New financial products bring with them familiar risks, and blockchain-issued investment funds are not immune. The assets of blockchain-based funds have almost tripled in a year: from $11.1 billion to almost $30 billion. New entrants VanEck, Fidelity, BNP Paribas and Apollo recently launched on-chain investment funds. Others come.
Blockchain-based and digitally native securities products have the potential to be the next big investment trend, leveraging technology to create lower-cost, faster and more efficient financial products. But as history shows, investors must be vigilant so as not to succumb to the same traps that defined the manias of the past.
The SPAC boom, the non-traded REIT craze, and the wave of cryptocurrency ICOs promised financial access and democratization, but largely left investors holding the bag. It’s worth remembering now what these events exposed: When new distribution channels collide with the hype, opportunists often rush to introduce products that are riskier, more expensive or less transparent than their counterparts.
The risk for investors in digital markets is how new technologies will be used. Blockchain has the potential to reduce costs, increase transparency and unlock new and novel investment vehicles. But as blockchain-based funds become more widespread, this 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 real improvement over their traditional counterparts or, worse yet, saddle investors with higher costs and weaker protections.
Investors should remember this saying: Timeō Danaōs et dōna ferentēs – “Be careful with Greeks who bring gifts.” Genuine blockchain-native vehicles may offer potential improvements such as more efficient pricing and continued performance, but investors should be wary of products that invoke blockchain’s promise of simply rebranding old financial structures without offering significant benefits.
The task of investors is to separate genuine progress from Odysseus’s Trojan horse.
A useful test is the fee structure. Post-trade processes run on blockchain rails should replace intermediaries to reduce costs. If the total expense ratio is higher than its traditional counterparts, buyer beware. Prominent digital asset critic Stephen Diehl did the math:
“BlackRock’s tokenized money market fund charges investors between 20 and 50 basis points in management fees. The non-tokenized version charges just 0.12 basis points. That’s up to 42 times more expensive.”
Investors should not pay more for buzzwords.
Be discerning about which products are migrating up the chain and why. Is the issuer tokenizing a product because it offers genuine benefits to all parties, or is blockchain simply a new distribution channel for overly complex and opaque products? Private funds that were previously off-limits to retail investors should not suddenly reappear as “blockchain-only offerings,” charging institutional-level fees for illiquid underlying holdings. There’s a reason early product innovations have focused on simple fund structures, like money market funds.
Products with suspiciously high returns or an unclear investment strategy deserve greater scrutiny.
The structure of the product also tells a story. A value issued natively on-chain at the source should be more efficient and reduce operational expenses. On the other hand, a tokenized security is an existing asset reflected on a blockchain that often reflects TradFi costs by retaining processes and product attributes off-chain. 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 broader access and lower barriers to entry for investors without sacrificing their protections. But don’t take the industry’s word for it: Keep an eye out for cost compression and the involvement of legacy, trusted institutions. A recent example of the latter is credit rating agency Moody’s testing a proof-of-concept project to embed its municipal bond ratings into tokenized securities. A simulated municipal bond with a credit rating attached to the on-chain asset has been tokenized, demonstrating how off-chain data can help on-chain securities products scale with greater transparency. Integrating an industry-standard rating system within a suite of new and novel products provides investors with a familiar and trusted touchstone.
In April 2025, SEC Chairman Paul Atkins highlighted the importance of “leveraging blockchain technology to modernize aspects of our financial system” and underscored his expectations of “enormous benefits from this market innovation in terms of efficiency, cost reduction, transparency, and risk mitigation.” But this must be done in the context of the SEC’s goal of maintaining investor protection. SIFMA reiterated in September the importance of preserving investor protection amid market modernization.
While early returns on blockchain technology promise these benefits and more profitable markets, it is not a panacea for the spectrum of charlatans, from run-of-the-mill opportunists to bona fide bad actors. Investors should exercise the same vigilance over digital markets that they apply to traditional markets: reading fund prospectuses, interrogating expense ratios, and requiring neutral third parties to instill the necessary market data and trust that is essential in traditional markets.
If issuers, investors and other market participants are aware of these standards as markets modernize, digital markets have the potential to deliver the efficiency and genuine innovation that “democratization” has promised.
