Digital asset funds
Digital asset funds are investment funds linked to blockchain technology, and the term covers two different products. A crypto fund invests in crypto-assets such as bitcoin or ether, while a tokenized fund keeps a conventional portfolio and records its units as tokens on a blockchain.
In a crypto fund the token is the asset itself, so custody of private keys, trading around the clock and price differences between venues shape the daily operations. In a tokenized fund the token is a record of ownership in a fund that may hold bonds or money market instruments, so the open questions concern the register, the transfer of units and the settlement of subscriptions and redemptions.
Crypto funds: the token is the asset
A crypto fund buys bitcoin, ether or other crypto-assets directly, or it gains exposure through futures, exchange-traded products or shares of companies in the sector. Strategies range from a passive basket that tracks an index to actively managed portfolios, market-neutral funds that earn the gap between spot and futures prices, and venture funds that buy tokens of young projects. In the EU most such funds are alternative investment funds for professional investors, run by an AIFM.
A crypto fund follows the same rules as any other regulated fund, but its controls work with blockchain records. The fund needs a depositary that can verify who controls the keys, a valuation policy that names price sources for a market without a close, and trading counterparties that quote firm prices for large orders.
Tokenized funds: the token is the record
A tokenized fund issues its units, or one share class of its units, as tokens on a blockchain. The portfolio, the strategy and the legal form of the fund stay the same, and the token replaces or mirrors the entry in the register of unitholders. Tokenized money market funds that hold short-term government debt are a common example, and investors use their tokens as collateral or to hold cash on a blockchain.
A tokenized fund can settle subscriptions and redemptions against stablecoins or tokenized deposits, and a smart contract can pay out distributions. Transfers stay limited to investors who passed the know-your-customer checks of the fund, because a fund unit remains a financial instrument. In Germany a regulation on crypto fund units (KryptoFAV) allows units to be issued as crypto securities, and Luxembourg allows securities to be held in accounts on a distributed ledger under its blockchain laws.
Crypto fund vs tokenized fund
The token has a different job in each of the two fund types:
| Point | Crypto fund | Tokenized fund |
|---|---|---|
| What the token is | The asset the fund owns | The record of a fund unit |
| Typical assets | Bitcoin, ether and other crypto-assets | Money market instruments, bonds, equities, private credit |
| Main operational risks | Key custody, price gaps between venues, volatility | Register accuracy, smart contract errors, legal recognition of the token |
| Custody | Crypto custodian or a depositary with a MiCA license | Depositary for the portfolio, token register for the units |
| Investors | Mostly professional investors | Professional investors and, for some funds, retail investors |
The two can meet in one product: a fund that holds crypto-assets can also issue its own units as tokens. The operational rules then add up, because the fund needs a crypto custodian for its assets and a token register for its investors.
Upcoming events on digital assets and funds
Crypto funds vs ETFs and ETPs
A crypto exchange-traded product holds one crypto-asset or a basket and trades on a stock exchange like a share, with market makers keeping its price close to the value of the holdings. In the EU such products are mostly exchange-traded notes, because UCITS rules do not allow an ETF that holds a single crypto-asset. A crypto fund is usually an actively managed AIF with periodic dealing at NAV, minimum investments for professional investors and a manager who decides what the fund holds.
Who may invest in a crypto fund?
In Germany, open-ended special AIFs for professional and semi-professional investors may hold up to 20 percent of their assets in crypto-assets, and public funds for retail investors may not buy them directly. In Luxembourg, AIFs reserved to well-informed investors may invest in crypto-assets directly, AIFs open to retail investors up to 10 percent of their NAV, and a UCITS only indirectly through transferable securities up to the same share. Retail investors who want direct exposure mostly buy exchange-traded products instead.
Digital asset funds and Finance Loop
Finance Loop covers crypto funds and tokenized funds in its track Investment & Digital Assets. Its events bring asset managers, custodians and fund administrators together in Germany, Austria and Switzerland.
Finance Loop is a professional network and has the goal of driving the institutional use of emerging technologies in finance, such as AI, digital payments, cloud and blockchain solutions. Finance Loop helps its members build skills and personal networks in these fields: Investment & Digital Assets, Payments & Digital Money, Digital Infrastructure & Sovereignty, and Risk & Compliance.