Key Takeaways
- • Industry professionals say tokenization could modernize Canada's and the global ETF industry without replacing ETFs, with Casey Yang of TD Securities describing it as "a modernization of the fund infrastructure."
- • Three models are outlined: third-party wrapped tokenized ETFs (already available in the U.S., parts of Europe and Latin America but not Canada), issuer-led tokenized share classes (proposed in the U.S. but not yet mainstream), and fully on-chain ETFs (conceptual).
- • Potential benefits include 24/7 trading, faster settlement, fractional ownership, global access and cost savings, while risks include fragmentation, cyber threats, liquidity and pricing mismatches, and systemic risk.
- • McKinsey projects tokenized assets could reach US$2 trillion by 2030, and PwC forecasts tokenized investment funds will grow at a 41% CAGR to US$715 billion in AUM by 2030.
- • Regulatory clarity will determine the pace of adoption, with the SEC and Canadian Securities Administrators still examining how tokenized assets fit within securities laws.
Summary
Tokenization, the representation of traditional assets or ownership interests as tokens on blockchain infrastructure, is emerging as a potential next development for the ETF industry, according to market participants cited by Investment Executive. Early adoption has centered on stablecoins, U.S. Treasury bills and money-market funds, with activity concentrated in the U.S. and Europe. BlackRock and Franklin Templeton offer tokenized money-market funds through approved platforms, while cryptocurrency exchange Kraken offers digital representations of popular stocks and ETFs issued by third-party providers. Nasdaq and the New York Stock Exchange plan to introduce tokenized securities.
Market participants describe three potential ETF models. In the first, a third-party intermediary issues blockchain tokens referencing existing ETF shares; this is the simplest approach because the issuer need not restructure the fund, but it leaves the issuer with limited control over distribution and trading. In the second, the issuer creates tokenized units alongside traditional shares, preserving product integrity, regulatory oversight and operational control; this model is being proposed in the U.S. but is not yet mainstream. The third, conceptual model would see fully on-chain ETFs handling issuance, trading, settlement and ownership through smart contracts.
Industry professionals cite potential benefits including 24/7 trading, faster and near-instant settlement, reduced intermediaries and long-term cost savings, as well as fractional ownership and global access. Ken Chen of Global X Investments Canada, whose firm offers the Global X Tokenization Ecosystem Index ETF, said issuers may need upfront investment to support new models. Gagan Bhatia of Purpose Investments said tokenization is "simply a digital representation of that ownership." Tokenization may also expand access to illiquid assets such as real estate, private equity and private credit, and increase transparency of holdings and net asset values.
Risks identified include fragmentation across platforms, blockchains and custodians, which could create liquidity challenges; investor confusion over whether exposure represents actual ownership; cyber threats to hot and cold wallets; and liquidity and pricing mismatches when tokenized ETFs trade 24/7 while underlying holdings do not. Bhatia warned that the connectivity of on-chain platforms could make disruptions "more catastrophic and irreversible." Industry professionals say regulatory clarity will be the determining factor, and they expect a gradual convergence between traditional and blockchain-based systems.
Market participants describe three potential ETF models. In the first, a third-party intermediary issues blockchain tokens referencing existing ETF shares; this is the simplest approach because the issuer need not restructure the fund, but it leaves the issuer with limited control over distribution and trading. In the second, the issuer creates tokenized units alongside traditional shares, preserving product integrity, regulatory oversight and operational control; this model is being proposed in the U.S. but is not yet mainstream. The third, conceptual model would see fully on-chain ETFs handling issuance, trading, settlement and ownership through smart contracts.
Industry professionals cite potential benefits including 24/7 trading, faster and near-instant settlement, reduced intermediaries and long-term cost savings, as well as fractional ownership and global access. Ken Chen of Global X Investments Canada, whose firm offers the Global X Tokenization Ecosystem Index ETF, said issuers may need upfront investment to support new models. Gagan Bhatia of Purpose Investments said tokenization is "simply a digital representation of that ownership." Tokenization may also expand access to illiquid assets such as real estate, private equity and private credit, and increase transparency of holdings and net asset values.
Risks identified include fragmentation across platforms, blockchains and custodians, which could create liquidity challenges; investor confusion over whether exposure represents actual ownership; cyber threats to hot and cold wallets; and liquidity and pricing mismatches when tokenized ETFs trade 24/7 while underlying holdings do not. Bhatia warned that the connectivity of on-chain platforms could make disruptions "more catastrophic and irreversible." Industry professionals say regulatory clarity will be the determining factor, and they expect a gradual convergence between traditional and blockchain-based systems.
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