Tokenization of financial assets has expanded rapidly since the beginning of 2025, even in the absence of regulatory clarity around issues such as custody, trading, and the applicability of transfer agent rules to tokenized assets. The first article in this series examined what tokenization is and how real-world assets are tokenized and explored the advantages, disadvantages, and risks of tokenization. This article, and the final article, in this three-part series will examine various issues that a fund board may wish to consider in connection with possible investments in tokenized assets.

Regulatory Ambiguity

There currently is no regulatory clarity around issues such as whether a digital asset network can serve as the master securityholder file or a component thereof for purposes of the Securities and Exchange Commission’s transfer agent rules.[1] Moreover, since assuming office, SEC Chairman Paul Atkins has:

• called for “clarity on the types of custodians that [are eligible to serve as such under the] Investment Company Act, as well as reasonable exceptions from [those] requirements to accommodate certain common practices within [digital] asset markets;”
• contemplated possible rule amendments to enable funds to engage in self-custody under certain circumstances; and
• expressed support for revamping the regulatory regime governing alternative trading systems “to better accommodate crypto assets [and exploring] whether further guidance or rulemaking may be helpful for enabling the listing and trading of crypto assets on national securities exchanges.”[2]

The resolution of these issues is likely to affect advisers’ decisions regarding the scope and extent of investments in tokenized assets.

Board members may wish to consider engaging with advisers regarding whether and to what extent they are engaging with regulators on these issues, what positions they are taking, and the rationale for those positions.

Assessing Distributed Ledgers

The first article in this series discussed differences between public and private ledgers, though it did not delve into “permissioned” versus “permissionless” structures of those ledgers. Each structure has varying trade-offs and advantages.[3]

Public ledgers may be “permissioned” or “permissionless.” A public permissioned ledger is a network open to selected, vetted participants such as regulated entities. It typically combines decentralization with controlled governance, limiting validation of transactions to certain trusted parties. Advantages relative to a public permissionless ledger include better performance and easier know-your-customer and anti-money-laundering checks. However, liquidity will typically not be as great as that of a permissionless ledger. A public, permissionless ledger is an open, decentralized network where anyone can join, transact, and validate transactions without prior approval. It permits broad participation and innovation. However, the downsides of public permissionless ledgers include variable performance, limited default privacy, and greater difficulty in implementing compliance with legal and regulatory requirements.

As a practical matter, private ledgers may only be “permissioned.” A private permissioned ledger will be a fully controlled and centralized network with restricted access to pre-approved participants. This type of network is optimized for high performance, confidentiality, regulatory compliance, and internal institutional use cases. A private permissioned ledger is considered faster and cheaper to maintain than a public permissionless ledger because validation of transactions occurs through a trusted third party. However, its barriers to entry may also limit liquidity.

Paradoxically, none of these models have clear-cut security advantages relative to the others. For example, a widely used public permissionless ledger is likely to be more costly to attack than a smaller platform with fewer nodes because the economic resources required to attack these large platforms are greater than those required to attack smaller platforms.[4] Moreover, centralization of a private ledger offers a single possible point of failure compared to the decentralized nature of public ledger.[5] On the other hand, the restrictions associated with a private permissioned ledger provide malicious actors with fewer possible points of entry than a public ledger.

Board members may wish to consider engaging with advisers regarding whether they are considering tokenized assets found on all types of ledgers, or only a particular subset, and the basis for their decisions.

Investment Opportunities

The release adopting Rule 38a-1 under the Investment Company Act of 1940 and Rule 206(4)-7 under the Investment Advisers Act of 1940 stated that fund compliance procedures should address the allocation of investment opportunities among clients.[6] While the SEC does not require investment advisers to allocate investment opportunities on a pro rata basis,[7] investment advisers that claim compliance with the CFA Institute Asset Manager Code are encouraged to allocate investment opportunities on a pro rata basis to eligible accounts whenever possible.[8] One common exception to pro rata allocation of investment opportunities is if the minimum size of the investment opportunity would provide the account with an allocation that is larger than an allocation to which it would be entitled if the investment opportunity were allocated strictly pro rata. 

More than 80% of institutional investors have indicated that they have plans to invest in tokenized bonds by the end of 2026.[9] And since one potential benefit of tokenization is fractionalization of assets, this could indicate that tokenization may enable smaller funds to participate in fixed-income offerings that were previously unavailable to them. Conversely, funds that benefitted from the exclusion of smaller funds or other accounts may find that their allocations of investment opportunities will shrink going forward.

Board members may wish to consider engaging with advisers regarding how they view tokenization affecting investment opportunities and challenges associated with the purchase of tokenized assets.

As noted above, exceptions to pro rata allocation policies that are based on assets having a minimum denomination size that precludes pro rata distribution to all accounts may no longer be relevant if an asset is tokenized. However, a fund or other client may not be able to accept a tokenized asset for reasons ranging from a lack of authority to invest in tokenized assets to an inability to adequately custody the token.

Board members may wish to consider engaging with advisers regarding whether existing allocation and aggregation policies are sufficient to accommodate transactions in tokenized assets or whether and to what extent modifications would need to be made.

Best Execution and 24/7 Trading

When securities are tokenized, the books and records demonstrating ownership, issuance, transfer, and redemption are maintained on the relevant blockchain or other distributed ledger. Accordingly, when securities are bought or sold on a blockchain, investors can directly initiate transfers and redemptions and conduct other processes using blockchain infrastructure. Investors also can monitor the execution of these operations themselves. Importantly, tokenization allows automated functions to be coded into the blockchain through smart contracts, and ownership to be tracked in a shared ledger. This contrasts with traditional market trading mechanisms, where ownership is recorded in separate databases, requiring additional systems to communicate and reconcile transactions.

Tokenized assets may enable automated transactions and enhance efficiency.[10] Tokenization also introduces the possibility of composability, whereby smart contracts combine multiple tokenized assets to create customized financial products with preprogrammed transaction steps. Composability also enables assets to be divided into smaller, transferable units, potentially making traditionally illiquid assets more accessible.[11] However, if tokenization occurs on private blockchains or if multiple blockchains are created to trade a given asset, then, absent interoperability (the ability to move tokens across blockchains), tokenization could reduce liquidity for these assets and result in fragmentation.

Tokenization also introduces the possibility of a 24/7 public stock market that utilizes blockchain technology for instant settlement, transparent ownership tracking, and automated compliance.[12] Unlike traditional stock trading, which relies on clearinghouses and intermediaries, tokenized public stocks could be recorded onchain, allowing for direct transactions between issuers and investors and between investors.[13] In a tokenized stock market, tokenized shares could be issued directly via the blockchain via smart contracts. This would allow investors to hold assets in self-custodied wallets or regulated custodial accounts.[14]

A move to 24/7 trading likely would increase the global accessibility of U.S. stocks, offering international traders the ability to engage with the markets during their local business hours.[15] This could lead to greater adoption from international investors, helping to increase liquidity and broadening the investor base.[16] It also would allow market participants to respond to breaking news and earnings calls and announcements, which typically occur before or after traditional trading hours. The ability to trade continuously could not only improve capital flow but also create opportunities for better risk management in response to unexpected incidents.[17]

However, many issues remain unanswered, such as the impact of tokenization on research and various types of “brokerage services” currently provided in accordance with Section 28(e) of the Securities Exchange Act of 1934. At first glance, it would seem many of the “brokerage services” provided today would not exist in a world where trades are automatically tracked on the blockchain via smart contracts. In a world without intermediaries, an investment adviser could not cause a fund to pay an intermediary a full-service commission for research. 

It also is unclear whether and to what extent the factors that an adviser is required to consider when satisfying its duty to seek best execution of fund transactions would continue to be relevant when trading in tokenized assets.[18] The SEC has stated: “A money manager should consider the full range and quality of a broker’s services in placing brokerage, including, among other things, the value of research provided, as well as execution capability, commission rate, financial responsibility, and responsiveness to the money manager. …[T]he determinative factor is not the lowest possible commission cost but whether the transaction represents the best qualitative execution for the managed account.”[19]

Factors such as execution capability, commission rate, financial responsibility and responsiveness to the money manager do not appear to be germane to assessing execution quality in a disintermediated environment. Instead, it would seem that the sole concerns of the adviser in assessing execution quality should be price and gas fees (transaction costs).[20]

However, in a world with increased efficiency, reduced (perhaps minimal) trading costs, and instant settlement, how does one measure best execution when transactions are automatically recorded on the blockchain? Today, the National Best Bid and Offer represents the highest bid price and the lowest offer price for a security across all U.S. exchanges. It acts as a benchmark for broker-dealers to ensure they provide customers with the best possible execution price for trades. However, each blockchain is designed with its own unique standards, codebases, and protocols, making it inherently incompatible with another blockchain. As a result, blockchains generally do not natively “speak to” each other. They are typically built as isolated systems with limited or no built-in communication capabilities, meaning they operate as independent “islands” and are unable to share data or assets with other chains.

While there are solutions being developed that would provide for interoperability across blockchains, they have not been widely adopted yet. More fundamentally, the SEC and other securities regulators will have to consider the market structure challenges associated with trades being affected and settled on blockchains. Until interoperability is possible and the SEC adopts rules mandating trades to be executed at something akin to the NBBO, investors will be uncertain whether they are getting good—let alone best—execution by trading on any particular blockchain.

Board members may wish to consider engaging with advisers regarding issues such as the extent to which they are monitoring trading developments in tokenized assets, what opportunities and challenges they see in connection with trading of tokenized assets (both in isolation and as compared with trading of traditional securities), whether there are particular asset classes that are more likely to migrate to a blockchain before other asset classes do so (if ever), and if and when assets become tokenized and migrate to a blockchain, how the adviser’s approach to trading and assessment of execution quality will adjust.

Click here to read the first article in this three-part series on tokenization.

Ethan Corey (pictured, left) is a senior counsel at Eversheds Sutherland in Washington, D.C. With more than 20 years of experience in the financial services industry, Corey has deep knowledge in distribution issues (including FINRA rules), as well as those related to the Investment Company Act of 1940 and the Investment Advisers Act of 1940. He also has counseled clients on matters related to Municipal Securities Rulemaking Board rules and regulations set forth by the Commodity Futures Trading Commission, as well as the U.K. Financial Conduct Authority’s Conduct of Business Rules and European legislative frameworks such as MiFID II.

Michael Koffler (pictured, middle) is a partner at Eversheds in New York who works with investment advisers, broker-dealers, and investment funds in their compliance with federal and state securities laws and regulations and SRO rules. Koffler advises clients on the full spectrum of business operations, including advertising, portfolio management, trading, internal controls, compliance programs, mergers and acquisitions, and other management issues. He also counsels banks and insurance companies on securities issues associated with the management and distribution of investment products.

Carolyn Garcia (pictured, right) is an associate in Eversheds Sutherland’s Investment Services and Products Practice Group in Washington, D.C. Her experience includes advising broker-dealers and investment advisers on compliance with federal and state securities laws, including Securities and Exchange Commission and Financial Industry Regulatory Authority rules and regulations.