Things to Consider in Blockchain Investment Funds

The Rise of On-Chain Investment Funds

In the past year, the asset value in blockchain-based funds has risen from 11.1 billion dollars to 30 billion dollars. New players like VanEck, Fidelity, BNP Paribas, and Apollo have launched on-chain investment funds. New initiatives are ongoing.

Blockchain trading and digital asset products have the potential to be a new trend in the investment world with promises of lower costs, faster transactions, and increased efficiency. However, past experiences require investors to be cautious. The SPAC boom, the non-traded REIT craze, and the wave of cryptocurrency ICOs have offered great opportunities while disappointing investors.

Risks and Opportunities

History shows that when exaggerated expectations meet new distribution channels, opportunists enter the market with risky and costly products. In digital markets, how new technologies are utilized poses significant risk. Blockchain has the potential to reduce costs, increase transparency, and create innovative investment instruments. However, as these funds become more widespread, the same technology may be used to reintroduce previously failed strategies or to charge high fees under the guise of “digital innovation.”

Investors should pursue genuine improvements as well as simple financial structures and low costs. For example, BlackRock's tokenized money market fund charges investors 20 to 50 basis points in management fees, while its traditional version only demands 0.12 basis points. This means it is 42 times more expensive.

Product Scrutiny

Investors should think critically about products that transition to on-chain. Does the product truly benefit all parties, or is blockchain being used for the distribution of complex and ambiguous products? The sudden emergence of private funds as “private blockchain offerings” may indicate that they were previously closed to retail investors. Initial product innovations have generally focused on simple fund structures.

Another point to consider when investing is the effectiveness of the structure that constitutes the product. A security directly created on the blockchain should be more efficient and reduce operating costs. However, a tokenized security is often a reflection of an existing asset on the blockchain and it should be noted that this can increase operating fees.

Market Innovation and Security

True democratization of the capital markets means broader access and lower entry barriers for investors, but without compromising investor protections. Recently, Moody’s credit rating agency conducted a test that integrated municipal bond ratings into tokenized securities. Such projects have the potential to provide transparency.

Paul Atkins, the Chairman of the U.S. Securities and Exchange Commission (SEC), highlighted the importance of blockchain technology in modernizing certain aspects of the financial system. Companies must be careful in pursuing these goals while maintaining investor protections.

In conclusion, investors should exercise the same caution and diligence in digital markets as they do in traditional markets. The need to read fund prospectuses, question cost ratios, and obtain data from reliable third parties is also applicable in digital markets. If investors observe these standards, digital markets can provide the desired efficiency and true innovation.