Tokenization

Tokenization is the process of representing an asset or an interest in an asset using a digital token on a blockchain or similar distributed ledger. Tokenized securities are securities—such as stocks, bonds, or fund interests—whose ownership records use that technology in whole or in part. The token’s legal rights depend on its structure.

In alternative investments, tokenization can change how investors hold and transfer fund interests. It does not, by itself, change the fund’s investment strategy or turn an illiquid portfolio into a liquid investment.

How tokenized securities work

A digital wallet identifies where tokens are held. Blockchain records may form part of the official ownership register or communicate transfers to an offchain register. Investors should establish which record legally controls ownership. The SEC staff’s Statement on Tokenized Securities distinguishes issuer-sponsored tokenization from third-party arrangements, including custodial interests and synthetic exposure.

A token issued by a company or fund may represent its own security. A third-party token may represent an indirect interest in securities held in custody, or a separate obligation linked to their value. Synthetic exposure does not necessarily provide ownership or voting rights in the referenced company. A tokenized security also need not constitute a separate share class.

Tokenized funds and alternative investments

A tokenized fund uses blockchain infrastructure for interests in an investment vehicle. Tokenization describes how those interests are recorded or transferred; it does not identify the fund’s asset class. The portfolio might hold government securities, private loans, real estate, or other investments.

For example, the Franklin OnChain U.S. Government Money Fund uses the BENJI token and blockchain recordkeeping for a registered money market fund. Its tokenized format does not make it a cryptocurrency investment strategy. Franklin’s platform also supports transfers between eligible shareholders, illustrating how fund shares can have uses beyond a conventional brokerage account.

When evaluating a tokenized alternative fund, identify the entity whose interests the investor receives. Direct fund shares and interests in a feeder fund carry different claims: a feeder is a separate vehicle that invests in another fund. Its fees, eligibility requirements, and withdrawal terms require their own review. Tokenizing a fund interest does not necessarily tokenize each asset in its portfolio.

Liquidity and transfer restrictions

Investors should distinguish three questions: Can the token be transferred? Can a buyer be found at an acceptable price? Can the fund redeem or repurchase the investment? These are separate sources of flexibility.

The Arca U.S. Treasury Fund prospectus, for example, describes digital shares that can trade on an alternative trading system while warning of limited liquidity. A trading platform can exist without providing a deep market. Blockchain settlement does not eliminate discounts, transfer restrictions, or the need for counterparties.

Review wallet eligibility, transfer approvals, custody arrangements, fees, repurchase terms, and procedures for lost keys or erroneous transactions. Technology introduces operational risks alongside the risks of the underlying investment.

Regulation of tokenized securities

In the United States, using a token does not remove applicable securities-law requirements. Whether an offering must be registered or can use an exemption depends on its legal structure and circumstances, rather than its digital format.

The SEC’s September 2026 Innovation Exemption provides temporary, conditional relief for certain venues and liquidity providers trading tokenized National Market System stocks. It also permits tokenized money market funds as trading-pair assets alongside those stocks. The order does not provide Investment Company Act relief or general permission to trade every tokenized fund. Fund structure, investor eligibility, and trading arrangements still require separate analysis.

Tokenization should be evaluated alongside the investment’s legal structure and access requirements. Explore Alternative.Investments’ guide to fund structures and asset classes for related entries on interval funds, tender offer funds, accredited investors, and qualified purchasers.