Is BlackRock’s BUIDL fund a template for tokenized securities?
On March 21, 2024, BlackRock unveiled its first tokenized fund issued on a public blockchain (BUIDL). This ERC-20 token represents shares of a BlackRock-managed fund containing yield-generating U.S. Treasury bonds and other stable assets.
For those of us tracking the growth of tokenized securities, a major institution like BlackRock entering the space is exciting news! However, while BUIDL is an exciting experiment, the product’s details highlight how much room there is for growth.
In this post, we explore BlackRock’s conservative approach to its first tokenized security and consider what the BUIDL token’s impact may be on broader blockchain-based security issuances.
While BlackRock is issuing an ERC-20 token, it is also imposing strict contractual obligations on investors in the BUIDL fund which significantly reduce the advantages of tokenization. For example:
- BUIDL tokens can only be sold or resold to accredited investors who have individually been whitelisted by BlackRock’s transfer agent.
- The legal owners of the tokens are determined by a centralized internal ledger kept by BlackRock’s transfer agent.
- When there are conflicts between BlackRock’s centralized internal ledger and the on-chain wallet address in possession of the actual token, the centralized ledger takes precedence.
- BUIDL tokens provide no voting rights to token-holders regarding the management of the fund.
- Dividends are not distributed using a smart contract. Instead, their recipients are determined by the transfer agent in an off-chain process and an in-kind distribution is made once per month.
As part of the process of issuing BUIDL, BlackRock filed a Form D with the SEC, which indicates that a company is issuing a security which is exempt from many of the requirements associated with the sale of a security to the general public. The required disclosures for publicly available securities include lengthy corporate financial disclosures and details about potential investment risks. BlackRock specifies in its Form D for the BUIDL token that, it is issuing the token under the exemption applicable to securities which are only sold to accredited investors (among other statutory exemptions). BlackRock could be using this limited sale structure and the strict contractual obligations imposed on buyers to stay on the right side of the SEC.
These contractual restrictions on the holders of BUIDL undercut much of the exciting potential of tokenized securities:
- If all purchasers must be preemptively whitelisted by BlackRock’s transfer agent, the use of the token on secondary exchanges not affiliated with BlackRock is made functionally impossible. This would include all DeFi exchanges.
- Private peer-to-peer transfers of BUIDL tokens are necessarily intermediated by BlackRock’s centralized internal ledger, reducing composability should this product gain adoption. Transfer of the token being related to, but not determinative of, transfer of ownership rights could also be confusing for investors.
- Instead of increasing efficiency and transparency by distributing dividends using a smart contract or other blockchain-native mechanisms, BlackRock is using the internal ledger-driven distribution process it would with its other investment products.
- Possession of BUIDL tokens do not provide an outlet for influencing the governance of the fund. Blockchain technology simplifies and expands on ownership-based voting rights, yet tokenized shares which explicitly lack voting rights do not take advantage of this innovation.
While the contractual limitations on how the BUIDL token can be used are concerning, the entrance of BlackRock into the tokenized securities space is a positive — the institutions are, in fact, coming. While the BUIDL token cannot be used in the ways crypto-native users might expect, its distribution still requires one of the largest financial institutions in the world to build knowledge about wallets, custody, and permissionless infrastructure.
While BlackRock’s BUIDL token isnt yet compatible with DeFi, it is a step in the right direction. As global regulators and large institutions continue to dip their toes in the water, the crypto industry should be welcoming to new partners from traditional finance without compromising on our shared mission. The BUIDL token shouldn’t be a template, but it is a compelling pilot.
