Tokenisation: A Force Multiplier for Investment Funds

Tokenised funds aren’t the future, they are already here. Strip away the digital asset jargon, and tokenised funds are in many ways just like traditional investment funds, but with potential for greater efficiencies in terms of settlement, automated compliance, lower costs, better transparency and distribution. In the near future it is quite reasonable to expect that most hedge funds will be tokenised, with investors expecting less friction and faster liquidity as standard.

Amid significant debate over the potential impact and adoption of tokenised funds in the investment space, it is appropriate to consider how they will operate in practice within the traditional fund ecosystem, whilst leveraging the unique properties of blockchain technology. While the associated disruptive technology will be transformative, tokenised funds today can still be considered as an upgrade on traditional funds rather than a reinvention, in similar fashion to how email upgraded physical post and banking online has become more prevalent than at brick and mortar branches.

Tokenised funds are still real funds, with real assets, real governance, a real administrator and custodian, and very real regulatory and compliance obligations. One major misconception is that tokenised funds only hold crypto assets, however this is typically not the case. Tokenised funds can hold exactly the same assets as traditional funds, with the same investment strategies, such as private equity or private credit or traditional long/short hedge funds. Tokenised funds utilise a blockchain primarily for enhanced record keeping functionality with no change to the underlying assets held by the fund.

The tokenised equity interests issued by a tokenised fund, just like paper shares, do not actually hold or touch the assets in the fund. Legal title to these assets remains with the fund itself and custody of such assets is still maintained in custody accounts or broker/bank accounts, with investor records being maintained by the transfer agency or administrator, which means that physical asset custody and often the formal statutory registers and records of the fund stays ‘off-chain’. It should be noted, there is nothing preventing a ‘crypto fund’ – with underlying digital assets and a digital custodian – from being a tokenised fund, but this does not necessarily need to be the case. The key perceptive difference with traditional funds is that an investor’s equity in the fund is issued in tokenised form and the fund’s records of issuance, transfer and redemption of such interests reside on a blockchain, providing immutable transaction records.

As many investors know from first-hand experience, the typically manual paper subscription process for traditional funds can be painful. Going back and forth with the fund and/or its administrator for more paper work is time consuming and increases the risk of manual errors.  Tokenised funds that utilise on-chain subscription and e-KYC processes provide an e-solution to this laborious process with 24/7 functionality as the blockchain doesn’t close at 4pm EST or on weekends. As compliance is already embedded into the blockchain, systems can screen for qualified investors and process subscriptions and transactions at lower cost, while also eliminating human error. It’s also important to note that most tokenised funds are being established by large investment firms with substantial existing client bases, so  participants  are often already existing investors in related firm products and would have previously provided KYC information and cleared AML and sanctions requirements.

Tokenisation does not alter the legal obligations of the fund, however it does introduce new operational, regulatory, governance and technical risks, which must be addressed by the fund. For example, tokens purchased by investors require new custody considerations and solutions and the fund’s governing documents should clearly set out the required procedures to be applied in the event of loss of private keys, and contain policies to mitigate against poor wallet governance and counter-party risk. Such strategies may include dual signatory controls, Multi Party Computation (MPC) solutions, thorough blockchain analysis and recovery processes.

Compliance with statutory and regulatory procedures should be built into token functionality via smart contracts, which provide for proper execution with the correct protocols built into them, such as whitelisting investors, enforcing lockups, transfers, minting, and burning of tokens. If these smart contracts are poorly written they can create operational issues for the fund.

The Cayman Islands: A Natural Fit

In many ways the Cayman Islands is attractive and a natural fit for tokenised funds, as the jurisdiction offers flexible structures, tax neutrality, a strong legal framework and protections for investors, with a world leading investment fund ecosystem with its existing human capital. With this framework in place, the layering of tokenised funds is a logical step forward.

From a regulatory perspective, the Cayman Islands government recently confirmed that tokenised funds are most appropriately regulated within Cayman’s existing funds framework, preserving the robust investor protection and AML oversight for which the jurisdiction is renowned. Previously the absence of express statutory provisions governing tokenised funds had created an element of uncertainty for the industry. The Virtual Asset (Service Providers) (Amendment) Bill, 2026 provided clarity that the issuance, creation, sale, transfer, or other disposition of tokenised equity or investment interests by regulated mutual funds and private investment funds does not constitute the issuance of virtual assets under the VASP Act, triggering duplicative VASP registration requirements. With Cayman’s large and dynamic investment funds sector, tokenised funds represent further progression towards the ‘retailisation’ of investment funds. As operational and transactional efficiencies improve, access is increased for smaller investors traditionally locked out of the alternatives industry.

As tokenised funds become more widely available investors need to be cognisant of the challenges involved, such as pricing mismatches on secondary markets if NAVs are still struck infrequently with low liquidity. Such pricing disparities can raise questions around investor fairness and arbitrage risks for managers and operators, attracting regulatory scrutiny. At the same time, institutional wallet custody is still evolving and secondary liquidity remains fragmented and subject to regulatory and compliance restrictions. Fund administrators are continuing to work to integrate this new technology and global regulators are still adjusting the necessary regulatory frameworks.

Fund tokenisation is not a revolution, but can instead be seen as a force multiplier in the fund space,  upgrading traditional operations across the entire industry. Clearly, tokenised funds will in time substantially disrupt  the investment fund industry and as with any new advances in technology, fund managers and their stakeholders must address the associated challenges squarely. The stakeholders and jurisdictions which embrace tokenised funds early will lead the next decade of global fund innovation.

For legal and regulatory disclosures please visit: maples.com/legal-notices.