BNY: Tokenized ETFs Create Reputation Risk for Issuers

Asset managers are rushing to tokenize their funds, driven by a fear of missing out on a potential new distribution channel. Ben Slavin, global head of exchange-traded funds at BNY, described the scramble in an interview.

“We have a number of different projects in flight, different variants to effectively tokenize ETFs,” he said. “What is interesting about it is I think a lot of clients feel like there is an opportunity there to raise assets. A lot of them really have a ‘FOMO’ effect, where they want to get in early.”

Firms including BlackRock and Franklin Templeton are already exploring ways to place traditional fund shares on blockchain rails. Tokenized products so far have focused on money market funds. Slavin said the interest extends well beyond cash management.

The push comes even though many underlying questions remain unresolved. Asset managers are still figuring out how tokenized funds should interact with existing infrastructure and which regulatory frameworks will govern the products. Slavin said firms appear reluctant to wait for full clarity.

“Even though the regulations and the rails aren’t fully ready yet, they want to get products out,” he said.

Wall Street views blockchain as a potential new distribution channel. Tokenized funds could settle around the clock, reduce timing gaps between trades, and reach global investors. Those advantages are well understood. The less visible risk, according to Slavin, is that tokenized versions of well-known ETFs are already trading on platforms outside traditional financial markets – often without direct involvement from the fund sponsors themselves.

“There are ETFs, like hundreds of them, that are trading in unregulated markets around the world,” he said.

Because anyone can theoretically create a tokenized representation of a publicly traded fund, issuers face the prospect of products bearing their names circulating beyond any oversight. That creates a growing topic of discussion among BNY’s asset-management clients.

“It’s opaque,” Slavin said. “It effectively creates a reputation risk, even though it’s not at all affiliated, frankly, with the asset manager.”

The dynamic mirrors the early days of bitcoin and crypto trading, where the technology evolved faster than the rules governing it. The same pattern is now playing out with tokenized real-world assets.

Combined exchange volumes across spot and derivatives fell 3.45% in May to $4.41 trillion, the lowest since September 2024. RWA perpetual futures volumes rose 10.4% against that trend, hitting a new all-time high. The divergence highlights growing speculative interest in tokenized real-world assets even as broader crypto trading cools.

For asset managers weighing a tokenization strategy, the key tension is between first-mover advantage and operational risk. Slavin said BNY has multiple projects in the pipeline covering different approaches to how fund shares trade on distributed ledgers.

“Even though the regulations and the rails aren’t fully ready yet, they want to get products out,” he repeated. The sentiment captures an industry caught between promise and exposure.