Tokenized Funds vs. On-Chain Funds: Differences & Decision Framework

Operating Model Differences

Governance & recordkeeping

A tokenized fund keeps a transfer agent as the source of truth. Tokens mirror the official register and the transfer agent controls corrections, reversals, and corporate actions. Franklin Templeton’s model illustrates this approach: the transfer agent’s blockchain-integrated system maintains the official shareholder record while leveraging Stellar for transaction activity, which supports auditability without ceding control to unpermissioned processes. (Franklin Resources)

An onchain fund shifts governance toward smart contracts. Subscriptions, unit issuance, NAV workflows, and redemptions can execute programmatically, with every state change recorded onchain and designed for deterministic audit trails. This design increases transparency but introduces protocol-level risk and upgrade planning. Regulators and standard-setting bodies have flagged that tokenized arrangements may require enhanced governance and legal frameworks because risks can manifest differently than in conventional infrastructures. (Bank for International Settlements)

Implications for corrections, migrations, and audits. In a tokenized fund, a transfer agent can correct entries and perform share-class actions through established controls that synchronize with token balances. In an onchain fund, upgrades and migrations require planned contract governance and clearly auditable change management. Both models must retain a defensible audit trail, but the point of control differs.

Compliance & identity

Tokenized funds frequently implement ex-ante transfer gating at the token layer. ERC-3643, for example, uses an identity registry and validator to restrict transfers to eligible, allow-listed holders that meet regulatory checks at execution time. ERC-1400 provides interfaces for partitions and transfer restrictions, enabling issuer-level controls that map to regulatory obligations such as holder caps or jurisdictional rules. (Ethereum Improvement Proposals, ERC-3643 Permissioned Tokens, polymath.network, GitHub)

Onchain funds can use the same standards or run compliance at the application layer. Either way, the logic becomes part of the operating code path, so changes in eligibility rules, sanctions, or investor status must propagate safely through contract upgrades or configurable policy engines. The compliance stack becomes a first-class component of the system rather than a bolt-on to a traditional register.

Custody & keys

Both models require qualified custody for underlying assets, with enterprise-grade wallet controls such as MPC or HSMs. In tokenized funds, the underlying portfolio is custodied by a traditional custodian while investors hold tokenized shares in approved wallets. BUIDL shows this split clearly: BNY Mellon acts as asset custodian and administrator, and the ecosystem includes Anchorage Digital Bank, BitGo, Coinbase, and Fireblocks for token custody options. (Business Wire)

Key management choices vary. Some issuers enable investor-managed wallets that pass compliance checks, while others rely on transfer-agent-hosted or platform-managed wallets for simplicity and recoverability. Supervisory dialogue in major jurisdictions continues to focus on qualified custody, segregation, and wallet-level safeguards for tokenized securities. (Axios)

Commercial Trade-offs

Distribution reach. Tokenized funds keep a familiar wrapper, which eases onboarding across institutional platforms, portals, and private placement channels. Onchain funds can reach crypto-native venues and enable integrations with collateral and treasury workflows, but distribution often depends on newer compliance rails and may require permissioned markets.

Investor experience. Tokenized funds already deliver tangible benefits: faster settlement, near-instant position visibility, and 24/7 transferability among eligible wallets. BUIDL explicitly supports around-the-clock transfers to pre-approved investors and automates accrual and distribution of income. (Business Wire) Onchain funds can go further with fully programmatic subscriptions and redemptions, embedded NAV logic, and composability with other onchain services.

Liquidity formation. Tokenization reduces operational frictions, but it does not guarantee robust secondary liquidity. BlackRock’s own disclosure cautions that any liquidity discussion is speculative, and interests are not exchange-listed. Global standard setters likewise warn that liquidity and other risks in tokenized arrangements may appear differently than in traditional infrastructures and must be managed deliberately. (Business Wire, Bank for International Settlements)

Operational efficiency and cost footprint. Tokenized funds can streamline transfer operations, cap table management, and distribution processing without replacing existing fund accounting. Onchain funds can automate larger portions of the lifecycle, which may compress back-office costs over time, but they require investment in smart-contract security, upgrade governance, and continuous monitoring.

Pragmatic first use case. Institutional money market funds have become the early proving ground for tokenized funds. BlackRock’s BUIDL and Franklin Templeton’s FOBXX demonstrate compliance-gated issuance, daily accrual, and familiar cash-equivalent portfolios delivered through blockchain rails. (Business Wire, Franklin Resources)

Key risks.

• Smart-contract and oracle exposure in onchain processes.
• Cross-chain complexity if distribution spans multiple networks.
• Regulatory fragmentation across jurisdictions and evolving custody expectations.
• Liquidity risk that mirrors traditional open-ended funds, now with additional technology dependencies. Supervisors, including IOSCO, have refreshed liquidity risk management guidance for open-ended funds that remains relevant as tokenization scales. (IOSCO)

Decision Framework — When to Use Which

Choose a tokenized fund if you need immediate regulatory fit with existing wrappers, transfer-agent processes, and distribution channels. Implement ERC-3643 or ERC-1400 for eligibility controls and partitioned balances, keep the transfer agent as the authoritative register, and enable 24/7 compliance-gated transfers among approved investors. This path minimizes change management while delivering operational wins. (ERC-3643 Permissioned Tokens, Ethereum Improvement Proposals, polymath.network, GitHub)

Choose an onchain fund if your strategy benefits from fully programmable portfolio and NAV mechanics. For example, if you intend to automate rebalancing, gating, and fee accrual at the contract level, or integrate with onchain collateral, your operating model likely requires smart-contract governance, upgradable policy modules, and a more advanced compliance stack that can adapt as rules evolve. Supervisory bodies stress the need for robust governance, legal clarity, and liquidity management in such designs. (Bank for International Settlements, IOSCO)

Readiness checks before you commit:

1. Identity infrastructure. Can you implement an identity registry and eligibility checks at transfer time across your target networks and venues, including KYC refresh and sanctions updates, using standards like ERC-3643 or ERC-1400 as appropriate. (ERC-3643 Permissioned Tokens, Ethereum Improvement Proposals, polymath.network)
2. Custody controls. Do you have qualified custody for portfolio assets and enterprise-grade wallet controls for tokenized shares, including MPC or HSM support and recovery procedures. BUIDL’s custody and wallet ecosystem provides a live reference. (Business Wire)
3. Sandbox and governance. Do you have a controlled environment for contract reviews, audit, and staged rollouts, plus an upgrade path that preserves auditability and investor protections. Supervisory guidance emphasizes governance because risk profiles differ from conventional infrastructures. (Bank for International Settlements)
4. Target investor base. Are your buyers comfortable with allow-listed wallets and compliance-gated transfers, or do they need fully managed, platform-hosted wallets to start.
5. Secondary market plan. How will you support liquidity if any, for example through permissioned ATSs or bilateral transfers among approved investors. Avoid over-promising liquidity, since tokenization does not inherently create it. (Business Wire)

Quick decision checklist: regulatory fit today, identity and compliance rails, custody architecture, contract governance plan, investor wallet strategy, and a realistic liquidity roadmap.

Frequently Asked Questions

Which model is faster to market?

A tokenized fund is generally faster because it reuses the existing legal entity, fund accounting, and transfer-agent processes, adding a token layer for issuance and transfers among approved investors. The BUIDL and FOBXX implementations show how issuers can move quickly by plugging blockchain rails into current operations rather than rebuilding the fund lifecycle onchain. (Business Wire, Franklin Resources)

How do corrections and errors get handled?

In a tokenized fund, the transfer agent remains the system of record and can correct shareholder balances and corporate actions through established workflows that synchronize with tokens. Franklin Templeton explicitly states that its transfer agent maintains the official record via a blockchain-integrated system. In an onchain fund, corrections typically require contract-level controls or upgrade paths defined in governance, plus transparent audit logs for any state change. (Franklin Resources)

What standards are required?

There is no single mandated standard, but ERC-3643 and ERC-1400 are widely used for regulated tokens. ERC-3643 adds an identity registry and validator that enforce eligibility and transfer rules at execution time. ERC-1400 provides interfaces for partitions and restrictions while remaining compatible with ERC-20. Choice depends on your compliance model, network, and integration needs. (Ethereum Improvement Proposals, ERC-3643 Permissioned Tokens, polymath.network, GitHub)

What about secondary trading and liquidity?

Tokenization simplifies transfers and post-trade processes, yet it does not create demand or market-maker support by itself. BlackRock’s BUIDL disclosure notes that any liquidity discussion is speculative and interests are not exchange-listed. Regulators and standard setters also highlight that liquidity risk management for open-ended funds remains essential as tokenized structures scale. If secondary activity is part of the plan, design for permissioned ATS connectivity, market-making arrangements where permitted, and robust transfer controls. (Business Wire, IOSCO)

Bottom line: Use tokenized funds to achieve immediate fit with today’s wrappers and distribution while gaining operational speed and 24/7, compliance-gated mobility. Step up to onchain funds when your strategy demands programmable NAV and lifecycle automation, and when your compliance, custody, and governance stacks are ready to operate primarily onchain.