The Tokenization Gap: Everyone Is Curious. Almost Nobody Is Ready.

By Ravi Gupta, Chief Strategic Solutions Officer, NAV Fund Services

Nearly every week for the past year or so, my team and I get calls from fund managers who want to talk about tokenization. What has changed recently, however, is WHO is calling. A year ago, these conversations were dominated by crypto-native managers, but now the calls are coming from traditional asset fund managers who have previously kept their distance from anything blockchain-adjacent. These days, managers associated with funds running the gamut from private credit portfolios and money market funds to fixed income strategies want to know how tokenization could fit into their strategies.

That tells me something. It tells me that tokenization is moving from being just a crypto experiment to a real and broader structural consideration for fund management. But that transition also exposes a problem: there is currently no blueprint for implementing tokenization with traditional funds — not operationally, nor in the regulatory space. Every engagement that I've been involved with ends up starting from the ground up and no two implementations look alike.

It starts with a question most managers haven't fully answered

When I meet a manager, before we even get into details like technology or vendors or smart contracts, the first question I always ask is: "What are you actually trying to achieve?"

The answers vary more than most people might expect. Some managers just want to unlock a new investor base. For example, crypto-native investors hold capital that traditional fund structures cannot reach, and tokenized shares could be a way into those opportunities.

Others are drawn more to the liquidity of tokenized funds and the ability to offer 24/7 or near continuous trading in contrast to the monthly or quarterly operational windows they’re accustomed to.

Someone else may have an interest in secondary market functionality, in which any existing investor can buy and sell tokens among themselves or via an alternative trading system.

And then there are the managers exploring DeFi applications that enable investors to collateralize their tokens, borrow against them, and reinvest.

There are many more variations on those themes. A manager who just wants access to a crypto-native investor will likely have a relatively simple implementation, whereas a manager who wants to enable token collateralization will be building something brand new that didn't even exist in fund structures a year ago.

In essence, tokenization is not a single product. The key elements of a tokenized fund are dependent on the goal — the operational infrastructure, the vendor relationships, the compliance workflows, the smart contract design — any or all of it can change based on the end result the fund manager is trying to achieve. The choices made during the first few weeks scoping the project will define what is possible for the life of the fund.

How much know-how does tokenization require?

Actually, much more than most people assume. I have been involved with implementations for institutional clients that required a year or more, with much of that time spent on tokenization education. We also devote a significant block of time to discussing, refining, and finalizing a clear set of goals with the client team, which can sometimes include dozens of stakeholders. We consider it a key part of our role to commit the time and effort to support our clients' success by making sure they are fully informed, understand the ecosystem, and are clear about the process at the outset, before we have a single conversation about the specifics of our services.

Client teams always have a wide variety of questions, reflecting their roles and initiatives within the organization. We may cover how crypto transactions work and how money moves between fiat and digital rails, to what happens when an investor subscribes during banking hours versus over a weekend. The compliance piece alone often requires several weeks to work through.

Once we get to the technical questions, those can also get deep really fast. When do you publish a Net Asset Value for a fund in which investor activity is continuous but underlying assets trade on a traditional schedule? If an investor subscribes at 10 am, then tries to redeem at noon but the fund has not meaningfully deployed the capital in those two hours, how do you price fairly without opening an arbitrage window?

As with all considerations associated with tokenization, there are different potential solutions and individual funds solve them differently. Some choose to hold cash reserves in stablecoins. Some use market makers and structure the liquidity layer almost like an ETF. Others may decide to trade crypto-native assets in which the timing mismatch is less severe. There is no standardized approach and nothing is plug and play

In short, the learning curve is real. That's not a reason to avoid tokenization, but it is a reason to allow for plenty of time to develop a knowledge base, carefully consider the impact various decisions may have on your fund, and build a solid plan before taking the next steps toward your anticipated launch.

Four misconceptions I keep hearing

1. Everything is automated on the blockchain

   If I only had a dollar for every time I've heard this statement! Yes, subscriptions and redemptions can be processed on chain. But the vast majority of funds that are exploring tokenization today are not trading crypto-native assets. They are trading loans and treasury bills, repos, private credit, or equities. None of those live on a blockchain. The investor-facing mechanics may be digital, but the investment-side operations remain traditional. You will still need brokers, accounting, NAV calculations, and service-level agreements.

   Even standard functions like cash management are more complicated with a tokenized fund than many people realize. For example: let's say an investor sends USDC stablecoins on a Saturday. The fund can't buy Treasury bills with crypto, so a conversion process and deployment timeline need to take place before that capital is working. Meanwhile, how do you decide how much money you hold liquid for weekend redemptions versus putting it to work to start earning returns? These are the type of operational questions that need human judgement, not just smart contracts.

2. All smart contracts work the same way

   They do not. In well-designed implementations the rules governing a token — like the holding period, transfer restrictions, and compliance checks — are written into the smart contract itself. That means the token carries its own logic.

   However, some platforms may do it differently, creating a "dummy token" that runs all the logic through a traditional Web 2.0 portal. The token itself is inert and the rules live in the platform software, not encoded into the token smart contract. This setup can create two challenges: It limits what investors can do with the tokens outside the platform, and secondly, it creates a lock-in. If a fund manager wants to switch the smart contract provider in the future, they cannot take their tokens with them since they will only function on the platform that issued them initially.

3. Tokenized funds enable increased flexibility

   This is the element that many fund managers may misunderstand and underestimate. In traditional fund structures you can switch administrators and operational processes relatively easily. With tokenized funds, the architectural choices you make at the start become pretty much baked in. Changing them after launch can range from difficult to virtually impossible. That's what makes the project scoping phase the single most consequential part of the entire process, but it's rarely treated with the appropriate significance.

4. You have to launch a new fund

   Not true. You can find and work with service providers to tokenize a share class of an existing fund and avoid requirements for a new legal entity and new fundraising. Most managers NAV works with are launching new structures, but for those interested in tokenization without committing to a full new fund launch, appropriate solution paths exist and they work!

Compliance gets harder, not easier

Many managers assume blockchain structures will simplify compliance. In my experience, the opposite happens. Think about it — in a traditional fund, if an investor is missing documentation or their risk score goes up, you have time to run enhanced due diligence before processing their redemptions. However, in a tokenized fund, the investor can perform redemption through the blockchain on their own.

If that investor's compliance status has changed since joining the fund and your smart contracts whitelist is not up-to-date, the money can be gone before you have the opportunity to act. Smart contracts must be designed with the ability to blacklist and whitelist investors in real time as risk scores change.

Also, regulatory frameworks are still being written across global jurisdictions by entities like the Securities and Exchange Commission (SEC) in the United States, the Financial Conduct Authority (FCA) in the United Kingdom, and various European Union bodies. While they may broadly track traditional fund regulations, they often add layers of tokenization-specific requirements that managers need to consider and plan for from the beginning.

Consequently, specific fund administration expertise with tokenized funds is not optional. The compliance infrastructure is not only more complex than traditional funds, but the margins for error are much smaller because everything moves faster in the tokenized world.

Where tokenization works best right now

While tokenization is riding the hype cycle, not every strategy is a good fit. The strongest traction I see is with money market, private credit, and fixed income funds. The liquidity upside is clear for these strategies, and the operational mechanics are far more developed than for other asset classes.

It's a different story for real estate, private equity, and venture capital funds. Sure, you can tokenize a real estate fund and an investor can sell their tokens on the blockchain, but the fund still owns the property. In this case, the liquidity advantage of a tokenized fund conflicts with the illiquidity of the underlying asset. Structures in scenarios like that may have a marketing moment right now, but institutional interest is primarily in strategies where tokenization can offer tangible and sustained benefits.

One related point: stablecoins, the USDC in particular, have become the primary investment vehicle for tokenized fund subscriptions, which helps solves two issues: timing and volatility. For instance, an investor can use stablecoins to send capital outside normal banking hours, which fiat wires simply cannot do. And, because their value is pegged to the US dollar, there is no volatility in stablecoins in the span from subscription to deployment. This piece of infrastructure detail may be easy to overlook, but it's what makes many of the day-to-day mechanics of a tokenized fund’s operations actually work smoothly and efficiently.

How interested fund managers should start

If you are interested in exploring tokenized funds, start with a conversation. You don't need a finished plan. You don't even need a launch date. Since there may be a knowledge gap to address and because discovery and infrastructure design choices are so much more critical than in traditional funds, starting early gives you plenty of time to get up to speed and make informed and optimal decisions from square one.

Beware the somewhat natural temptation to try to fast-track a tokenized fund with an off-the-shelf solution that requires you to adapt your operations and objectives to its parameters and constraints. I have personally seen what can happen when managers rush to market on a pre-built tokenization template. They find themselves hitting serious limitations and investor frustration after launch, and by that time the architecture is locked in. Trying to fix it, with no guarantee that workable fixes are even possible, ends up costing more — to your budget and your reputation — than creating a custom system from scratch aligned to your specific needs.

Also consider that the service provider ecosystem required for a tokenized fund (custodian, oracle, smart contract developer, fund administrator) can range from adequate to great. Build space in your pre-launch planning to carefully consider your options.

Your best shot at success it to assemble a roster of experienced partners who have collaborated on successful implementations and are knowledgeable with both traditional and digital asset funds. Make sure they are committed to working with your team and each other to invest serious time defining your tokenized fund's goals and supporting you through critical planning and decision making before a single line of smart contract code is written.

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Ravi Gupta is Chief Strategic Solutions Officer at NAV Fund Services, where he leads product development strategy and works directly with institutional clients on tokenized fund implementations. NAV administers $450 billion in total assets across 2,550+ funds globally, including one of the largest portfolios of digital asset funds in the industry. NAV's digital assets team administers more than $45 billion in assets for 1,000+ digital asset funds. NAV has consistently been recognized with industry awards for global achievement in digital assets fund administration services, including most recently as Best Administrator - Digital Assets at the With Intelligence HFM Asia Services Awards; Best Digital Assets Provider in the With Intelligence HFM US Services Awards, and consecutive wins as Administrator of the Year - Overall in the Hedgeweek Global Digital Assets Awards.