Understanding BlackRock’s tokenized fund experiment BUIDL: model, status quo and difficulties

Written by DigiFT

Summary

• Introduction: On March 20, 2024, BlackRock, a well-known asset management company,Token化平台 Securitize 合作，发行了Token化基金 BUIDL（BlackRock USD Institutional Digital Liquidity Fund），进一步扩展其在 Web3 领域的影响力。这一举措紧随其比特币现货 ETF 的批准，标志着主流cryptocurrencyThe tokenized fund BUIDL represents a significant step forward for traditional institutions to leverage publicBlockchainTechnology improves operational and capital efficiency, heraldingBlockchainWider adoption of technology.

• Problems solved by tokenized funds: Traditional publicly issued funds, such as money market funds, involve the operations of multiple institutions, resulting in inefficiencies and high costs due to independent databases.BlockchainTokenized funds eliminate the need for centralized registries and reduce costs by providing real-time, traceable transaction records. They enable real-time atomic settlement and secondary market trading, improve capital utilization and provide higher returns. Tokenized funds also support the use of smartcontractIt can be used for various applications such as staking and lending.

• Large institutions enter the public chain: The DeFi field demonstrates the advantages of blockchain, but the transfer of traditional financial capital to Web3 faces huge resistance. Fund tokens with KYC and AML compliance whitelist controls demonstrate the efforts of mainstream institutions to explore DeFi. Examples include Franklin Templeton's FOBXX and WisdomTree's WTSYX, which initially used blockchain for auxiliary bookkeeping. BlackRock's BUIDL marks a breakthrough by using public blockchain as the main bookkeeping tool in cooperation with Securitize as a regulated transfer agent.

• BUIDL design and performance: BUIDL is issued as an ERC20 token on Ethereum and supports real-time on-chain transfers within the whitelist.contract, and provides real-time USDC redemption through Circle. As of July 9, 2024, BUIDL's assets under management reached $502.8 million, held by 17 addresses, including significant participation from institutions such as Ondo Finance. BUIDL promotes the integration of DeFi, allowing stable real-world returns to flow into the DeFi space.

• Challenges and Future Outlook: Despite BUIDL’s success, it still faces significant regulatory and compliance challenges. The tokenization of assets faces conservative regulation around the world, limiting issuance to accredited investors. However, initiatives by BlackRock and Franklin Templeton are drawing attention to the efficiency of on-chain interactions and driving the development of new laws and standards.

On March 20, 2024, asset management giant BlackRock has further laid out Web3 since the issuance of the Bitcoin spot ETF. Through cooperation with the US-based tokenization platform Securitize, it issued the tokenized fund BUIDL (BlackRock USD Institutional Digital Liquidity Fund).cryptocurrency作为一种新型资产类型，纳入到广大合规资金的投资领域，是对加密货币作为一类资产的认可。代币化基金的更大意义在于，传统机构在尝试以区块链中的公链为底层的新技术，来提升运营和资本效率，是对区块链这项技术技术的认可和采纳。

Compared with traditional funds, what problems can tokenized funds solve?

The funds that investors are widely exposed to are generally public funds. Due to their low threshold, wide coverage, and large amount of funds, such funds, such as money market funds, are strictly regulated. If there are no special regulations, generally speaking, the fund operation process involves the coordination between multiple institutions. Each institution is responsible for a part of the process behind the fund operation, improving efficiency through operational specialization and avoiding excessive concentration of power in a single entity, which may lead to evil. The whole process from beginning to end roughly includes: fund distribution channels (banks, securities firms, financial advisors), fund administrative management, transfer agents, fund audits, fund custody,exchangewait.

However, the inconsistency of the databases of all parties in the process has caused a lot of friction and costs. Generally speaking, every subscription and redemption of a fund involves various institutions in this chain. The order information will be transmitted manually or automatically, and the funds will be delivered through the settlement system. Therefore, it often takes several days to settle a fund subscription.

Through fund tokenization, fund shares are issued and traded on the public chain in the form of tokens, and shares enter investors directly in the form of tokenswallet, shares and net worth can be viewed publicly on the chain, and all transaction records are accessible and queried on the blockchain, recorded in real time and automatically, eliminating the need for centralized registration and avoiding the cost of multiple parties checking back and forth.

After tokenization, the distribution platform cancontract, to achieve real-time atomic settlement between fund share tokens and payment tokens (such as various stablecoins) to reduce the waiting time for investors. If the fund tokens realize the secondary market on the chain, investors can directly enter and exit the secondary market in real time, which can reduce the redundant funds retained by the fund to meet redemption, thereby improving the fund's capital utilization efficiency and creating higher returns; investors can obtain efficient trading experience through the secondary market with real-time settlement on the chain, avoiding the waiting period for subscription and redemption.

In addition, tokenized funds can be combined with more application scenarios, such as supporting staking, lending and other business scenarios through smart contracts, thereby meeting a wider range of user needs.

Institutional attempts to enter the public chain - from auxiliary tools to main ledgers

The DeFi scenario fully demonstrates the advantages of blockchain, but in order to transfer the vast traditional financial funds from a complete system of Web2 to a new system based on Web3 technology, there is still huge resistance in the middle. It needs to be gradually promoted and overcome, and new practical solutions need to be explored.

Due to compliance, especially KYC and AML requirements, unlike common cryptocurrencies, fund tokens usually have a whitelist mechanism. Each whitelist address corresponds to a user who has passed KYC on the fund platform, and transactions with non-whitelisted addresses cannot be executed. For example, the free transfer function between addresses, the transfer risk, fund loss risk, transaction monitoring and other issues derived from it, will be a difficult limit to break through before the emergence of risk control solutions.

But we have noticed that mainstream asset management institutions are also exploring the DeFi field, trying to transform their products in combination with the characteristics of blockchain technology. We can see the trajectory of evolution in their product design.

In 2021, the US asset management giant Franklin Templeton issued the tokenized fund Franklin Onchain US Government Money Fund — FOBXX. In the original design, the tokens were actually officially recorded by the transfer agency on a private database system, and secondary records were made on Stella and Polygon. If there is a conflict between the centralized accounting and the public chain accounting, the centralized accounting will be used as the main method. Investors trade fund share tokens through Franklin's APP. Each user will be assigned an on-chain address, but investors cannot transferwalletIn 2022, WisdomTree also issued a similarly designed tokenized fund WTSYX on the Stella blockchain that invests in short-term U.S. Treasury bonds.

The design of FOBXX and WTSYX actually only uses blockchain as a tool to assist in bookkeeping and makes share records public, but does not achieve any actual benefits.

In March 2024, BlackRock achieved a major breakthrough in the issuance of BlackRock USD Institutional Digital Liquidity Fund (BUIDL) through the tokenization platform Securitize. Part of the reason for this is that Securitize, as a regulatory-approved registrar (transfer agent), can use the public chain as the main accounting tool to record the ownership and change records of issued assets.

Deep Dive into BUIDL Design — Obstacles and Improvements

According to the BUIDL release document, the basic release information is as follows:

• Issuer: BlackRock USD Institutional Digital Liquidity Fund Ltd. (BlackRock’s BVI entity, established in 2023)

• Registration exemption: SEC Reg D Rule 506(c), Section 3(c)(7) (Reg D is an exemption for securities issuance that allows fundraising from qualified investors with no restrictions on the number of investors and the size of the fundraising)

• Registered securities type: Collective investment (pooled investment fund

• Investment threshold: Qualified Purchaser.

• Minimum investment amount: 5 million USD for individual investors; 25 million USD for institutional investors

• Issue size and investor size: Unlimited

At the time of issuance, the only distribution channel was Securitize Markets, LLC, a securities broker registered with the SEC. In addition, Securitize, LLC, a related entity of Securitize, is a transfer agent registered with the SEC and is able to register and record the ownership of securities on the blockchain.

It is worth noting that the fund was issued using a newly registered BVI entity of BlackRock, rather than its regular fund issuing entity. This setting may be due to risk considerations to avoid affecting the compliant entity as much as possible. In addition, the four relevant persons involved in the SEC registration documents are Ian Pilgrim in Bermuda, Jennifer Collins in Cayman, W. William Woods in Canada and Nolle L'Heureux in California, USA. Among them, only Nolle L'Heureux is the Managing Director of BlackRock, who has worked at BlackRock for 32 years. The other three should belong to third-party institutions.

BUIDL Product Design

• Trading Currency: USD and USDC

• Subscription and redemption: Daily subscription and redemption

• Strategy: Invest mainly in short-term government bonds

• Net value of share: 1 BUIDL = 1USD

• Token standard: specially designed ERC20 with a whitelist mechanism design. Tokens can only be circulated in whitelist addresses. Transfers and transactions to addresses outside the whitelist will fail.

• Revenue calculation: Revenue is recorded based on the shares held by the address at 3:00 p.m. Eastern Time every working day, and revenue is distributed through the issuance of additional BUIDL tokens and airdrops on the first working day of each month.

• Redemption rules: Daily redemption, redemption on the same day is based on the number of BUIDL tokens held at 1 BUIDL = 1 USD; direct redemption through Securitize requires sending tokens to a designated address, and then destroying BUIDL and completing the off-chain USD redemption operation at 3 pm every working day, and the general redemption is T+0. The accumulated income from the last dividend payment needs to initiate a "full redemption" operation, and the full redemption will be completed 2-3 working days after the interest is paid (the first working day of each month).

BUIDL is an ERC20 token issued on the Ethereum blockchain. It can be freely transferred within the whitelist and can also enter the smart contract of the whitelist. Interactions with addresses outside the whitelist will fail. For DeFi users, a simple step is actually a major breakthrough in traditional finance. This means that large institutions have begun to recognize public chains and use them as accounting tools to register asset ownership transfers and changes. A series of rights and interests based on ownership will also be recorded in the public chain ledger, enjoying its openness, transparency, efficiency and traceability.

By opening the transfer function, BUIDL has enjoyed the advantages of the blockchain-based settlement system to a certain extent. One of the use cases is provided by Circle, which released a contract that allows real-time BUIDL to be exchanged for USDC after BUIDL was released, and prepared a redemption reserve of 100 million USDC to provide BUIDL holders with the option of real-time 1 BUIDL = 1 USDC redemption.

This redemption option is provided by Circle and is essentially an OTC transaction: Circle provides an exchange contract (Redemption address in the figure below). When users transfer funds to the exchange contract, it will trigger the contract to transfer USDC in another EOA account (holder address in the figure below) to the user's address. These steps are all on-chain transactions with atomic settlement.

Figure 1: USDC redemption contract flow chart provided by Circle for BUIDL

At the beginning of its establishment, the EOA account had a balance of 100 million USDC. Here, since the daily interest of BUIDL tokens is realized through centralized accounting, if USDC is exchanged through the Circle contract, it is a transfer from the perspective of the issuer BlackRock. Therefore, the interest recorded daily between the last dividend payment and the time of the transfer will also be paid at the next dividend payment time. After the BUIDL is exchanged, Circle will hold BUIDL, and subsequent operations will be decided by Circle. From the current on-chain information, Circle will redeem BUIDL from time to time through Securitize in exchange for USD, and then mint USDC and add it to the fund pool.

Three months after launch, what is the current status of BUIDL?

On May 15, 2024, BUIDL's AUM (Asset Under Management) exceeded Franklin Templeton's tokenized treasury bond fund FOBXX, becoming the largest tokenized fund project. As of October 17, 2024, the total asset management scale reached 557 million USD. However, compared with the trillion-dollar scale of the traditional market, the overall tokenized treasury bond product fund scale is only 2.35 billion USD, and there is still a lot of room for growth. (Data source: RWA.XYZ, October 17, 2024)

Currently, BUIDL is held by 27 addresses, and the holding ratios of each address are as follows:

Figure 2: BlackRock BUIDL token holdings distribution (data as of October 17, 2024)

Securitize allows each customer to bind up to 10 on-chain whitelist addresses. Among the above 27 addresses, 2 of them belong to Ondo Finance, the largest holder, with a total of 216M BUIDL, worth 216M USD. The two addresses are 0x72, holding approximately 164 million BUIDL and 0x28, holding 51 million BUIDL, which are the underlying assets of its tokenized treasury fund product OUSG (asset management scale 216 million M USD). Previously, the underlying assets were BlackRock iShares' short-term treasury bond ETFs, which were all converted to BUIDL after the issuance of BUIDL. Currently, the redemption operation of OUSG realizes real-time USDC redemption through Circle's redemption contract.

In addition, because BUIDL cooperates with several crypto custodians, multiple addresses on the chain are displayed as EOA addresses with no historical transaction records, or traditional institutions invited by BlackRock and Securitize to cooperate in trying to tokenize fund purchases and are held in the accounts of these custodians.

The USDC redemption pool provided by Circle currently has a balance of 80.03 million USDC, with the main redeemer being Ondo Finance. The Circle address (0xcf) also holds approximately 19.96 million BUIDL.

Figure 3: The amount of USDC held by the BUIDL USDC redemption contract, data as of October 17, 2024.

The DeFi Path of Financial Institutions

Due to the investment threshold set by BUIDL, it is difficult for ordinary users to directly obtain BUIDL. However, BlackRock willSafetyThe issuance of money market funds on the chain allows other institutions to introduce stable returns from the real world into the DeFi world by using BUIDL as the underlying raw material.

A typical example here is Ondo Finance. As mentioned earlier, Ondo is the largest holder of BUIDL. Through BUIDL and the redemption contract provided by Circle, Ondo Finance has achieved the rapid subscription and redemption of the money fund product OUSG through USDC, while lowering the threshold for users to obtain it, from the starting investment threshold of 5 million USD to 5,000 USD. At the same time, Ondo can cooperate with other DeFi protocols to further transfer the income to the DeFi world, such as through DeFi lending platforms such as Flux Finance, anonymous DeFi users can also obtain real-world income. Such a layered packaging structure can direct the real-world income provided by traditional large institutions to the DeFi world.

Institutional full entry? Faced with numerous obstacles

Products like BUIDL improve the liquidity management efficiency of money market funds through the design of combining on-chain and off-chain, and provide investors on the chain with a channel to obtain real-world returns. BlackRock tokenizes funds and cooperates with related Web3 institutions such as Securitize, Circle, and Ondo Finance to enable Web3 institutions to obtain real-world returns in the form of tokens on the public chain, avoiding complicated deposit and withdrawal processes, and achieving interoperability through smart contracts to increase application scenarios and improveXiaobai NavigationEfficiency of capital utilization.

In fact, one of the things BUIDL does here is to allow tokens to be directly transferred on the chain without going through a centralized institution. Behind the simple transfer function, the compliance and legal costs are very high. It is difficult to transfer between different accounts in traditional financial platforms, and even accounts with the same name are very difficult. Generally, financial institutions only allow transactions, subscriptions and redemptions on the platform. One month after BlackRock implemented the transfer function, Franklin Templeton's FOBXX also implemented this function, indicating that the institution recognizes the public chain as a ledger, which is also a breakthrough at the product level. (The difference is that FOBXX holders do not have control over the address private key, so they can only transfer within the platform and cannot perform real on-chain operations).

From the perspective of asset tokenization regulation in different countries and regions, the current regulation is conservative: the United States has no clear legislation, so asset issuers only use various exemption clauses, and BlackRock also avoids affecting its own compliance entities by setting up an SPV in BVI. In other regions, such as Singapore, asset tokens are subject to whitelist restrictions and can only be issued to qualified investors. These restrictions and uncertainties hinder users and institutions from further entering the field of Web3.

On the positive side, companies such as BlackRock and Franklin Templeton have delved into the field of tokenization, attracting a great deal of attention from the financial community. They have used real cases to demonstrate the high efficiency of on-chain interactions, while promoting regulation to advance the formulation of new laws and standards.

The article comes from the Internet:Understanding BlackRock’s tokenized fund experiment BUIDL: model, status quo and difficulties

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