F/m Investments just took a step toward modernizing ETFs by asking the SEC to let it issue tokenized shares of its Treasury 3 Month Bill ETF, TBIL. Under F/m’s proposal, ownership of these ETFs would be recorded on a permissioned blockchain ledger, and investors could trade these shares of TBIL on regulated alternative platforms like Securitize or Coinbase, with transactions funneled back to U.S. Bank, the ETF’s current transfer agent.
While it sounds promising, F/m has stated that it won’t start building the first trading platform for tokenized ETF shares until they get their approval from the SEC. Multiple firms have launched tokenized mutual funds, but applying tokenization to ETFs comes with extra regulatory and operational complexity that no one has tackled yet, putting F/m squarely at the front of the line. Regulators are still wrestling with how asset tokenization fits into existing rules and regulations, and the Clarity Act seems to have lost some of its momentum. So F/m has decided to wait until gets some feedback from the SEC.
Legal Tokens
While some mutual funds have been tokenized, ETFs may be a bit trickier. Mutual funds are traded once per day, in a centralized manner (all shares are bought and “sold” (that is, redeemed) by the fund. ETFs on the other hand, are constantly being traded throughout the day on public exchanges, creating additional regulatory and operational challenges. It remains to be seen how serious F/m’s commitment is, but it seems that at this point, tokenization of ETF shares is a question of when, no if.1
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1 Particularly given the DTC pilot program on tokenizing shares. See our blog post, "Dawning of a New Era in Securities Trading: SEC Greenlights Securities Tokenization Pilot Program.”