What Does Real-World Asset Tokenization Mean for Asset Managers?

As mutual funds celebrate 100 years in existence, other affordable investment wrappers are coming for their market share.

Index funds continue to dominate American fund flows. Investors have flocked to exchange-traded funds in search of tax advantages, transparency, and ease of access.

WisdomTree’s Will Peck believes that blockchain solutions could do to ETFs what ETFs did to mutual funds.

“We think that over time, and even today, tokenized funds can unlock some benefits for investors,” he explains.

As the head of digital assets at WisdomTree, Will oversees crypto asset management products, tokenization, and WisdomTree Prime. He joined the Big Picture in Practice podcast to discuss current and future use cases for blockchain in asset management.

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When investors think of crypto, they often think of new currencies like Bitcoin or Ethereum with volatile valuations. Nine spot Bitcoin ETFs arrived with a bang in January, attracting $27 billion of inflows by March.

Recent digital funds from firms like WisdomTree and BlackRock function differently.

Tokenization of real-world assets refers to the process of converting real-world or traditional assets—such as equities, bonds, real estate, or commodities—into digital tokens on a blockchain platform.

WisdomTree is an early adopter of tokenizing traditional assets like mutual funds, bonds, and gold.

These digital funds, or tokenized funds, use blockchain technology on public networks like Ethereum or Stellar. Investors hold a tokenized share record in their digital wallet, representing their interest in the underlying mutual fund.

Tokenized funds don’t support the anonymous transactions that many associate with cryptocurrencies. Digital funds also do not have to invest in cryptocurrency.

Tokenized funds are subject to regulatory frameworks and require compliance with securities laws.

Like mutual funds, WisdomTree’s digital funds are open-ended and registered under the 1940 Act.

WisdomTree also recently secured a charter from the New York State Department of Financial Services. The charter allows WisdomTree to exercise fiduciary powers and to offer products and services to New York customers.

"A digital fund is an SEC-registered mutual fund, registered under all of the same rules that exist in the US sold-by prospectus."

RWA tokenization has the potential to empower new forms of ownership and trading.

Because blockchain solutions are programmable, firms can enforce smart contracts, or code-based rules, in financial processes. Depending on the issuer and investor interest, funds could offer rights to dividends, cash flows, governance rights, or profit participation.

With blockchain technology, firms like WisdomTree hope to find easier ways to reach investors. By tokenizing traditional assets, Will believes this technology can “try to improve the existing investor experience.”

Here’s how.

Currently, digital funds are settled once a day like mutual funds, but Will envisions more flexibility in the future.

Instead of buying shares of a company through a stock exchange, investors could trade digital tokens any day at any time, even after markets close. Trades settle atomically, which means assets and cash are exchanged simultaneously to reduce counterparty risk.

“Customers can trade and settle on a more frequent, potentially trustless basis, which we see adding value over time,” Will says.

Blockchain platforms use a decentralized ledger technology. Everyone can know what’s in the basket daily, and see it published to the market. At any point, the system can show how much any investor has and the total assets available.

“Transparency has always been within people’s interest in financial services,” Will says. “Blockchains are built on this idea of transparency.”

Today, transfer agents act as intermediaries between asset managers and clearinghouses. When an investor buys or sells a share, transfer agents process transactions, distribute dividends, calculate cost basis, and keep accurate records of shareholder information.

Digital funds use the blockchain as a secondary recordkeeping system. Investors have the advantage of knowing how much they own and its value. Buy-side asset managers could reduce reconciliation errors and improve reporting accuracy.

“Blockchains have solved that reconciliation process to make keeping track of ownership easier, better, and more efficient,” Will explains.

If they hold money in multiple brokerage accounts, investors might struggle to move their assets around. Each account won’t have access to the same asset classes, especially across stocks, ETFs, mutual funds, options, or cryptocurrencies.

Blockchain technology could allow fintech apps and financial services providers to speak to each other natively.

“Anyone with a smartphone can have a wallet that can hold a token that represents any single underlying asset,” he says. “Over time, that will allow people to control and move their money around in ways they want.”

In the future, investors could move funds out of a brokerage platform and into their self-custodial wallet. Tokenization could also enable fractional ownership, allowing investors to own part of an asset.

The infrastructure for decentralized finance is still under construction. With WisdomTree’s digital funds, Will hopes to serve customers who are already active in the space.

“I’m not expecting that a lot of the financial advisors are going to be able to buy digital funds wherever they custody in the immediate future,” Will cautions.

Will thinks that broader replatforming efforts will take place over time. He points to emerging examples like PayPal, whose stablecoin is pegged to the value of $1. Users can transfer PayPal USD to Ethereum wallet addresses outside of their platform. BlackRock also recently launched a tokenized money-market fund.

“We're excited to be an early mover,” Will says. “We have a broad range of products out there, and we’re excited to see where this goes from here.”