ELI5 What are Tokenized Funds?

Gal Crypto

5 years ago

Imagine investing in a cryptocurrency token that is automatically tied to an investment fund located anywhere in the world?

Something like owning shares of a startup, but instead of signing papers and joining venture capital hedge funds, all you had to do was to buy some cryptocurrency tokens.

This isn’t fiction – it’s the reality of tokenized funds.

Tokenized Funds

So, how do Tokenized Funds work?

Investopedia has a nice article about tokenized equities, you should definitely read it for a great introduction to the topic.

Here’s our tl;dr; explanation of tokenized funds and how you might be able to benefit from them in the future.

Technically there’s nothing new under the hood. A hedge fund will issue tokens via a smart contract running on the Ethereum or some other 2nd generation cryptocurrency blockchain.

The real difference from other tokens is in the bureaucracy: these tokens will legally represent shares in a fund that invests in startups or other equities.

Each token represents a certain number of shares, determined by a fund statute which legally registered within some jurisdiction.

The smart contract will then implement the fund statute on a public blockchain so everyone can check it for compliance. For example, the fund would only be able to issue more shares and tokens when the board authorizes it, which is typically when more funds are raised.

Regulation

If there’s nothing technically different between a tokenized fund and other various tokens, then as you can imagine the difference will be in the regulatory framework.

Starting an investment fund in Europe or USA is not a simple task. Regulatory requirements are strict. But as with everything else in cryptos, you can start a fund anywhere in the world. Ideally you’d choose a crypto-friendly nation.

Currently the nations attracting most crypto investments are British Virgin Islands, Singapore, Bermuda, Malta and Cayman Islands.

You can search for specifics on each of these nations – there’s plenty of material available on how to start your tokenized fund in these territories. (The purpose of this article is to give you an overview, so we won’t go into all the nitty gritty details.)

Last year over U$ 21 billion were raised by token emissions. It’s a lot of money, especially considering that most Fortune 500 companies started out with thousands of times less capital than that. There’s enormous potential in tokenized funds.

It’s also so easy to buy and sell these tokens – if you stick to cryptocurrency-only you might not even need to do KYC in some exchanges (though admiteddly in most US and Europe based exchanges you’ll have to submit ID and passport).

Now this is where it gets really exciting: when you’re buying or selling a fund token, you’re actually selling a piece of a startup or established company somewhere! It’s the definitive union between ICO’s and venture capital. That symbol stored in some blockchain actually represents a piece of something and it may become really really valuable one day.

If Apple, Microsoft, Facebook and others were funded with primitive instruments and got this big a few decades later, can you imagine the potential of tokenized funds? Raising money for great ideas globally? This is the future. If I’ve ever said that before, I’d never said it with this much confidence.

Stay tuned for developments in tokenized funds – this is big and it’s very likely to explode in the coming years.