DigiFT is the smart contract based digital asset exchange which has already partnered with asset managers such as UBS and Invesco to tokenize and distribute tokenized funds to accredited and institutional investors. Now it is preparing to launch a tokenized fund containing AI stocks, where the underlying stocks are also tokenized. Component stocks are likely to include Nvidia, Apple, Microsoft, Tesla, and Alphabet.

The first asset manager likely to partner with DigiFT is Hash Global, with whom it’s working on two tokenized funds. One of them is the DigiFT Hash Global AI Index Fund.

“Tokenizing the underlying assets—not just fund shares—fundamentally transforms how asset management operates, creating unprecedented liquidity, transparency, and accessibility for institutional investors,” said Henry Zhang, Founder & CEO of DigiFT.

 

“By bringing real-world equities fully on-chain, we remove inefficiencies, enhance accessibility, and set a new standard for how portfolios are structured, traded, and managed in a blockchain-native environment.”

One of the key benefits is the potential efficiencies for asset managers, especially if they are crypto natives. Instead of going via brokerages and custodians, the entire process is on chain.

Automating the asset management process

Today the workflow for fund issuance and redemption tends to be slow and arduous. For example, in the US ‘authorized participants’ (APs) who are usually large dealers, are responsible for the issuance and redemption of ETFs. They place an order for new ETF units and deliver the corresponding underlying stocks to the asset manager. The AP can then sell the ETF shares in the secondary market. Three large banks, Bank of America, Goldman Sachs and JP Morgan are responsible for more than half of ETF issuance and redemption in the United States.

What if the underlying stocks in the ETF were all tokenized stocks?

If demand is significant, a smart contract could issue new shares in the fund by automatically acquiring the underlying tokenized stocks.

Investors can also see the stocks that belong to the fund are sitting in the fund’s wallet.

UK-based fund distribution platform Calastone has been banging the drum for years about moving beyond tokenizing only the fund to tokenizing the underlying assets, which is where much of the efficiencies lie. One of the ultimate benefits will be the disruption of portfolio creation enabled by automation. There could be a model fund with an infinite number of variations based on the investor’s requirements.

Here’s a comparison of how this differs from conventional funds:

Web3 investors

The key target market for these sorts of funds are web3 investors including corporate treasuries, whales and crypto asset managers. There is already quite a bit of choice in money market funds, but this type of crypto-style fund could substantially broaden the options available.

We have only one caveat – that fact that Hash Global’s team prefers to remain anonymous and isn’t licensed in a major jurisdiction (as far as we can see). That said, you can quite easily find a couple of partner names if you look hard enough.

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Australia’s Treasury published high level plans for the regulation of the digital assets sector. It’s less concerned about the issuance of cryptocurrencies and more focused on platforms that have custody of client assets. That includes crypto exchanges, custody providers, some brokers and stablecoin issuers.

Decentralized Finance or DeFi is sidestepped while the situation is clarified around the world. Notably, a significant proportion of DeFi does not involve custody, a key area where the Treasury wants to protect consumers.

It’s not just digital asset providers (DAPs) that will be covered, but also those “providing specified services, such as operating and dealing in DAPs”.

Crypto exchanges will be obligated to provide disclosures in cases where assets don’t have an identifiable issuer.

For crypto trading venues and others which are small in scale, there will be some exemptions, although platforms will still have to demonstrate some level of compliance.

The rules will exclude non financial assets (such as in-game assets as NFTs), developing software and some maintenance roles for digital asset infrastructures.

Stablecoin issuers

In many parts of the world there’s the concept of e-money which is one-to-one backed. For example, PayPal is considered e-money in certain jurisdictions and in Europe, stablecoins are classed as e-money tokens. So EU stablecoin issuers have to be licensed like other e-money providers. Australia’s equivalent of e-money is a ‘stored value facility’ (SVF), and it’s taking a similar approach to the EU – stablecoin regulations will largely follow SVF rules.

One of the reasons why the Treasury’s crypto focus is less on issuance may be that Australia considers many cryptocurrencies to be covered by securities laws. Late last year the securities regulator ASIC provided some guidance showing what is considered a financial product or not.

The Treasury also plans to explore an expanded regulatory sandbox. And the Reserve Bank of Australia (RBA) and the Digital Finance Cooperative Research Centre (DFCRC) continue to explore wholesale CBDC and asset tokenization.

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The Securities and Exchange Commission took a big step in starting to provide regulatory clarity around cryptocurrencies, by issuing a note saying that solo and pooled mining for proof of work blockchains will generally not be considered to involve securities.

The crux of the argument is that in both cases the expectation of profit is based on the efforts of the miner, not of others. The Howey securities test requires the expectation of profit based on the efforts of third parties.

Acting SEC Chair Uyeda and Commissioner Peirce complained that the SEC under the previous administration failed to provide clarity around cryptocurrencies and instead aimed to regulate by enforcement. They are now trying to correct the course.

What about Proof of Stake?

While Bitcoin miners play an important role, the vast majority of blockchains today use proof of stake to secure the network rather than proof of work. So, the bigger question is how will staking be treated? There’s some expectation that staking on its own may not be classed as a security, because the purpose is to secure the network. However, that remains to be seen.

On the other hand, there’s a reasonable likelihood that Staking-as-a-Service could be considered as involving securities in many cases. Staking-as-a-Service involves end users delegating their coins to a third party, who stakes them on their behalf.

When the SEC shut down Kraken’s staking program two years ago, in one of her more forthright dissentions, Commissioner Peirce said it was the action of a “paternalistic and lazy regulator”.

However, her dissent was more about the SEC neither providing regulatory clarity nor a pathway for a staking service provider to become regulated. She noted that the topic “raises a host of complicated questions, including whether the staking program as a whole would be registered or whether each token’s staking program would be separately registered.”

The FIT Act for digital assets was passed by the House last year (but not the Senate). It included a clause referencing staking, classing it as an ‘end user distribution’ which is explicitly excluded from being treated as an investment contract by the Act.

However, this only applies to “activities directly related to the operation of the blockchain system, such as mining, validating, staking, or other activity directly tied to the operation of the blockchain system”. Again, arguably this is for those that perform staking directly but does not cover Staking-as-a-Service.

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