Tokenize ETF Shares: F/m Investments’ Bold SEC Gamble Could Reshape Finance
In a landmark move that could bridge traditional finance with digital asset innovation, U.S. ETF manager F/m Investments has formally requested SEC approval to tokenize shares of its U.S. Treasury 3-Month Bill ETF (TBIL). This unprecedented filing, reported by The Block in early 2025, represents the first formal request for regulatory relief specifically targeting the tokenization of a registered investment company’s ETF shares. The proposal aims to record ownership on a permissioned blockchain ledger, fundamentally altering how ETF shares transfer and settle.
Understanding the Push to Tokenize ETF Shares
F/m Investments’ proposal centers on creating digital tokens that represent direct ownership in the TBIL ETF. These tokenized shares would maintain identical characteristics to traditional shares. Specifically, they would carry the same CUSIP identifier, shareholder rights, fee structure, voting power, and economic conditions. The firm emphasizes full compliance with the Investment Company Act of 1940. This framework ensures board oversight, daily portfolio transparency, and independent third-party custody and auditing. Consequently, the tokenization seeks to enhance efficiency without altering the fund’s fundamental regulatory protections.
The permissioned blockchain ledger would function as a supplementary record-keeping system. Authorized participants could process share creation, redemption, transfer, and settlement on-chain. This technological shift promises several potential advantages. For instance, it could reduce settlement times from the standard T+2 cycle to near-instantaneous finality. It may also lower operational costs and minimize reconciliation errors between intermediaries. However, the SEC must first grant exemptive relief, as current regulations do not explicitly permit this structure.
The Regulatory Landscape for Blockchain ETFs
The SEC has historically approached crypto-related ETFs with significant caution. Notably, the agency approved several spot Bitcoin ETFs in January 2024 after a decade of rejections and delays. This approval followed a pivotal court ruling that found the SEC’s denial of Grayscale’s application to be “arbitrary and capricious.” The precedent set by these approvals created a more defined pathway for digital asset investment products. However, F/m’s request differs fundamentally. It does not propose an ETF holding cryptocurrencies. Instead, it seeks to represent a traditional securities ETF—a fund holding U.S. Treasury bills—using blockchain technology as its infrastructure.
This distinction places the filing in a novel regulatory category. The SEC’s Division of Investment Management, which oversees registered funds, will likely scrutinize several key areas. These include:
- Custody and Safekeeping: How the blockchain ledger integrates with existing custodian banks.
- Investor Protection: Ensuring retail investors understand the tokenized structure.
- Market Integrity: Preventing manipulation or fraud on the permissioned ledger.
- Operational Resilience: Guaranteeing system stability and cybersecurity.
Industry observers note the proposal arrives amid broader Wall Street experimentation with tokenization. Major institutions like JPMorgan, BlackRock, and Franklin Templeton have launched blockchain-based platforms for traditional assets. For example, JPMorgan’s Onyx network processes billions daily in tokenized collateral transactions. Similarly, BlackRock’s BUIDL fund tokenizes U.S. Treasury offerings on the Ethereum network. F/m’s filing represents a logical next step: applying this technology to the highly standardized, liquid ETF wrapper.
Expert Analysis on the TBIL ETF Proposal
Financial technology analysts highlight the strategic choice of the TBIL ETF for this pilot. The U.S. Treasury 3-Month Bill ETF holds short-term government debt, one of the safest and most liquid asset classes globally. This minimizes underlying asset risk, allowing regulators to focus solely on the technological innovation. Moreover, TBIL’s structure is straightforward, with daily transparency into its holdings. This transparency aligns well with blockchain’s inherent characteristic of providing an immutable, real-time ledger.
Legal experts point to the detailed assurances within F/m’s filing as critical. The firm explicitly states that tokenized shares will not create a new security. They will be the same shares, merely recorded differently. This argument hinges on a functional equivalence doctrine. If the SEC accepts this reasoning, it could establish a template for hundreds of other ETFs. The potential scale is significant. The U.S. ETF market surpassed $9 trillion in assets by the end of 2024, according to data from the Investment Company Institute.
The table below contrasts traditional ETF settlement with the proposed tokenized model:
| Aspect | Traditional ETF Settlement | Proposed Tokenized ETF |
|---|---|---|
| Record Keeping | Centralized depository (DTCC) | Permissioned blockchain ledger |
| Settlement Time | T+2 (Trade date plus two days) | Potential for near-instant (T+0) |
| Process Transparency | Opaque to end-investor | Auditable, transparent ledger |
| Intermediaries | Multiple (broker, custodian, transfer agent) | Potentially reduced count |
| Regulatory Framework | Investment Company Act of 1940 | Same Act, with exemptive relief |
Potential Impacts on the Financial Ecosystem
Approval could trigger a wave of similar applications from other asset managers. The race to tokenize ETFs would likely accelerate, driven by competition for efficiency gains. Primary market activities—the creation and redemption of ETF shares by authorized participants—could become more streamlined and automated. This efficiency might translate into lower costs for fund managers, potentially benefiting end-investors through reduced expense ratios over time.
Secondary market trading presents another fascinating dimension. Tokenized ETF shares could, in theory, trade on digital asset exchanges or through new blockchain-based trading venues. This would require further regulatory coordination with the SEC’s Division of Trading and Markets and FINRA. Initially, F/m’s model likely envisions the token acting as a settlement layer behind existing brokerage accounts. An investor’s brokerage statement might simply note that their TBIL holding is “tokenized,” with no direct interaction with the blockchain required.
The long-term vision, however, is more transformative. Programmable finance, where ETF tokens integrate seamlessly with smart contracts for collateral, lending, or complex derivatives, becomes conceivable. This interoperability could unlock new financial products and services. For instance, an investor could use tokenized TBIL shares as instant, verifiable collateral in a decentralized lending protocol without moving assets from their brokerage account. Such innovations remain years away, contingent on regulatory comfort and technological maturation.
Timeline and Next Steps for the SEC
The SEC’s review process for exemptive relief applications is typically methodical and lengthy. The agency will publish the filing for public comment, inviting feedback from other asset managers, legal scholars, investor advocates, and the technology sector. This comment period often lasts 45 to 90 days. Subsequently, SEC staff will analyze the comments, pose detailed questions to F/m Investments, and potentially request modifications to the proposal.
Historical precedent suggests a decision could take anywhere from six months to over a year. The approval of spot Bitcoin ETFs established that the SEC can move decisively when market structure concerns are adequately addressed. F/m’s challenge is to demonstrate that its permissioned blockchain introduces no new risks to investors or markets. Success would mark a pivotal moment, signaling regulatory acceptance of blockchain as a legitimate infrastructure for mainstream securities.
Conclusion
F/m Investments’ request to tokenize ETF shares represents a strategic and carefully constructed test case for integrating blockchain technology into the core of regulated capital markets. By focusing on a simple, transparent U.S. Treasury ETF and pledging full adherence to existing investor protection laws, the firm has crafted a compelling argument for SEC approval. The outcome will significantly influence whether traditional finance fully embraces the efficiency and transparency promises of distributed ledger technology. A green light could catalyze a new era of innovation, fundamentally changing how we record, transfer, and manage ownership in investment funds.
FAQs
Q1: What does it mean to tokenize ETF shares?
Tokenization means creating a digital representation of an asset on a blockchain. For an ETF, each token would correspond to a share, with ownership recorded on a secure, distributed ledger instead of, or in addition to, traditional centralized records.
Q2: Is the TBIL ETF investing in cryptocurrency?
No. The TBIL ETF invests exclusively in U.S. Treasury bills. The tokenization refers only to the technological method of recording share ownership, not a change in the fund’s underlying assets.
Q3: How would a tokenized ETF benefit investors?
Potential benefits include faster settlement times, reduced operational costs that could lead to lower fees, increased transparency into share ownership transfers, and future potential for integration with other blockchain-based financial services.
Q4: What is a permissioned blockchain ledger?
Unlike public blockchains like Bitcoin, a permissioned ledger restricts who can participate in validating transactions and accessing data. This control is crucial for regulated financial institutions to comply with know-your-customer (KYC) and anti-money laundering (AML) rules.
Q5: Has the SEC approved anything like this before?
While the SEC has approved blockchain-based money market funds (like the Franklin OnChain U.S. Government Money Fund) and spot Bitcoin ETFs, this is the first formal request to tokenize the shares of an existing, SEC-registered open-end investment company (ETF) structure.
