Recent news about asset tokenization, led by companies like Circle, has captured the attention of investors and the wider financial industry. We’re now seeing large financial institutions rethink and reshape how assets are traded and transferred between owners. Vanguard, a household name in investing, saw its “dual share class” patent expire in 2023. At the time, this innovation was a major breakthrough for the industry and played a key role in establishing Vanguard’s popularity among investors who chose its products as their preferred investment choice. The financial services industry has gone through many different iterations or innovation. Which leads us to it most recent one in the form of tokenization.
Before mutual funds and ETFs only shares of company’s stocks existed. Then came the mutual fund, a vehicle of investment that was popularly used by investors since the 1980s and 1990s. This innovation let investors pool their money into a single basket of assets, spreading risk across multiple holdings and making diversification much easier. Instead of buying in 30 different companies, an individual could simply invest in one mutual fund that handled it all for them. In the mid-2000s, exchange-traded funds (ETFs) began gaining popularity among investors. Introduced as an alternative to mutual funds, they were marketed as a cheaper and more efficient way to invest.
Since then, ETFs have become the most popular investment vehicle for retail investors. Finally, Vanguard developed its innovative dual-share structure, securing a patent that gave it exclusive control over how its funds were built and managed. Without getting too technical, the main difference between mutual funds and ETFs is how they are traded. Mutual funds are bought or sold directly through the fund company. While ETFs, like individual stocks, are traded on an exchange throughout the day. This patent for a “dual share class” structure allowed Vanguard to have a structural competitive advantage in how they offered their investment funds to the public.
One drawback from owning a mutual fund is the potential for capital gains distributions, which investors have no control over. This is an important factor to consider when choosing between a mutual fund and an ETF. The innovation of the ETF structure effectively eliminates this issue, giving investors more control over when they realize capital gains. After Vanguard’s patent expired, major firms such as Fidelity and BlackRock started filing with the SEC to adopt this structure, drawn by the advantages it provides to investors. The ETF structure has been a truly powerful and effective innovation in the investing space and continues to break records as U.S. ETF inflows are on pace to set a new annual record of $1.4 trillion by the end of 2025 per an article from Reuters.
This now leads us to the latest innovation in the space, tokenization. Tokenization is the process of converting the ownership of an asset; like a stock, or bond, into a digital token on a blockchain. Each token made represents a fractional share of the asset. Unlike traditional trading, where ownership is recorded through centralized ledgers maintained by brokers and clearinghouses, blockchain technology enables ownership to be tracked digitally, securely, and in real time.
In September, Nasdaq announced that it had submitted a filing to the SEC to enable the trading of tokenized securities on its markets. The exchange indicated that the initiative could be finalized and implemented by the end of the third quarter of 2026. Under the current “T+1” settlement system, when you buy or sell a security on Monday, the trade (T) officially settles on Tuesday, just one business day later. Until 2024, trades followed a T+2 system, meaning settlement took two business days. The goal of tokenization is to further shorten this process, giving investors faster access to their funds or shares by reducing the number of intermediaries involved and in turn, lowering transaction costs.
Additionally, the company Circle Internet Group Inc. went public this year. Its IPO saw huge interest among investors. At one point being up over 200% just weeks after its initial offering. The company is involved in the evolving digital finance landscape, particularly in the tokenization of assets. Circle is the issuer of the USDC stablecoin, which is a regulated digital dollar used to facilitate faster settlement times when trading assets. While tokenization might not be the final step in financial innovation, it’s a crucial building block for more advancements across the industry.
So why does it matter? Across the industry, tokenization is widely viewed as an innovation that could potentially enhance how advisors manage their clients. Tokenization is increasingly highlighted for its potential to improve efficiency, enhance access to investments, and support faster, more flexible portfolio management. Examples include faster and more efficient access to cash and the progress towards the ability to trade or access investments outside standard market hours. Many point to how these could have a net benefit for investors. While the technology continues to advance, adoption among major brokerage firms is still in its early stages, which may slow broader availability.
Regulatory guidelines from the SEC are still being developed, and the outcome will influence how quickly this technology becomes fully integrated into the broader market. As with any digital asset, strong cybersecurity measures are essential. Concerns such as hacking and fraud remain important to address, especially as many institutions are not yet equipped to fully support these emerging systems. As integration progresses, guidance will be essential. As the financial system continues to evolve, having a trusted advisor can help bridge the gap between emerging technology and a sound investment strategy.