Fund subscription and redemption

Why tokenise? i

Buying into or cashing out of a fund today means an order that passes through a platform, an order network and a transfer agent, priced once a day and paid for a day or more later, on business days only. When fund shares are tokens, an approved investor can pay in a stablecoin and receive shares in minutes, at any hour, and then use those shares as collateral or cash-like reserves.

Improves an existing process Subscribing and redeeming is what every fund already does. Tokenisation changes how fast and when it can happen, and what investors can do with the shares afterwards. The underlying fund, its pricing and its rules stay mostly the same. The genuinely new part is using fund shares directly as collateral or as reserves inside on-chain products, which is still small.

The problem today

• Orders travel through a chain of firms. In the UK, the fund manager usually buys and sells units as a middleman between investors and the fund, which the FCA says creates significant operating overheads, client money obligations and short-term exposure to the manager while a deal is in progress.^[1]
• Cash and shares settle after the trade, not at the same moment. US mutual fund trades processed through DTCC's Fund/SERV order network only moved from two business days to one in May 2024, with confirmations due as late as the next morning.Fund/SERV settlement cut from T+2 to T+1 on 28 May 2024^[2]
• Each firm keeps its own records, so they must be matched. The depositary has to reconcile all fund cash flows and check that units in issue agree between fund accounting and the transfer agent's register.^[1]
• Funds are priced once a day. Orders that miss the daily cut-off wait for the next price, and nothing happens at weekends or on bank holidays.^[3]
• Processing is expensive and getting more so. A vendor survey of 26 asset managers projects fund processing costs rising sharply and finds launching a new fund takes about three months.Fund processing costs projected to rise 32% in three years; about 12 weeks to launch a fund (Calastone survey, industry-funded)^[4]
• Fund shares cannot easily be used as collateral, so in a stress investors sell them for cash to meet margin calls. Respondents to the FCA pointed to the 2022 gilt crisis, when pension funds sold assets for cash that was then often reinvested in money market funds.^[1]

Today vs tokenised (simplified)

End to end: T+1 or later, business days only → minutes, any day

Benefits · 7, of which 5 evidenced

Who it suits

Asset manager, Fintech or technology firm, Market infrastructure (FMI), Specialist digital asset custodian, Broker-dealer or market maker, Bank · effort: medium · one firm can get value on its own

• A transfer agent (in-house or third party) able to keep the register on a ledger
• Investor onboarding with wallet allow-listing
• A stablecoin or tokenised cash route for subscriptions and redemptions, with liquidity to pay out outside market hours

Limits and open questions

• Most tokenised funds are only for qualified or professional investors, often with high minimums, so wider access is largely still a promise. BUIDL, for example, is a private placement with a $5 million initial investment minimum.^[9]
• Most money market funds still price once a day, so instant minting and redemption sit uneasily with a daily valuation and cut-off; out-of-hours redemptions depend on the manager or a liquidity provider fronting cash.^[3]
• Funds spread across many chains split liquidity into separate pools, and cross-chain transfers raise legal questions about finality; without common standards tokenised funds risk becoming isolated digital islands.^[3]
• Faster, round-the-clock redemption could make runs on money market funds faster in a stress, a risk the FCA notes respondents raised.^[1]
• New York Fed researchers say it is too early to judge the impact: use has stayed mostly inside the digital-asset ecosystem, with limited evidence of wider market acceptance.^[8]