized solutions provide a transparent and secure investment experience while helping asset management companies gain trust and liquidity. Solv is building infrastructure and ecosystems to provide comprehensive services, including creation, issuance, marketing, and risk management. This lowers the barriers to participating in Web3 while promoting the maturity of the crypto market.

Olivier Deng from Nomura Securities, an investor in Solv Protocol, stated: "Solv has built a trustless, institutional-grade DeFi platform that integrates brokers, underwriters, market makers, and custodians, creating the first liquidity financial infrastructure that bridges DeFi, CeFi, and TradFi on the blockchain."

3. Settlement of Tokenization Funds

Tokenization funds can to some extent replace some intermediary institutions (, such as fund distributors ), and improve the digital level of the fund market, but the market does not evolve overnight. From the most realistic perspective for fund managers and investors, tokenization will inevitably change the settlement methods for fund subscriptions and redemptions.

3.1 Tokenization Fund Settlement

Currently, funds are generally priced based on net asset value, and fund managers collect or pay cash through the banking system, settling against the issue or cancellation of fund shares three days later (T+3). However, tokenized funds calculate prices multiple times a day, and since subscriptions and redemptions will be settled "automatically" on the blockchain, the bank system's method of settlement (T+3) will be replaced. We can see in the Solv Protocol case that fully blockchain-based tokenized funds can achieve real-time pricing and real-time settlement in a round-the-clock market (7/24).

This settlement method that leverages blockchain and distributed ledger technology is known as: Atomic Settlement(, which means that cash equivalents are directly linked to fund share transactions, that is, when one asset transfer occurs, another asset transfer happens simultaneously. In other words, the prerequisite for settlement is that both parties involved in the transaction have cash and fund shares available for exchange in their electronic wallets, and the settlement depends on simultaneous exchange. If cash or shares are not delivered, the transaction will not occur. This settlement method eliminates counterparty risk, enables real-time settlement, and brings a significant improvement to trading efficiency.

Bitcoin was originally designed to achieve a decentralized peer-to-peer electronic cash payment system. Bitcoin payments allow users to transfer directly between each other without the need for third-party institutions such as banks, clearinghouses, and electronic payment platforms, thus avoiding high fees and cumbersome transmission processes. This atomic settlement method applied in the cross-border payment field can solve the problems of high costs, low efficiency, and high expenses associated with traditional cross-border payments.

Another interesting use case is that tokenization can more effectively settle exchange-traded funds ) ETF (. Because ETFs are subscribed and redeemed through physical assets, if the underlying securities are tokenized ), a basket of securities in the ( ETF can greatly simplify the settlement process of the underlying securities of the ETF, achieving real-time settlement.

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) 3.2 Tokenization fund settlement use cases

This atomic settlement trading method has been approved by the U.S. SEC and is applied to the Franklin OnChain U.S. Government Money Fund, which has an asset size of 310 million USD. At the same time, the Monetary Authority of Singapore is also running a similar pilot project with UBS's tokenization fund. Although these funds are not purely on-chain tokenized funds, they leverage the accounting and settlement advantages of blockchain and distributed ledger technology to create a tokenized fund model.

(# 3.2.1 Franklin OnChain U.S. Government Money Fund

Franklin Templeton launched the Franklin OnChain U.S. Government Money Fund )FOBXX( in 2021. This fund is the first tokenized fund in the U.S. approved by the SEC that uses Stellar blockchain technology to process transactions and record ownership. In April of this year, it expanded to Polygon, and may later be issued on the Avalanche and Aptos blockchains, as well as the Ethereum Layer 2 solution Arbitrum.

As of now, it manages assets of over $310 million, and investors can enjoy an annualized return of 5.19%. One share of the fund is represented by one BENJI Token, and currently, there is no visibility of BENJI Token interacting with DeFi protocols on-chain. Investors need to undergo compliance verification through the Franklin Templeton App or website, enter the whitelist, and meet KYC/AML/CTF compliance requirements.

Franklin Templeton's head of digital assets stated: "We believe that blockchain technology has the potential to reshape the asset management industry, providing greater transparency and lower operational costs for traditional financial products. Blockchains like Stellar are very important for the future of asset management, and tokenized assets built on blockchain will eventually achieve interoperability with other parts of the cryptocurrency ecosystem." It is reported that the overall cost of the Franklin Tokenization Fund is only 1/10 of traditional fund costs.

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(# 3.2.2 Compound Founder's Superstate Fund

Fund managers with rich DeFi experience will fully leverage the advantages of blockchain and distributed ledger technology. For example, Compound founder Robert Leshner announced the establishment of a new company, Superstate, on June 28, 2023, which aims to bring regulated financial products from traditional financial markets onto the chain.

According to the documents submitted by Superstate to the SEC, Superstate will use Ethereum as an auxiliary accounting and settlement tool to create a fund for investing in short-term government bonds, including U.S. Treasury bonds and government.