The investment firm BlackRock is taking a further step after the introduction of Bitcoin spot ETFs. In collaboration with the financial services company Securitize, it is launching a private equity fund on the market. The aim is to tokenize real assets on the Ethereum blockchain. In addition, the fund is starting with an initial liquidity of 100 million US dollars. What are the expectations? How will the market be influenced by the funds? And what is the potential?
How does tokenization work?
Today, the term tokenization is mainly used in connection with regulated financial products, often in conjunction with real world assets (RWA). Basically, tokenization is about representing assets in the form of blockchain tokens. Investors can then hold shares as security tokens in their crypto wallet. Unlike utility tokens, security tokens can be easily created and issued as they must comply with financial authority rules. A tokenization project applies the same principle as traditional financial instruments and is subject to the same rules. The difference is the use of blockchain technology, which enables a new way of representation and simplifies trading and transferability.
For example, if a company wants to raise money to expand its business, tokenization can simplify this process by accepting money from several investors at the same time. However, it is first necessary to determine how much money should be raised and what type of tokenization should be used. There are various options, such as the sale of company shares or the assignment of profit rights to products. After legal clarification, the tokens can be sold to investors via online portals. Dividends can be paid out either via the blockchain itself or by traditional bank transfer.
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How BlackRock is now using tokenization
In collaboration with the financial services company Securitize, BlackRock is now launching a tokenization project on the Ethereum blockchain. This is an RWA, namely a private equity fund. The fund is called the “BlackRock USD Institutional Digital Liquidity Fund” (BUIDL for short). BlackRock has transferred an amount of USD 100 million to a crypto wallet as initial liquidity. The well-known public limited company Coinbase is acting as the infrastructure provider for the tokenization project. Daily returns for holders are generated in the form of BUIDL tokens. Investors also have the option of transferring these to other addresses using the wallet provided by Securitize.
BUIDL is intended not only to combine the innovative advantages of blockchain with traditional financial stability, but also to guarantee investors a stable value. This is backed by cash, US government bonds and repurchase agreements. The token also enables returns to be generated through blockchain technology.
BlackRock’s CEO Larry Fink is enthusiastic about the possibilities of tokenization. He sees the previously introduced spot ETFs as the first step in the technological revolution on the financial market. The tokenization of all financial assets should be the second step, as the technology already exists. Proof of this is the current launch of the tokenization fund. He also explains that cryptocurrencies are not so much a new currency, but rather a new asset class.
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Advantages and challenges
There are many advantages, such as eliminating the need for a middleman. With traditional fundraising, you have to take investors to a notary to transfer shares. This is eliminated with tokenization, which digitizes the entire process. Some offline hurdles that exist in Germany, for example, are also eliminated when working with the blockchain. In addition, not only private equity funds can be transferred, but also profit participation rights or bonds with variable and fixed interest rates. Tokenization also offers increased security. Corruption is practically impossible. Cooperation with decentralized finance (DeFi) ensures that there are no malfunctions, such as KYC processes. A so-called KYC-NFT enables the trading of security tokens on decentralized exchanges. The issuer is always informed about the token holders. In Germany, investors are still subject to the KYC obligation.
On the other hand, tokenization also brings new challenges. After transferring 100 million stablecoins to the crypto wallet, BlackRock received meme coins from various people on this wallet. This means that BlackRock must now include these in its balance sheets. In addition, the long-term storage of security tokens is currently still a challenge for all investors, as there is basically no infrastructure to hold crypto assets for the long term. This could deter larger and institutional investors from investing. One solution would be so-called regulated crypto custodians. They take on the role of the broker in the traditional financial system and eliminate the need for infrastructure.
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The potential of the tokenization fund
BlackRock is moving with the times, recognizing that the way assets will be represented in the future is moving towards blockchain technology. The tokenization of the private equity fund has enormous potential. Compared to Securitize’s previous projects, this is particularly large. Therefore, it is not surprising if the tokenization project in collaboration with BlackRock is groundbreaking for other funds. BlackRock is a giant in its field of venture capital, which is why other investment firms are likely to consider launching tokenized funds soon as well. It is advisable to get informed now and consider the benefits of tokenization over other methods.
Conclusion
BlackRock and Securitize are taking another step towards the tokenization of RWAs with the BUIDL token. Tokenization offers many advantages and seems to be the future form of asset management. As Larry Fink has already said, the necessary technology already exists. Whether for businesses or real estate purchases, tokenization makes many things possible. It is to be expected that all kinds of assets will be tokenized in the future, including various products, valuable items such as art, but also company shares and intangible things such as patents. Of course, there are also some challenges, but they are far fewer than the benefits, and there are already solutions. The potential is enormous and it is very likely that the new technology will be able to replace traditional share trading in the long term.