New financial products come with familiar risks, and investment funds issued on blockchain are not immune. Assets in blockchain-based funds nearly tripled in one year, from $11.1 billion to nearly $30 billion. New entrants VanEck, Fidelity, BNP Paribas, and Apollo recently launched on-chain investment funds. Others are coming too.
Blockchain-based, digitally native securities products have the potential to become the next big investment trend by leveraging technology to create lower-cost, faster, and more efficient financial products. But as history has shown, investors need to be wary of succumbing to the same traps that defined past manias.
The SPAC boom, non-traded REIT craze, and wave of crypto ICOs all promised to democratize access and finance, but they were largely out of reach for investors. What these events have revealed is worth remembering now. When new distribution channels collide with hype, opportunists often rush to bring in products that are riskier, more expensive, or less transparent than their competitors.
The risk for investors in digital markets is how new technologies are used. Blockchain has the potential to reduce costs, increase transparency, and unlock new and novel investment avenues. But as blockchain-based funds move into the mainstream, the same technology could be used to recycle failed strategies or justify high fees under the guise of “digital innovation.” The result could be products that offer no material improvement over traditional equivalents, or worse, impose higher costs and weaker protections on investors.
Investors should remember the following adage: Timeo Danaos e Donan Ferentes – “Beware the Greeks with Gifts.” While genuine blockchain-native instruments may offer potential improvements such as more efficient pricing and recurring yields, investors should continue to be wary of products that evoke the promise of blockchain by simply rebranding old financial structures without offering any meaningful benefits.
The challenge for investors is to separate real progress from Odysseus’ Trojan Horse.
One useful test is pricing. Post-trade processes running on blockchain rails should replace intermediaries to reduce costs. If the total expense ratio is higher than its traditional counterpart, buyer beware. Prominent digital asset commentator Stephen Deal calculated this as follows:
“BlackRock’s tokenized money market funds charge investors 20 to 50 basis points in management fees. The non-tokenized version charges a fee of just 0.12 basis points, which is up to 42 times higher.”
Investors shouldn’t pay more for buzzwords.
Find out which products are moving on-chain and why. Are issuers tokenizing their products because it offers real benefits to all parties, or is blockchain just a new distribution channel for overly complex and opaque products? Private funds, previously prohibited to retail investors, should not suddenly make a comeback as “proprietary blockchain products” charging institutional-level fees for illiquid underlying assets. There’s a reason why early product innovations focused on simple fund structures, such as money market funds.
Products with suspiciously high returns or opaque investment strategies should be subject to increased scrutiny.
The structure of your product also tells a story. Security issued natively on-chain at the time of issuance should be more efficient and reduce operational overhead. Tokenized security, on the other hand, is an existing asset that is mirrored onto the blockchain, often mirroring TradFi costs by preserving the product’s off-chain processes and attributes. Issuers need to be clear about the structure of their on-chain products and what this means for costs, shareholder rights, and liquidity.
True democratization of capital markets means widening access to investors and lowering barriers to entry, without sacrificing investor protection. But don’t just take the industry’s word for it. Look out for cost compression and the involvement of trusted traditional institutions. One recent example of the latter is credit rating agency Moody’s testing a proof-of-concept project that embeds municipal bond ratings into tokenized securities. Mock municipal bonds were tokenized with credit ratings attached to on-chain assets, demonstrating how off-chain data can help increase transparency and scale on-chain securities products. Integrating an industry-standard rating system with a new and novel product set provides investors with a familiar and trusted touchstone.
In April 2025, SEC Chairman Paul Atkins emphasized the importance of “harnessing blockchain technology to modernize aspects of the financial system” and highlighted the promise of “significant benefits from market innovation in terms of efficiency, cost savings, transparency, and risk mitigation.” However, this must be done in the context of the SEC’s goal of maintaining investor protection. In September, SIFMA reiterated the importance of maintaining investor protection amid market modernization.
While blockchain technology’s early returns certainly promise these benefits and a more cost-effective market, it is not a panacea for a variety of charlatans, from habitual opportunists to straight-up bad actors. Investors must be as wary of digital markets as they are of traditional markets. Read fund prospectuses, research expense ratios, and ask a neutral third party to inject the necessary market data and trust that is the foundation of traditional markets.
As markets modernize, digital markets have the potential to deliver the efficiency and true innovation that democratization promises, provided issuers, investors, and other market participants keep these criteria in mind.
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