Tokenization Could Redefine ETF Trading—24/7 and Beyond

BlackRock, the world’s largest asset manager, is actively exploring the tokenization of its exchange-traded fund (ETF) portfolio as a potential evolution of its investment product offerings. The firm’s interest in blockchain technology builds upon its existing forays into digital assets, including the launch of the BlackRock USD Institutional Digital Liquidity Fund (BUIDL), a tokenized money market fund that holds $2.2 billion in assets across multiple blockchain networks. According to internal discussions reported by Bloomberg, the firm is considering extending tokenization to ETFs with exposure to real-world assets (RWAs), a move that could enhance tradability and functionality.

Tokenizing ETF shares could enable 24/7 trading beyond standard market hours and facilitate the use of ETFs as collateral in decentralized finance (DeFi) applications. This aligns with broader industry efforts to integrate traditional financial instruments with blockchain infrastructure, as demonstrated by initiatives such as the collaboration between Goldman Sachs and Bank of New York Mellon. These efforts aim to offer clients tokenized access to money market funds through private blockchain systems, a model BlackRock is poised to join.

The development is part of a growing trend among traditional financial institutions to leverage tokenization for enhanced efficiency and accessibility. JPMorgan has described the transition as a "significant leap" for the $7 trillion money market fund industry, emphasizing its potential to streamline settlement processes and expand collateral use. BlackRock’s experiments with tokenization are already underway, including trials using JPMorgan’s Kinexys platform to test the settlement of trades on blockchain while maintaining compatibility with traditional clearing systems.

Despite the technological feasibility, regulatory alignment remains a key challenge. The firm must ensure that tokenized ETFs adhere to existing compliance frameworks and that their mechanics align with the timing and structure of traditional Wall Street systems. Custodians, exchanges, and regulatory bodies will need to coordinate closely to facilitate adoption without compromising market integrity.

BlackRock CEO Larry Fink has previously outlined a vision in which tokenization could redefine the financial landscape, making digital representations of traditional assets the norm. This initiative reflects that vision, with the potential to accelerate settlement speeds, increase market access for international investors, and diversify the utility of ETFs. However, the pace of implementation will depend on regulatory developments and industry-wide adoption.