How Are Institutions Entering DeFi? What's the Status of BlackRock's BUIDL?
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How Are Institutions Entering DeFi? What's the Status of BlackRock's BUIDL?
The tokenized fund BUIDL represents traditional institutions leveraging public blockchain technology to enhance operational and capital efficiency, signaling broader adoption of blockchain technology.
Navigating Web3 tides with focused insightsAuthor: DigiFT
Summary
• Introduction: On March 20, 2024, BlackRock, a leading asset management firm, partnered with U.S.-based tokenization platform Securitize to launch BUIDL (BlackRock USD Institutional Digital Liquidity Fund), a tokenized fund, further expanding its influence in the Web3 space. This move follows the approval of its spot Bitcoin ETF and marks significant progress in mainstream crypto investment. The BUIDL fund exemplifies how traditional institutions are leveraging public blockchain technology to improve operational and capital efficiency, signaling broader adoption of blockchain technology.
• Problems Solved by Tokenized Funds: Traditional publicly offered funds such as money market funds involve operations across multiple institutions, leading to inefficiencies and high costs due to siloed databases. As tokens issued on public blockchains, tokenized funds eliminate the need for centralized registries by providing real-time, traceable transaction records that reduce costs. They enable real-time atomic settlement and secondary market trading, improving capital utilization and generating higher returns. Tokenized funds also support diverse applications like staking and lending via smart contracts.
• Institutional Adoption of Public Blockchains: While DeFi showcases the advantages of blockchain, transferring traditional financial capital into Web3 systems faces significant resistance. Fund tokens with KYC/AML-compliant whitelists represent mainstream institutions’ efforts to explore DeFi. Examples include Franklin Templeton’s FOBXX and WisdomTree’s WTSYX, which initially used blockchains only for auxiliary record-keeping. BlackRock's BUIDL marks a breakthrough by using a public blockchain as the primary ledger, in partnership with Securitize, a regulated transfer agent.
• BUIDL Design and Performance: BUIDL is issued as an ERC20 token on Ethereum, enabling real-time on-chain transfers within a whitelist. It supports interaction with smart contracts and offers instant USDC redemptions through Circle. As of July 9, 2024, BUIDL reached $502.8 million in assets under management (AUM), held by 17 addresses, including major participation from institutional players like Ondo Finance. BUIDL facilitates DeFi integration by channeling stable real-world yields into the DeFi ecosystem.
• Challenges and Outlook: Despite BUIDL’s success, it still faces significant regulatory and compliance hurdles. Asset tokenization remains subject to conservative global regulations, restricting issuance to qualified investors. However, initiatives by BlackRock and Franklin Templeton are drawing attention to the efficiency of on-chain interactions and driving the development of new laws and standards.
On March 20, 2024, financial giant BlackRock expanded further into Web3 following its launch of a spot Bitcoin ETF, issuing the tokenized fund BUIDL (BlackRock USD Institutional Digital Liquidity Fund) in collaboration with U.S.-based tokenization platform Securitize. If the approval of spot Bitcoin ETFs represents recognition of cryptocurrencies as a legitimate asset class accessible to compliant capital, the significance of tokenized funds lies in traditional institutions adopting public blockchains as foundational technology to enhance operational and capital efficiency—marking recognition and adoption of blockchain itself.
What Problems Do Tokenized Funds Solve Compared to Traditional Funds?
Publicly available funds, such as money market funds, are widely accessible to investors due to low entry barriers, broad coverage, and large capital scales. These funds are strictly regulated. Unless otherwise specified, their operation involves coordination among multiple institutions, each handling part of the process—such as distribution (banks, brokers, advisors), administration, transfer agency, auditing, custody, and exchanges—to achieve specialization, improve efficiency, and prevent concentration of power.
However, inconsistent databases across these parties create friction and increase costs. Each subscription or redemption typically requires communication and settlement across all entities involved, often taking several days to complete due to manual or semi-automated processes.
Tokenizing funds allows fund shares to be issued and traded as tokens on public blockchains. Shares are directly deposited into investor wallets, with share balances and net asset value visible on-chain. All transactions are recorded transparently, accessibly, and automatically on the blockchain, eliminating the need for centralized registration and reducing reconciliation costs between parties.
With tokenization, distribution platforms can use smart contracts to enable real-time atomic settlement between fund tokens and payment tokens (e.g., stablecoins), significantly reducing investor wait times. If fund tokens are enabled for secondary markets on-chain, investors can enter and exit instantly, reducing the need for funds to hold excess liquidity for redemptions—thus improving capital efficiency and generating higher returns. Investors benefit from faster settlement and avoid long subscription/redemption cycles.
Additionally, tokenized funds can integrate with more application scenarios, such as supporting staking and lending through smart contracts, meeting broader user needs.
Institutional Exploration of Public Blockchains – From Auxiliary Tools to Primary Ledgers
DeFi fully demonstrates the advantages of blockchain technology, but migrating vast traditional financial capital from Web2 systems to Web3-based infrastructures faces considerable resistance and requires gradual progress and innovative solutions.
Due to compliance requirements, particularly KYC and AML, fund tokens differ from typical cryptocurrencies by implementing a whitelist mechanism. Each whitelisted address corresponds to a user verified through the platform’s KYC process; transactions involving non-whitelisted addresses are blocked. Features like free inter-address transfers introduce risks—such as fund loss and monitoring challenges—that remain difficult to resolve without robust risk controls.
Nevertheless, we observe mainstream asset managers exploring DeFi, adapting their products to leverage blockchain features, revealing an evolutionary trajectory in product design.
In 2021, U.S. asset manager Franklin Templeton launched the tokenized fund Franklin Onchain U.S. Government Money Fund (FOBXX). Initially, official records were maintained by a transfer agent on a private database, with secondary records kept on Stellar and Polygon. In case of discrepancies, the centralized ledger took precedence. Investors traded shares via Franklin’s app and received a blockchain address, but could not transfer tokens out of their wallets. In 2022, WisdomTree followed with a similar short-term U.S. Treasury tokenized fund (WTSYX) on the Stellar blockchain.
The designs of FOBXX and WTSYX treated blockchain merely as a supplementary accounting tool—recording holdings publicly—but failed to unlock tangible benefits.
In March 2024, BlackRock’s BUIDL, issued via Securitize, marked a major breakthrough. One key reason is that Securitize, as a regulator-approved registered transfer agent, enables the public blockchain to serve as the primary ledger for recording asset ownership and changes.
Diving into BUIDL’s Design – Obstacles and Improvements
According to BUIDL’s offering documents, key issuance details are as follows:
Issuer: BlackRock USD Institutional Digital Liquidity Fund Ltd. (a British Virgin Islands entity established in 2023)
Registration Exemption: SEC Reg D Rule 506(c), Section 3(c)(7) (Reg D allows fundraising from accredited investors without limits on number or amount)
Type of Registered Security: Pooled investment fund
Investment Eligibility: Qualified Purchaser
Minimum Investment: $5 million USD for individual investors; $25 million USD for institutional investors
Issuance Size and Investor Cap: No upper limit
At launch, the sole distribution channel was Securitize Markets, LLC, an SEC-registered securities broker. Additionally, Securitize, LLC—a related entity—is an SEC-registered transfer agent authorized to register and record security ownership on the blockchain.
Notably, the fund uses a newly incorporated BVI entity rather than BlackRock’s standard fund vehicle, likely a risk mitigation strategy to isolate potential impacts on regulated entities. The SEC filing lists four individuals: Ian Pilgrim (Bermuda), Jennifer Collins (Cayman Islands), W. William Woods (Canada), and Noëlle L’Heureux (California, USA). Only Noëlle L’Heureux is a Managing Director at BlackRock with 32 years of tenure; the others appear to represent third-party firms.
BUIDL Product Design
Currency: USD
Subscription/Redemption: Daily
Strategy: Primarily invested in short-term U.S. Treasuries
Net Asset Value: 1 BUIDL = 1 USD
Token Standard: Customized ERC20 with a whitelist mechanism; tokens can only be transferred between whitelisted addresses. Transfers to non-whitelisted addresses will fail.
Yield Calculation: Yield accrues daily at 3:00 PM Eastern Time based on holdings and is distributed monthly on the first business day via BUIDL token airdrop.
Redemption Rules: Daily redemption available at 1 BUIDL = 1 USD. Direct redemptions via Securitize require sending tokens to a designated address, followed by off-chain USD settlement after BUIDL destruction at 3:00 PM daily (typically T+0). Accrued interest since the last payout requires a "full redemption" request, completed 2–3 business days after the monthly distribution date.
BUIDL is an ERC20 token on the Ethereum blockchain, enabling free transfers within the whitelist and compatibility with whitelisted smart contracts. Interactions with non-whitelisted addresses will fail. For DeFi users, this simple step represents a major leap for traditional finance—signifying institutional acceptance of public blockchains as tools for recording asset ownership transfers and associated rights, leveraging their transparency, efficiency, and immutability.
By enabling transfer functionality, BUIDL partially benefits from blockchain-based settlement advantages. One notable use case comes from Circle, which launched a contract allowing real-time exchange of BUIDL for USDC, backed by a $100 million USDC reserve, offering holders instant 1:1 conversion.
This redemption option, provided by Circle, functions as an OTC trade: Circle deploys an exchange contract (the Redemption address in the diagram below). Users send funds to this contract, triggering an automatic transfer of USDC from another EOA account (the holder address) to the user—all executed on-chain with atomic settlement.
Figure 1: Flowchart of Circle’s USDC redemption contract for BUIDL
Initially, the EOA account holds $100 million in USDC. Since BUIDL’s daily interest is calculated off-chain, a redemption via Circle’s contract appears to BlackRock as a simple transfer. Therefore, accrued interest between the last payout and redemption will still be distributed at the next payout date. After the swap, Circle holds the BUIDL tokens and manages them independently. Chain data shows Circle periodically redeems BUIDL via Securitize for USD, then mints new USDC to replenish the pool.
Three Months After Launch: What Is BUIDL’s Current Status?
On May 15, 2024, BUIDL surpassed Franklin Templeton’s tokenized Treasury fund FOBXX in AUM, becoming the largest tokenized fund. As of July 9, 2024, total AUM reached $502 million USD. Compared to the trillions in traditional markets, the entire tokenized Treasury fund sector stands at just $1.81 billion—indicating substantial growth potential. (Source: RWA.XYZ, July 9, 2024)
Currently, BUIDL is held by 17 addresses, with distribution as follows:
Figure 2: Distribution of BlackRock BUIDL token holdings (data as of July 9, 2024)
Securitize allows each client to link up to 10 whitelisted on-chain addresses. Among the 17 addresses, two belong to Ondo Finance—the largest holder—with 223 million BUIDL ($223 million USD). The addresses 0x72 and 0x28 hold approximately 173 million and 50 million BUIDL respectively, serving as underlying assets for Ondo’s tokenized Treasury fund OUSG (AUM: $223 million). Previously backed by BlackRock iShares’ short-term Treasury ETF, OUSG switched entirely to BUIDL upon its launch. OUSG now enables instant USDC redemptions via Circle’s redemption contract.
Moreover, due to partnerships with several crypto custodians, multiple on-chain addresses appear as EOAs with no transaction history, or belong to traditional institutions invited by BlackRock and Securitize to test tokenized fund investments held in custodial accounts.
Circle’s USDC redemption pool currently holds 80.6 million USDC, with Ondo Finance being the main redeemer. The Circle address (0xcf) retains about 19.6 million BUIDL.
Figure 3: USDC balance in BUIDL’s USDC redemption contract (data as of July 9, 2024). Source: BlackRock BUIDL (Dune)
The Financial Sector’s Path Toward DeFi
Due to BUIDL’s high investment threshold, retail investors cannot directly access it. However, by issuing a secure, yield-generating money market fund on-chain, BlackRock enables other institutions to use BUIDL as underlying collateral to bring stable real-world yields into DeFi.
A prime example is Ondo Finance. As BUIDL’s largest holder, Ondo leverages BUIDL and Circle’s redemption contract to enable fast USDC-based subscriptions and redemptions for its OUSG fund, lowering the entry barrier from $5 million to $100,000. Furthermore, Ondo can partner with DeFi protocols like Flux Finance—a decentralized lending platform—to extend real-world yields to anonymous DeFi users. This layered architecture channels traditional institutional yields into the DeFi ecosystem.
Full Institutional Onboarding? Facing Major Hurdles
Products like BUIDL enhance liquidity management for money market funds through hybrid on-chain/off-chain designs and provide on-chain investors with access to real-world yields. By tokenizing funds and collaborating with Web3 players such as Securitize, Circle, and Ondo Finance, BlackRock enables Web3 entities to access real-world returns via on-chain tokens—bypassing complex deposit/withdrawal processes and increasing utility and capital efficiency through smart contract interoperability.
Crucially, BUIDL enables direct on-chain transfers without relying on centralized intermediaries. While seemingly simple, this capability carries immense compliance and legal complexity. In traditional finance, even transfers between same-name accounts are highly restricted, with most platforms only allowing internal trades, subscriptions, and redemptions. Just one month after BlackRock enabled this feature, Franklin Templeton extended similar functionality to FOBXX—reflecting growing institutional recognition of public blockchains as valid ledgers and marking a product-level breakthrough. (Notably, FOBXX holders do not control private keys, limiting transfers to within the platform and preventing true on-chain autonomy.)
Globally, regulation around asset tokenization remains conservative. In the U.S., there is no clear legislation, so issuers rely on exemptions—like BlackRock’s use of a BVI SPV to shield its core regulated entities. In jurisdictions like Singapore, tokenized assets face whitelist restrictions and are limited to qualified investors. These constraints and uncertainties hinder broader institutional and user adoption of Web3.
Optimistically, deep exploration by firms like BlackRock and Franklin Templeton is drawing significant attention from the financial world, demonstrating the efficiency of on-chain interactions through real-world cases and catalyzing regulatory evolution toward new laws and standards.
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