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Hi all,

You may have heard of BlackRock. It's the largest asset manager in the world, managing a bit more money than the GDP of Germany and Japan combined. 

Hundreds of millions of dollars may not seem like a big deal in this context (although it's still quite a lot). That money, however, is now represented on the public Ethereum blockchain. It's called the "BlackRock USD Institutional Digital Liquidity Fund" or BUIDL. (The abbreviation is actually a pun for crypto-natives but that's a sidenote.)

So what’s up?

We tell you why BlackRock's move signals the start of a much larger development. Ultimately, it will become a revolution in the financial sector with huge implications for banks. It will also change how you save or invest your own money.

It won't be next week or even next month. Nevertheless, there will be a lot of opportunities so it makes sense to keep an eye on ongoing developments.

Let’s get started! 🤓

With assets under management at around $10 trillion, BlackRock is the largest asset manager in the world. But what does that mean?

Let's assume you are saving money every month. To do that, you are buying shares in some type of investment fund. The fund has to be managed by somebody who gets paid for their efforts. In many cases, that "somebody" is BlackRock.

They don't actually own those $10 trillion. They're merely managing them for their clients. And that seems to be a pretty lucrative business. In the past three years, the first quarter of 2023 was the worst quarter – with revenues of just over $4.2 billion.

In theory, clients don't need BlackRock. They can buy stocks or bonds themselves and avoid paying management fees. In practice, however, private investors as well as large institutions prefer to outsource the day-to-day work. Moreover, many financial products which are bought and managed by funds are only offered to funds to begin with.

When you purchase shares in a fund, some company holds them for you. This is the part where regulation comes in to ensure that these companies are really trustworthy.

You're still the owner of the shares though. You can sell them to somebody else or redeem them to get your money back from the fund itself. The shares may even be used as collateral for a loan. You can get money for immediate spendings, but you don't have to sell long-term investments.

All the admin work in the background, however, is based on technology that is essentially a couple of decades old. It works, but it could be much faster and cheaper. That's where blockchains come in.

What is tokenization and why is it useful?

On a blockchain, fund shares – as well as virtually every other financial instrument – can be tokenized. These tokens then represent the instrument which is held by a trusted custodian. (That's where regulation is again important.)

Tokens can be sold, redeemed to get your money back, used as collateral for a loan... you get the idea. You can do all the things that are possible with regular fund shares which are not represented on a blockchain.

So what are the benefits of tokenization? Turns out that's quite a list so here are just three aspects:

• More transparency: Everybody can track the total supply or transfers of the BUIDL token in real time. Companies – or other organisations – can easily show all or some of their reserves in public without much hassle.

• Lower costs: For individual investors, transferring tokens is usually a lot cheaper than using the systems which are currently in place. For institutions, audits and due diligence processes become much less time-consuming – and therefore cheaper.

• Better accessibility: In theory, you can buy stocks or bonds all over the world. In practice, access to markets is often complicated. Tokenization offers opportunities for investors and provides additional liquidity to markets.

And that's just the start. This podcast provides a pretty in-depth look at the potential.

Or you can just briefly listen to BlackRock's CEO Larry Fink talking about the benefits of tokenization. It's obvious that a significant technology shift isn't far away.

Changes and opportunities

BlackRock's BUIDL token is not the first fund to be tokenized. Other asset managers like Hamilton Lane or KKR have launched such funds on a limited scale as well.

However, when the biggest brand in finance makes a move, others are likely to pay more attention. That makes it much easier to believe in predictions that the market for tokenized assets could reach $3.5 trillion even in a pessimistic scenario. The optimistic case? Almost $10 trillion.

For now, BlackRock's new fund doesn't have direct benefits for private investors. Only companies can register, and they need to buy at least $5 million worth of BUIDL tokens. Moreover, the tokens cannot simply be re-sold or transferred – for now. The technology is there, all it takes is for regulators to catch up.

Meanwhile, BlackRock didn't just launch a blockchain-based fund. They also announced a strategic investmentin Securitize, the company responsible for the technical processes around the token in the background.

In a nutshell, this launch shows that BlackRock is already investing time and money into tokenization. More importantly though, it also underlines that reputational risks from interactions with blockchain tech can be limited. That's a vital sign for the crypto industry as a whole. It also comes after the successful launch of Bitcoin ETFs earlier this year.

For companies as well as for retail investors, it will take a bit more time to start using blockchains for traditional investments on a bigger scale. It makes sense, however, to keep an eye on developments. New technology will lead to many opportunities – and interesting returns.

That’s the end for today! 😢