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Institutions enter DeFi, what is the current status of BlackRock’s BUIDL?

Institutions enter DeFi, what is the current status of BlackRock’s BUIDL?

BlockBeats2024/07/15 11:22
By:BlockBeats
Original title: "Institutions enter DeFi, what is the status of BlackRock's BUIDL?"
Original source: DigiFT Research


Abstract


• Introduction: On March 20, 2024, BlackRock, a well-known asset management company, issued the tokenized fund BUIDL (BlackRock USD Institutional Digital Liquidity Fund) through cooperation with the US tokenization platform Securitize, further expanding its influence in the Web3 field. This move follows the approval of its Bitcoin spot ETF, marking a major step forward in mainstream cryptocurrency investment. The tokenized fund BUIDL represents traditional institutions using public blockchain technology to improve operational and capital efficiency, heralding the wider adoption of blockchain technology.


•Problems solved by tokenized funds:Traditional publicly issued funds, such as money market funds, involve the operations of multiple institutions, resulting in inefficiencies and high costs due to independent databases. As tokens issued on public blockchains, tokenized funds eliminate the need for centralized registration and reduce costs by providing real-time, traceable transaction records. They enable real-time atomic settlement and secondary market transactions, improve capital utilization and provide higher returns. Tokenized funds also support a variety of applications such as staking and lending through smart contracts.


•Large institutions enter the public chain:The DeFi field demonstrates the advantages of blockchain, but the transfer of traditional financial capital to Web3 faces huge resistance. Fund tokens with KYC and AML compliance whitelist controls demonstrate the efforts of mainstream institutions to explore DeFi. Examples include Franklin Templeton's FOBXX and WisdomTree's WTSYX, which initially used blockchain for auxiliary accounting. BlackRock’s BUIDL marks a breakthrough by using a public blockchain as the primary accounting tool, working with Securitize as a regulated transfer agent.


• Design and performance of BUIDL: BUIDL is issued on Ethereum as an ERC20 token, supporting real-time on-chain transfers within a whitelist. It supports interaction with smart contracts and provides real-time USDC redemption through Circle. As of July 9, 2024, BUIDL’s assets under management reached $502.8 million, held by 17 addresses, including significant participation from institutions such as Ondo Finance. BUIDL promotes DeFi integration, allowing stable real-world returns to flow into the DeFi space.


• Challenges and Future Outlook: Despite its success, BUIDL still faces significant regulatory and compliance challenges. The tokenization of assets faces conservative regulation around the world, limiting issuance to qualified investors. However, BlackRock and Franklin Templeton's initiatives are drawing attention to the efficiency of on-chain interactions and driving the development of new laws and standards.


On March 20, 2024, asset management giant BlackRock has further laid out Web3 since the issuance of the Bitcoin spot ETF. Through cooperation with the US-based tokenization platform Securitize, it issued the tokenized fund BUIDL (BlackRock USD Institutional Digital Liquidity Fund). If the passage of the Bitcoin spot ETF can include cryptocurrency as a new type of asset into the investment field of a large number of compliant funds, it is a recognition of cryptocurrency as a class of assets. The greater significance of tokenized funds is that traditional institutions are trying to use the public chain in the blockchain as the underlying new technology to improve operational and capital efficiency, which is a recognition and adoption of the blockchain technology.


Compared with traditional funds, what kind of problems can tokenized funds solve?


The funds that investors are widely exposed to are generally public funds. Due to their low threshold, wide coverage, and large amount of funds, such funds are strictly regulated, taking money market funds as an example. If there are no special regulations, generally speaking, the fund operation process involves the coordination between multiple institutions. Each institution is responsible for part of the process behind the fund operation, improving efficiency through operational specialization, and avoiding the excessive concentration of power in a single entity, resulting in evil. The whole process from front to back probably includes: fund distribution channels (banks, securities firms, financial advisors), fund administration, transfer agents, fund audits, fund custody, exchanges, etc.


However, in the process, the inconsistency of the databases of all parties caused a lot of friction and costs. Generally speaking, every subscription and redemption of a fund involves various institutions on this chain. Order information will be transmitted manually or automatically, and then the settlement of funds will be completed through the settlement system. Therefore, a fund subscription often takes several days to settle.


Through fund tokenization, fund shares are issued and traded on the public chain in the form of tokens, and the shares enter the investor's wallet directly in the form of tokens. The shares and net value can be publicly viewed on the chain. All transaction records are accessible and queried on the blockchain, and are recorded in real time and automatically, eliminating the need for centralized registration and avoiding the cost of multiple parties checking back and forth.


After tokenization, the distribution platform can use smart contracts to achieve real-time atomic settlement between fund share tokens and payment tokens (such as various stablecoins) to reduce the time investors need to wait. If the fund tokens realize the secondary market on the chain, investors can directly enter and exit the secondary market in real time, which can reduce the redundant funds retained by the fund to meet redemption, thereby improving the fund's capital utilization efficiency and creating higher returns; investors can obtain efficient trading experience through the secondary market with real-time settlement on the chain, avoiding the waiting period for subscription and redemption.


In addition, tokenized funds can be combined with more application scenarios, such as supporting business scenarios such as pledge and lending through smart contracts, so as to meet more user needs.


Institutional attempts to enter the public chain - from auxiliary tools to main ledgers


The DeFi scenario fully demonstrates the advantages of blockchain, but to transfer the vast traditional financial funds from a complete system of Web2 to a new system based on Web3 technology, there are still huge obstacles in the middle, which need to be gradually promoted and overcome, and new practical solutions need to be explored.


For compliance, especially the needs of KYC and AML, unlike our common cryptocurrencies, fund tokens usually set up a whitelist mechanism. Each whitelist address corresponds to a user who has passed the KYC of the fund platform, and transactions with non-whitelisted addresses cannot be executed. For example, the free transfer function between addresses, the transfer risk, fund loss risk, transaction monitoring and other issues derived from it, will be difficult to break through before the emergence of risk control solutions.


But we noticed that mainstream asset management institutions are also exploring the DeFi field, trying to transform their products in combination with the characteristics of blockchain technology. We can see the trajectory of evolution in their product design.


In 2021, the US asset management giant Franklin Templeton issued the tokenized fund Franklin Onchain U.S. Government Money Fund - FOBXX. In the original design, the tokens were actually maintained by the transfer agency on a private database system, and secondary records were made on Stella and Polygon. If there is a conflict between the records of centralized accounting and public chain accounting, centralized accounting will be the main method. Investors trade fund share tokens through Franklin's APP, and each user will be assigned an on-chain address, but investors cannot transfer tokens in their wallets. In 2022, WisdomTree also issued a similarly designed tokenized fund WTSYX on the Stella blockchain that invests in short-term US bonds.


FOBXX and WTSYX are designed to use blockchain as an auxiliary accounting tool, making share records public without gaining any real benefits.


In March 2024, BlackRock USD Institutional Digital Liquidity Fund (BUIDL), issued by the tokenization platform Securitize, made a major breakthrough, partly because Securitize, as a regulatory-approved registrar (Transfer agent), can use the public chain as the main accounting tool to record the ownership and change records of issued assets.


In-depth BUIDL Design - Obstacles and Improvements


According to the BUIDL issuance documents, the basic information of the issuance is as follows:


Issuer:BlackRock USD Institutional Digital Liquidity Fund Ltd. (BlackRock’s BVI entity, established in 2023)


Registration Exemption:SEC Reg D Rule 506(c), Section 3(c)(7) (Reg D is an exemption for securities issuance that allows fundraising from qualified investors with no restrictions on the number of investors and the scale of fundraising)


Registered Securities Type:Pooled Investment Fund


Investment Threshold:Qualified Purchaser.


Minimum investment amount: 5 million USD for individual investors; 25 million USD for institutional investors


Issuance scale and investor scale: unlimited


At the time of issuance, the only distribution channel was Securitize Markets, LLC, a securities broker registered with the SEC. In addition, Securitize, LLC, a transfer agent registered with the SEC, is able to register and record the ownership of securities on the blockchain.


It is worth noting that the issuance of the fund used a newly registered BVI entity of BlackRock instead of its regular fund issuance entity. This setting may be due to risk considerations to avoid affecting the compliance entity as much as possible. In addition, the four relevant persons involved in the SEC registration documents are Ian Pilgrim in Bermuda, Jennifer Collins in Cayman, W. William Woods in Canada and Noëlle L』Heureux in California, USA. Among them, only Noëlle L』Heureux is the Managing Director of BlackRock, and has worked at BlackRock for 32 years. The other three should belong to third-party institutions.


Information source Link


BUIDL product design


Transaction currency: USD


Subscription and redemption: Daily subscription and redemption


Strategy: Invest mainly in short-term government bonds


Net value of shares: 1 BUIDL = 1USD


Token standard: Specially designed ERC20 has a whitelist mechanism design. Tokens can only be circulated in whitelisted addresses. Transfers and transactions to addresses outside the whitelist will fail.


Income calculation:Income is recorded according to the shares held by the address at 3:00 pm Eastern Time every working day. Income is distributed by issuing additional BUIDL tokens and airdropping on the first working day of each month.


Redemption rules:Redemption is made daily. On that day, redemption is made at 1 BUIDL = 1 USD based on the number of BUIDL tokens held. Direct redemption through Securitize requires sending tokens to the specified address, and then destroying BUIDL at 3 pm every working day and completing the redemption operation of off-chain USD. Generally, redemption is T+0. The accumulated income from the last dividend payment needs to initiate a "full redemption" operation, and the full redemption is completed 2-3 working days after the interest payment (the first working day of each month).


BUIDL is an ERC20 token issued on the Ethereum blockchain, which enables free circulation within the whitelist and can also enter the smart contract of the whitelist. Interactions with addresses outside the whitelist will fail. For DeFi users, a simple step is actually a major breakthrough in traditional finance. This means that large institutions have begun to recognize public chains and use them as accounting tools to register asset ownership transfers and changes. A series of rights and interests based on ownership will also be recorded in the public chain ledger, enjoying its openness, transparency, efficiency and traceability.


By opening the transfer function, BUIDL has enjoyed the advantages of the blockchain-based settlement system to a certain extent. One of the use cases is provided by Circle. After the release of BUIDL, Circle released a contract that allows real-time BUIDL to be exchanged for USDC, and prepared a redemption reserve of 100 million USDC to provide BUIDL holders with a real-time 1 BUIDL = 1 USDC redemption option.


The redemption option is provided by Circle and is essentially an OTC transaction: Circle provides an exchange contract (Redemption address in the figure below), and users transfer funds to the exchange contract, which will trigger the contract to transfer USDC in another EOA account (holder address in the figure below) to the user's address. These steps are all on-chain transactions and atomic settlement.


Institutions enter DeFi, what is the current status of BlackRock’s BUIDL? image 0

Figure 1: Flowchart of the USDC redemption contract provided by Circle for BUIDL


At the beginning of its establishment, the EOA account had a balance of 100 million USDC. Here, since the daily interest of BUIDL tokens is realized through centralized accounting, if USDC is exchanged through the Circle contract, it is a transfer from the perspective of the issuer BlackRock. Therefore, the interest recorded daily between the last dividend payment and the time when the transfer occurred will also be paid at the next dividend payment time. After the BUIDL is exchanged, Circle will hold BUIDL, and subsequent operations will be decided by Circle. From the current on-chain information, Circle will periodically redeem BUIDL for USD through Securitize, and then mint USDC and add it to the fund pool.


What is the current status of BUIDL three months after its issuance?


On May 15, 2024, BUIDL's AUM (Asset Under Management) exceeded Franklin Templeton's tokenized treasury bond fund FOBXX, becoming the largest tokenized fund project. As of July 9, 2024, the total asset management scale reached 502 million USD. However, compared with the trillion-dollar scale of the traditional market, the overall tokenized treasury bond product fund scale is only 1.81 billion USD, and there is still great room for growth. (Data source: RWA.XYZ, July 9, 2024)


Currently BUIDL is held by 17 addresses, and the holding ratio of each address is as follows:


Institutions enter DeFi, what is the current status of BlackRock’s BUIDL? image 1

Figure 2: BlackRock BUIDL token holding distribution chart (data as of July 9, 2024)


Securitize allows each customer to bind up to 10 on-chain whitelist addresses. Among the above 17 addresses, 2 of them belong to Ondo Finance, the largest holder, with a total of 223 million BUIDL, worth 223 million USD. The two addresses are 0x72, holding about 173 million BUIDL and 0x28, holding 50 million BUIDL, which are the underlying assets of its tokenized treasury fund product OUSG (asset management scale 223 million M USD). Previously, the underlying assets were BlackRock iShares' short-term treasury bond ETFs, which were all converted to BUIDL after the issuance of BUIDL. Currently, the redemption of OUSG is achieved through the redemption contract of Circle to achieve real-time USDC redemption.


In addition, because BUIDL has cooperation with several crypto custodians, multiple addresses on the chain are displayed as EOA addresses, with no historical transaction records, or traditional institutions invited by BlackRock and Securitize to try to purchase tokenized funds and are custodial in the accounts of these custodians.


The USDC redemption pool provided by Circle currently has a balance of 80.6 million USDC, with Ondo Finance being the main redeemer. The Circle address (0xcf) also holds about 19.6 million BUIDL.


Institutions enter DeFi, what is the current status of BlackRock’s BUIDL? image 2

Figure 3: Number of USDC held by the BUIDL USDC redemption contract, data as of July 9, 2024. Data source: BlackRock BUIDL (Dune)


The DeFi path of financial institutions


Due to the investment threshold set by BUIDL, it is difficult for ordinary users to directly obtain BUIDL. However, BlackRock's issuance of money market funds with stable returns and secure assets on the chain allows other institutions to introduce stable returns from the real world into the DeFi world by using BUIDL as the underlying raw material.


A typical example here is Ondo Finance. As mentioned earlier, Ondo is the largest holder of BUIDL. Through the redemption contract provided by BUIDL and Circle, Ondo Finance has realized the rapid subscription and redemption of the money market fund product OUSG through USDC, while lowering the threshold for users to obtain it, from the starting investment threshold of 5 million USD to 100,000 USD. At the same time, Ondo can cooperate with other DeFi protocols to further transfer the income to the DeFi world, such as through DeFi lending platforms such as Flux Finance, so that anonymous DeFi users can also obtain real-world income. Such a layered packaging structure can guide the real-world income provided by traditional large institutions to the DeFi world.


Full entry of institutions? Facing many obstacles


Products such as BUIDL improve the liquidity management efficiency of money market funds through the design of combining on-chain and off-chain, and provide investors on the chain with a channel to obtain real-world income. BlackRock tokenizes funds and cooperates with related Web3 institutions such as Securitize, Circle, and Ondo Finance to enable Web3 institutions to obtain real-world returns in the form of tokens on the public chain, avoid complex deposit and withdrawal processes, and achieve interoperability through smart contracts to increase application scenarios and improve the efficiency of fund use.


In fact, one thing BUIDL does here is to allow tokens to be directly transferred on the chain without going through centralized institutions. Behind the simple transfer function, the compliance and legal costs are very high. In traditional financial platforms, it is difficult to transfer between different accounts, and even accounts with the same name are very difficult. Generally, financial institutions only allow transactions, subscriptions, and redemptions on the platform. One month after BlackRock implemented the transfer function, Franklin Templeton's FOBXX also implemented this function, indicating that the institution recognizes the public chain as a ledger, which is also a breakthrough at the product level. (The difference is that FOBXX holders do not have control over the address private key, so they can only transfer within the platform and cannot truly operate on the chain).


From the perspective of asset tokenization regulation in various countries and regions, the current regulation is conservative: the United States has no clear legislation, so asset issuers only use various exemption clauses, and BlackRock also avoids affecting its own compliance entities by setting up an SPV in BVI. In other regions, such as Singapore, asset tokens are subject to whitelist restrictions and can only be issued to qualified investors. These restrictions and uncertainties hinder users and institutions from further entering the field of Web3.


On the optimistic side, BlackRock and Franklin Templeton have explored the field of tokenization, which has attracted the attention of the financial community to a great extent. They have demonstrated the high efficiency of on-chain interactions with real cases, and promoted supervision to promote the formulation of new laws and standards.


This article comes from a contribution and does not represent the views of BlockBeats.


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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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