Tokenized Fund Shares Under the Investment Company Act

On April 7, 2021, Franklin Templeton’s OnChain US Government Money Fund (ticker: FOBXX) recorded its first share transaction on the Stellar blockchain. The transaction was unremarkable by most measures — a routine money market fund purchase by an institutional investor. What was remarkable was the infrastructure: for the first time in the United States, a registered investment company under the Investment Company Act of 1940 was using a public blockchain as the official book of record for share ownership. The SEC had approved this arrangement. The operational model worked. And a regulatory precedent of considerable significance had quietly been established.

FOBXX and the 1940 Act Framework

Franklin Templeton did not invent the concept of a blockchain-native investment fund in the United States — several smaller funds had explored the concept — but it was the first to navigate the specific regulatory requirements of the Investment Company Act of 1940 with a blockchain infrastructure component that the SEC explicitly approved.

The critical regulatory moment was the SEC’s acceptance of blockchain-as-transfer-agent for a registered investment company. Under SEC rules, registered investment companies are required to maintain books and records that accurately reflect their share ownership. These records are typically maintained by a registered transfer agent — a specialized financial institution that tracks shareholder accounts, processes transactions, and maintains the official register of fund ownership. Franklin Templeton proposed to supplement its traditional transfer agent recordkeeping with blockchain-based records on the Stellar network, treating the blockchain as an additional, authoritative record of ownership.

The SEC’s approval of this structure — communicated through staff guidance rather than formal rulemaking — established that blockchain-based records can satisfy the recordkeeping requirements of the Investment Company Act when maintained in conjunction with a registered transfer agent. This is a more conservative approval than full blockchain-as-sole-transfer-agent (the blockchain as the only record of ownership), but it established the regulatory precedent that blockchain infrastructure can form part of a compliant 1940 Act fund structure.

FOBXX holds US Treasury securities and government agency obligations — the standard portfolio of a money market fund. What distinguishes it is the distribution mechanism: fund shares are represented as tokens on the Stellar blockchain, and dividends are accrued and distributed through on-chain accounting. The token representation enables peer-to-peer transfer between credentialed wallets, fractional ownership at lower minimum investment thresholds than traditional institutional money market funds, and programmable integration with DeFi protocols that can use FOBXX tokens as collateral or yield-bearing assets in broader financial applications.

BlackRock BUIDL: The Reg D Alternative to the 1940 Act Structure

BlackRock chose a fundamentally different regulatory structure for its USD Institutional Digital Liquidity Fund, known by its ticker BUIDL. Rather than registering BUIDL under the Investment Company Act — which would impose the full regulatory framework of the 1940 Act, including diversification requirements, leverage limits, and public reporting — BlackRock structured BUIDL as a private placement fund exempt from 1940 Act registration under Section 3(c)(7), which exempts funds with exclusively qualified purchaser investors.

The Reg D vs. 1940 Act structural split has significant implications for investor access, regulatory obligations, and distribution economics. BUIDL, as a private fund, is accessible only to qualified purchasers — broadly, institutional investors with at least $25 million in investments. FOBXX, as a registered fund, is technically accessible to retail investors, though its operational distribution through blockchain wallets has focused on institutional and sophisticated investors in practice. The minimum investment for FOBXX shares held on-chain is effectively determined by the platform distributing them, rather than by a regulatory minimum.

The WisdomTree Prime Model and Retail Access

WisdomTree launched its WisdomTree Prime platform in 2023 as a consumer application providing retail investor access to blockchain-native versions of WisdomTree’s registered investment products, including gold-backed exchange-traded products and short-duration Treasury funds. The WisdomTree Prime model is structurally distinct from both FOBXX and BUIDL in that it explicitly targets retail investors with small balances and provides a mobile-first user interface designed for consumer adoption rather than institutional deployment.

The regulatory structure of WisdomTree Prime products relies on the Investment Company Act framework. WisdomTree’s digital fund products are registered investment companies with SEC-approved prospectuses, annual reporting obligations, and independent board oversight — the full apparatus of 1940 Act regulation. The blockchain layer provides transfer efficiency and programmable features; the 1940 Act layer provides the investor protection framework that enables retail participation.

WisdomTree Prime’s growth has been slower than the institutional tokenized fund market, reflecting the challenges of retail adoption of novel financial technology. The platform has processed tens of thousands of accounts and hundreds of millions in transaction volume, but achieving the scale necessary for meaningful market impact requires sustained marketing investment and a retail investor appetite for blockchain-native financial products that remains nascent. The comparison to the early days of robo-advisory adoption — which also faced initial retail skepticism before becoming mainstream — is instructive but not reassuring for short-term growth projections.

What a Tokenized S&P 500 ETF Would Require

The thought experiment that most clearly illustrates the regulatory complexity of tokenized fund shares is the tokenized S&P 500 ETF. Exchange-traded funds registered under the 1940 Act — the dominant retail investment vehicle in the United States, with over $8 trillion in US ETF AUM — present a more complex tokenization challenge than money market funds because of their exchange-listed, continuously tradeable structure.

A traditional ETF trades on a national securities exchange (NYSE Arca, Nasdaq, CBOE BZX) through the creation/redemption mechanism: authorized participants create or redeem ETF shares in large blocks (typically 25,000–50,000 shares) by exchanging in-kind baskets of underlying securities for ETF shares. The exchange listing means that ETF shares must be DTC-eligible — they must flow through the Depository Trust Company’s clearing infrastructure, which does not currently accommodate blockchain-native tokens.

A tokenized S&P 500 ETF would therefore require one of three regulatory accommodations that do not currently exist. First, DTC could accept tokenized ETF shares for book-entry settlement, treating the blockchain token as the canonical instrument in the way that DTC currently treats electronic book-entry records. This would require DTC rulemaking and SEC approval. Second, a national securities exchange could receive SEC approval to list blockchain-native securities that settle outside the DTC system, creating an alternative listing pathway for tokenized funds. Third, a new class of registered investment company — a blockchain-native fund not structured as a traditional ETF — could be registered with SEC approval for listing on a blockchain-native trading venue with an SEC exemption from DTC eligibility requirements.

None of these accommodations currently exist, but each is technically feasible and has institutional support. The SEC’s crypto task force has received formal requests for guidance on all three approaches from multiple market participants. The regulatory timeline for any of these accommodations is uncertain, but the direction of regulatory engagement suggests that at least preliminary guidance is possible within the 2025–2026 period.

The Transfer Agent Question

The mechanics of blockchain-based fund share transfer involve a regulatory question that has received less attention than it deserves: the role of the registered transfer agent. Under Section 17A of the Securities Exchange Act of 1934, any person that maintains the records of securities ownership for registered securities must register as a transfer agent with the SEC.

Franklin Templeton satisfies this requirement through its traditional transfer agent (BNY Mellon) while using the Stellar blockchain as an ancillary record. Securitize holds its own SEC transfer agent registration, enabling it to serve as the registered transfer agent for tokenized securities while using blockchain as the underlying record-keeping infrastructure. This dual approach — blockchain records maintained by a registered transfer agent entity — represents the current market-standard solution to the transfer agent question.

The more radical alternative — a blockchain protocol itself serving as the transfer agent, with no identified human entity assuming the registered transfer agent role — remains legally unavailable in the United States. The SEC has not indicated willingness to accept decentralized protocols as registered transfer agents, and the agency has consistently emphasized that identifiable registered persons must maintain accountability for securities recordkeeping.

Institutional Adoption Drivers and the DeFi Integration Thesis

Beyond the regulatory mechanics, the institutional adoption of tokenized fund shares under the 1940 Act framework is driven by a set of economic and operational incentives that become more compelling as the infrastructure matures.

For asset managers, tokenization of 1940 Act fund shares provides distribution efficiency: blockchain-native fund shares can be distributed directly to investor wallets without traditional broker-dealer intermediation, compressing distribution costs. The programmable dividend distribution of FOBXX — which accrues and distributes daily dividends to token holders through on-chain accounting — eliminates the traditional dividend posting process that requires coordination between the fund’s transfer agent, the clearing system, and investor accounts.

For institutional investors, tokenized fund shares serve as high-quality, yield-bearing collateral that can be deployed in DeFi protocols and blockchain-based margin arrangements. BUIDL tokens have been used as collateral in structured finance transactions where the counterparties required on-chain settlement. FOBXX tokens have been integrated into DeFi protocols that use them as a stable, yield-bearing base asset. These applications create demand for tokenized fund shares that does not exist for their traditional equivalents — adding an entirely new source of institutional demand beyond the traditional fund investment use case.

The convergence of regulatory clarity, institutional demand, and maturing infrastructure positions tokenized fund shares as one of the most credible near-term growth categories in the US tokenized securities market. The FOBXX and BUIDL structures have established the proof points. The remaining questions are about scale, competition, and the pace at which traditional fund distribution channels integrate blockchain-native infrastructure.