What to know:

• Bank of America has termed tokenization as “mutual fund 3.0,” proposing it’s the next evolution after mutual funds and ETFs.
• Tokenized money market funds are set to drive growth, providing alternatives to traditional brokers’ cash sweep options, according to the bank’s analysts.
• Although distribution is a challenge, platforms like Robinhood, Public, eToro, and Coinbase may serve as likely partners as blockchain finance develops alongside traditional markets.

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Bank of America (BAC) positions tokenization—the creation of a blockchain-linked virtual investment mechanism tied to a tangible asset—as the forthcoming phase in investment product evolution, dubbing it “mutual fund 3.0.” This follows the historical emergence of mutual funds in 1924 and the ETF revolution in the 2000s, suggesting that blockchain might catalyze a new wave of financial instruments, say analysts led by Craig Siegenthaler.

Real-world asset (RWA) tokenization is rapidly progressing. The bank referenced that companies like Securitize collaborate with managers such as BlackRock (BLK), Apollo, KKR, and Hamilton Lane to launch tokenized funds. WisdomTree (WT) has developed its own tokenization engine, enabling the offering of several tokenized funds.

As per data from RWA.xyz, the worth of real-world assets on-chain exceeds $28 billion, primarily in private credit and Treasuries. However, regulatory issues remain a significant obstacle. The GENIUS and Clarity Acts deal with stablecoins but leave numerous questions regarding tokenized funds unanswered. Nonetheless, Bank of America believes the benefits of tokenization will increase adoption over time, even with current access limitations for U.S. investors.

While the argument for tokenized equities is less compelling given that U.S. brokers already provide commission-free trading for stocks and ETFs post-Robinhood’s disruption in 2019, the report emphasizes that tokenized money market funds, supported by smart contracts, could revolutionize traditional cash management strategies and open new revenue possibilities.

Yet, distribution remains an impediment, with platforms offering tokenized funds still scarce. Online brokers, particularly those engaged in crypto like Robinhood, Public, and eToro, have a strategic advantage given their user base inclined towards self-custody and their established crypto operations. Coinbase (COIN) could also emerge as a significant partner as it broadens its services beyond cryptocurrency, the report highlighted.

Bank of America anticipates that tokenized money market funds will spearhead adoption due to their appealing yields compared to stablecoins, which are restricted from paying interest under the Genius Act, while private credit and high-yield investments are expected to follow suit.

Read further details about the latest advancements in tokenization here.