Digital Assets in Investment Funds: The Quiet but Steady Rise of Crypto Permissive Mandates

The Shift Towards Crypto-Permissive Mandates

Both open-ended and closed-ended funds are expanding their use of digital assets. Institutional managers of open-ended funds have traditionally been cautious adopters of emerging asset classes. In recent years, however, there has been a clear increase in mandates that permit exposure to digital assets.

According to the data in the Maples Group’s Q1 2026 Open-Ended Funds Report, approximately 19% of open-ended funds launched in Q1 2026 expressly permit investment in digital or crypto assets. Crypto and digital asset strategies also featured prominently among specialist and niche strategies, which collectively represented approximately 12% of all open-ended fund launches during the first quarter.

As confidence in the supporting infrastructure, including custody solutions, trading platforms and risk management frameworks, has grown, digital assets have evolved from opportunistic allocations to a strategic consideration within broader portfolios.

Open-ended funds, such as mutual funds and exchange-traded funds (“ETFs”), are increasingly providing investors with exposure to digital assets through regulated investment products.  The growth of cryptocurrency ETFs has enabled both institutional and retail investors to access the asset class without directly holding crypto assets.

For closed-ended funds, digital asset exposure can take a variety of forms, including investments in blockchain and Web3 businesses through venture capital strategies, acquisitions of digital asset companies and infrastructure providers by private equity funds, direct investment in cryptocurrencies with a longer-term investment horizon and the issuance of tokenised interests to facilitate secondary trading and enhance liquidity.

Tokenisation and Fund Structures

A key development alongside this shift to crypto-permissive mandates is the rise of tokenisation. Tokenised fund interests offer the potential for enhanced liquidity, faster settlement, operational efficiency and transparency, enabling quicker processing of subscriptions and redemptions with fewer manual steps, shorter settlement times and automation through the use of smart contracts for transfers, fee calculations and compliance checks. Managers may be able to reduce operating costs associated with transfer agents, reconciliation, recordkeeping, reporting and manual compliance processes. A blockchain-based investor register may facilitate more efficient auditing, greater visibility of investor activity, smaller minimum investment sizes through fractional ownership, access to a broader range of investors and more efficient cross-border distribution. Tokenisation may also support liquidity of the fund by facilitating secondary trading on approved digital asset venues, more efficient transfers, providing a greater pool of buyers given smaller fractional interests and/or global investor access.

Alongside the growth of tokenised fund structures, some investment managers, particularly in the money market sector, are adopting stablecoin funding rails, an on-chain payment infrastructure that uses fiat-pegged cryptocurrencies to transfer value globally, providing a shift away from slow, traditional correspondent banking. Others are adopting a “dual-rail” model alongside fiat rails to accommodate differing investor preferences.

For managers considering how to set up a tokenised fund in the Cayman Islands, the regulatory position is now clear. The Mutual Funds (Amendment) Act, 2026, the Private Funds (Amendment) Act, 2026 and the Virtual Asset (Service Providers) (Amendment) Act, 2026 (together, the “2026 Amendments”), which came into force on 24 March 2026, established a clear boundary between the funds regulatory regime and the virtual asset services regime. The 2026 Amendments confirmed that tokenised fund regulation falls within the existing funds regulatory framework rather than under the Virtual Asset (Service Providers) Act, which provides market participants with a familiar regulatory environment that supports technological innovation.

The legislation imposes specific obligations on operators of tokenised funds, including requirements relating to record-keeping, disclosure of token-specific risks (including cybersecurity and transferability risks), operator-approved transfers and annual compliance confirmations to the Cayman Islands Monetary Authority (“CIMA”). Early adoption of the framework is already evident, with twelve tokenised investment funds registered with CIMA since the legislation came into force.

CIMA retains broad supervisory powers over tokenised fund structures, including the ability to impose restrictions on tokenised interests, require periodic reporting and conduct inspections of both the underlying technology and related digital token transactions.

The collaborative consultation process that preceded the 2026 Amendments, involving industry stakeholders, CIMA and the Ministry of Financial Services and Commerce reflects the jurisdiction’s balanced approach to supporting innovation while ensuring appropriate regulatory oversight.

The Cayman Islands is widely regarded as the jurisdiction of choice for investment fund formation, with over 30,000 investment funds registered with CIMA. As digital assets and tokenisation continue to mature, it is anticipated that there will be a steady rise in the number of tokenised investment funds established in the jurisdiction.

Operational and Investor Considerations

The integration of digital assets into open-ended funds requires careful navigation of a range of operational and regulatory issues, including custody arrangements, valuation methodologies, liquidity management and risk assessment.

Custody remains a key focus area given the unique characteristics of digital assets and ensuring secure and compliant storage solutions is critical. Valuation can similarly present challenges, particularly in less liquid or highly volatile markets. Liquidity management is also receiving heightened attention.

According to the Maples Group’s Q1 2026 Open-Ended Funds Report, almost 80% of new open-ended fund launches in Q1 2026 incorporated one or more liquidity tools, with 53% including redemption gate provisions, 47% featuring lock-up periods and 36% adopting side-pocket mechanisms.

These trends reflect an environment in which prudent liquidity management, without compromising investment flexibility, has become standard practice for new fund launches.

Managers must also establish robust governance frameworks to address these complexities and provide transparency to investors.

From an investor perspective, due diligence processes are evolving to account for these factors alongside traditional considerations such as track record, strategy and operational infrastructure.

Beyond digital assets, managers are increasingly considering the implications of artificial intelligence into fund operations. Risk assessment and due diligence frameworks are evolving to address AI-related opportunities and risks alongside more traditional operational considerations. Approximately 38% of open-ended funds launched in Q1 2026 included risk factors relating to AI or machine learning technologies, while 15% expressly referenced such technologies in their investment process or operations, indicating that the industry’s awareness of AI-related risks currently outpaces its formal adoption of these tools.

Outlook

The outlook for digital assets in open-ended funds remains firmly positive. Institutional participation continues to increase and tokenisation may play an increasingly prominent role for some fund structures, particularly with the clarity brought by the 2026 Amendments. As the framework evolves, further regulatory guidance from CIMA on operational and compliance matters may support broader adoption of tokenised structures.

This positive trajectory should, however, be assessed against a number of persistent headwinds. Digital assets remain subject to significant price volatility relative to traditional asset classes, and managers must continue to calibrate risk management frameworks, stress-testing and investor disclosures accordingly. Regulatory treatment also remains dynamic: while the Cayman Islands has established a clear framework through the 2026 Amendments, other key jurisdictions continue to refine their approach to digital assets and a shift towards more restrictive regulation in any major market could affect global market infrastructure, liquidity or investor sentiment. The interconnected nature of digital asset markets also creates contagion risk, whereby disruption or failure at a major exchange, custodian or stablecoin issuer could have broader implications for funds with digital asset exposure, even where such funds are not directly affected. Finally, managers must remain alert to geopolitical and sanctions-related risk, given the pseudonymous and cross-border nature of many digital asset transactions and the evolving expectations of regulators and counterparties regarding source-of-funds verification and sanctions screening. These factors underscore the continued importance of robust governance, due diligence and risk management as adoption of digital assets within investment fund structures increases.

More broadly, digital assets are increasingly converging with other areas of technological innovation within fund operations, including the growing use of artificial intelligence, and managers should continue to monitor how these developments interact as the market matures.

Conclusion

The integration of digital assets into established fund structures represents a significant evolution in institutional portfolio management. Supported by maturing infrastructure, pragmatic regulation and increasing institutional confidence, digital assets have evolved from speculative allocations into strategic portfolio components. For open-ended funds, crypto-permissive mandates offer enhanced portfolio flexibility without sacrificing operational discipline, enabling managers to capture opportunities in this emerging asset class while maintaining the governance and risk management standards that institutional investors require. For closed-ended funds, digital assets present equally compelling investment opportunities, and the use of tokenisation may facilitate secondary trading and enhanced liquidity.

The Cayman Islands’ enactment of a comprehensive statutory framework for tokenised funds under the 2026 Amendments further reinforces the jurisdiction’s position as the domicile of choice for digital asset fund formation. With clear boundaries now established between fund and virtual asset service provider regimes and a proven track record of over 30,000 registered investment funds, the Cayman Islands continues to offer a legal and regulatory framework that enables managers and institutional investors to deploy capital in digital asset strategies with confidence. Some uncertainties nonetheless remain, including the timing and scope of the anticipated regulatory guidance from CIMA, the interplay with the global regulatory landscape, developments in custody, cybersecurity and smart contract technology, and the maturity of secondary market infrastructure for tokenised interests. Managers should continue to monitor these developments closely as they evaluate and structure digital asset strategies.

Despite these considerations, the direction of travel is clear. The Cayman Islands’ proactive and collaborative regulatory approach positions it well to adapt alongside advances in the digital asset landscape. As the ecosystem continues to evolve, the convergence of traditional fund structures and digital asset capabilities is likely to become an increasingly prominent feature of the investment funds landscape.