The global exchange-traded fund (ETF) market has surged to unprecedented levels in assets under management, fueled by strong market performance and growing investor confidence in these investment vehicles. As the financial landscape evolves, so too does the structure and functionality of ETFs. According to a recent report by EY, two major trends have defined the past decade: the rise of active ETFs and the integration of ETFs into the digital asset space. Now, the industry stands at the brink of another transformation—tokenization.
Could tokenization be the next evolutionary leap for ETFs? With advancements in blockchain technology and increasing regulatory acceptance of digital assets, the answer appears to be leaning toward yes.
The Rise of Digital Assets in ETFs
Digital assets are no longer on the fringes of finance—they’re moving into the mainstream. The U.S. Securities and Exchange Commission’s (SEC) approval of spot bitcoin ETFs marked a pivotal moment, legitimizing crypto-backed investment products and laying the groundwork for broader asset tokenization. While challenges remain—particularly around liquidity and settlement mismatches—efforts to shorten settlement cycles are already underway and could accelerate the adoption of tokenized ETFs.
👉 Discover how real-time settlement could reshape the future of ETFs.
The momentum didn’t stop with bitcoin. In May 2024, regulators gave the green light to ETFs investing in Ethereum, signaling growing institutional comfort with digital assets. These developments have fundamentally shifted the industry from a largely unregulated, Europe-centric model to a more structured, U.S.-led framework.
As EY highlights, ETFs backed by physical digital assets have existed in European markets for years, offered by firms like Shares and ETC Group. However, distribution limitations restricted their reach. The SEC’s approval of 11 spot bitcoin ETFs in January 2024—including the conversion of Grayscale’s Bitcoin Trust into an ETF—changed everything. Assets under management in this segment ballooned from under $13 billion in November 2023 to nearly $53 billion by January 2024.
Regulatory Shifts Paving the Way
Regulatory bodies are beginning to adapt to this new reality. In Europe, the European Commission is reviewing the directive on eligible assets for UCITS (Undertakings for Collective Investment in Transferable Securities). While this could eventually allow digital assets within UCITS frameworks, current diversification rules mean single-asset exposure products—like spot bitcoin ETFs—will likely remain classified as exchange-traded products (ETPs), similar to commodity or single-stock ETPs.
Still, the SEC’s approvals are proving transformative. They’re not just introducing new products—they’re increasing familiarity with digital assets among traditional financial players. This growing comfort level may be the catalyst needed for deeper structural changes across asset management.
“It remains to be seen whether this is the approval of another trendy product or a further step toward tokenization across the asset management industry.”
With real-time settlements on the horizon, questions are emerging about the long-term viability of the traditional ETF wrapper. Will investors demand faster, more efficient systems? And can legacy infrastructure keep up?
Settlement Cycles and Liquidity Mismatches
One of the most pressing operational challenges facing ETFs today is settlement timing. In May 2024, both the U.S. and Canada transitioned from T+2 to T+1 settlement cycles for securities. This change brings greater efficiency, reduces counterparty risk, and lowers operational costs—key benefits for ETF providers and investors alike.
However, this shift also introduces liquidity mismatches. Consider an ETF traded in Europe (T+2) that holds a portfolio of U.S. securities (T+1), or vice versa. Authorized participants must now bridge these timing gaps, leading to increased financing costs and operational complexity.
👉 See how tokenization can eliminate settlement delays across global markets.
EY predicts that once T+1 becomes standard in the U.S., pressure will grow for Europe to follow suit. The European Securities and Markets Authority (ESMA) is already consulting on potential changes. But harmonizing settlement across Europe is far more complex than in the U.S., given its fragmented landscape of exchanges, currencies, legal systems, and languages.
Yet, even T+1 may not be fast enough in the long run. As investor expectations evolve, demand for real-time settlement will intensify.
Tokenization: The Future of ETF Efficiency
Tokenization—the process of converting ownership rights of an asset into a digital token on a blockchain—could be the solution. By enabling near-instantaneous settlement, reducing intermediaries, and increasing transparency, tokenized assets offer a compelling upgrade to traditional ETF structures.
EY notes that some asset managers are already piloting tokenized fund issuance, tackling legal, commercial, and technological hurdles before broader rollout. In the UK, the Financial Conduct Authority (FCA) is collaborating with industry leaders, while the Investment Association has published a detailed roadmap for implementing tokenization in asset management.
The benefits extend beyond speed:
- Increased liquidity, especially for traditionally illiquid assets like private equity or real estate.
- Lower operational costs through automation and smart contracts.
- Greater accessibility, opening investment opportunities to a wider range of investors.
- Improved transparency via immutable blockchain records.
Frequently Asked Questions (FAQ)
Q: What is tokenization in the context of ETFs?
A: Tokenization involves representing ownership of an ETF or its underlying assets as digital tokens on a blockchain, enabling faster settlement, enhanced transparency, and improved efficiency.
Q: How do spot bitcoin ETFs relate to tokenization?
A: Spot bitcoin ETFs are a regulatory milestone that legitimizes digital assets in traditional finance, creating a foundation for more advanced innovations like fully tokenized funds.
Q: Will tokenized ETFs replace traditional ETFs?
A: Not immediately. While tokenization offers clear advantages, widespread adoption depends on regulatory alignment, infrastructure development, and market readiness.
Q: What are the main barriers to ETF tokenization?
A: Key challenges include regulatory uncertainty, cross-border legal frameworks, technological integration, and investor education.
Q: Can tokenization improve liquidity in ETFs?
A: Yes. By enabling 24/7 trading and real-time settlement, tokenization can significantly enhance liquidity, especially for niche or alternative asset classes.
Q: Is Europe behind the U.S. in adopting tokenized assets?
A: In some respects, yes—particularly in regulatory approvals for crypto-based ETFs. However, Europe is actively exploring tokenization through initiatives like the UCITS review and FCA collaboration.
👉 Explore how blockchain innovation is transforming investment products today.
Conclusion
The evolution of ETFs is far from over. From passive index trackers to active strategies and now digital asset integration, each phase has expanded what’s possible in investment management. Tokenization represents the next frontier—one that promises faster settlements, lower costs, and greater access.
While full-scale adoption may take years, the building blocks are already in place: regulatory progress, technological readiness, and growing investor demand. As settlement cycles shorten and global markets adapt, the pressure to embrace real-time systems will only grow.
For forward-thinking investors and institutions, now is the time to understand how tokenization could reshape not just ETFs—but the entire asset management ecosystem.
Core Keywords: tokenization, ETF, digital assets, blockchain, real-time settlement, spot bitcoin ETF, asset management, T+1 settlement