When BlackRock, the world’s largest asset manager, entertains the idea of tokenising exchange-traded funds, we are witnessing more than a quirk of financial fashion. It is an ambition that strikes at the heart of what modern finance should be: faster, cheaper, more transparent.
But as ever with grand promises, the devil is in the details — and the risk that the tokenisation of ETFs becomes a cage of complexity overshadowing its potential.
What are tokenised ETFs?
First, what do we mean by tokenised ETFs? Simply, it is the process of converting units of a traditional ETF (or its underlying real-world assets) into digital tokens on a blockchain. The tokens represent ownership (or exposure) to the ETF’s assets, facilitating fractional ownership, often 24/7 trading, and potentially more efficient settlement.
BlackRock is not alone; other asset managers such as State Street, Janus Henderson, Franklin Templeton are testing the waters. The Financial Times has reported that Janus Henderson is following BlackRock and Fidelity into securities tokenisation, seeking to strip away many of the layers that define traditional funds.
Proponents of tokenised ETFs paint a seductive picture. Imagine investing across the world at any hour, with settlement nearly instant, costs pared down, and ownership rights codified and transparent. For retail investors, fractionalisation could open up asset classes once reserved for institutions. For institutions, the promise is operational efficiency, reduced counterparty risk, and the ability to reimagine liquidity.
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Yet it would be naïve to assume that tokenisation is a panacea. Critics point to the thinness of liquidity in many tokenised offerings, the regulatory uncertainty, and the possibility that what appears novel is merely repackaged complexity. At base, many tokenised products do not confer the same legal rights as owning the underlying security; often, they mimic exposure rather than ownership.
ESMA (the European regulator) has already flagged risks of “investor misunderstanding.” Tokenised stock-like products may promise perpetual availability, fractional ownership, round-the-clock trading, but they often fail to grant shareholder rights or protections. For many retail investors, the distinction is subtle but crucial.
Obstacles facing tokenised ETFs
Moreover, blockchain doesn’t eliminate counterparty risk or intermediation; it relocates them. Smart contracts may automate settlement, but they are only as good as their coding, their audit, and their legal enforceability. Custody remains a knotty issue: who holds the asset, who assures its backing, and what happens if a platform fails? These are not speculative concerns; they are very real.
Then there is cost. While proponents claim tokenisation can reduce fees by cutting intermediaries, there are “gas” or transaction-cost equivalents; there is regulatory compliance; there is security; there is infrastructure. If these are not managed carefully, the savings may be marginal or even reversed. Also, innovative structures attract regulatory scrutiny: cross-border tokenised funds may run foul of multiple jurisdictions, or require harmonisation of law which remains lacking.
Still, one must beware of the conservative impulse to dismiss innovation wholesale. BlackRock’s scale and reputation mean its moves will be watched, adopted, or contested. If BlackRock manages to deliver tokenised ETFs that are transparent, safe, and truly accessible, the benefits could be real. For institutional investors, for pension funds, for those underserved by existing financial plumbing, this could represent a step change.
The question, however, is this: will tokenised ETFs be as transformational in practice as they are in prospect? Or will they turn out to be a technological veneer applied to traditional inefficiencies, accompanied by new, more tangled risks?
In the end, BlackRock’s tokenisation gambit may succeed — but only if it honours three requirements: legal clarity (especially around ownership and rights), regulatory robustness (prudential standards, investor protection), and genuine cost and efficiency improvements, not just hype. If it does, finance may move a bit closer to something better; if not, the promise of tokenisation will be another unfilled dream of the crypto-era, one more layer of glamour around age-old financial obscurities.
