Opinion, Prometheum, Wall Street, retail investment, Opinion Some on-chain investment funds may arrive packaged as “innovation” but conceal higher costs, weaker protections, or unnecessary complexity, Prometheum’s co-CEO Aaron Kaplan argues.
New financial products bring with them familiar risks, and blockchain-issued investment funds are not immune. Assets in blockchain-based funds have nearly tripled in a year – from $11.1 billion to nearly $30 billion. New entrants VanEck, Fidelity, BNP Paribas, and Apollo recently launched on-chain investment funds. Others are coming.
Blockchain-based and digitally-native securities products have the potential to be the next big investment trend, leveraging the technology to create lower cost, faster, and more efficient financial products. But as history shows, investors need to be vigilant not to succumb to the same trappings that defined past manias.
The SPAC boom, non-traded REITs craze, and crypto’s ICO wave all promised access and financial democratization but largely left investors holding the bag. What these events exposed is worth remembering now: when new distribution channels collide with hype, opportunists often rush in with products that are riskier, costlier, or less transparent than their counterparts.
The risk for investors in digital markets is how new technology will be used. Blockchain has the potential to reduce costs, increase transparency, and unlock new and novel investment vehicles. But as blockchain-based funds move into the mainstream, this same technology could be used to recycle failed strategies or justify high fees under the guise of “digital innovation.” The result could be products that deliver no real improvement over their traditional equivalents, or worse, saddle investors with higher costs and weaker protections.
Investors should remember this adage: Timeō Danaōs et dōna ferentēs – “Beware of Greeks Bearing Gifts.” Genuine blockchain-native vehicles can offer potential improvements such as more efficient pricing and continuous yield, but investors should remain cautious of products that invoke blockchain’s promise merely to rebrand old financial structures without delivering meaningful benefits.
The task for investors is separating genuine progress from Odysseus’ Trojan Horse.
One useful test is the fee structure. Post-trade processes executed on blockchain rails should replace intermediaries to reduce costs. If the total expense ratio is more than traditional counterparts, buyer beware. Noted digital asset critic Stephen Diehl did the math:
“BlackRock’s tokenized money market fund charges investors between 20 to 50 basis points in management fees. The non-tokenised version charges as little as 0.12 basis. That’s up to 42 times more expensive.”
Investors shouldn’t be paying more for buzzwords.
Be discerning about what products are migrating on-chain, and why. Is the issuer tokenizing a product because it offers genuine benefits to all parties, or is blockchain merely a new distribution channel for overly complex and opaque products? Private funds that were previously prohibited to retail investors should not suddenly reappear as “exclusive blockchain offerings,” charging institutional-level fees for illiquid underlying holdings. There’s a reason early product innovation has focused on simple fund structures such as money market funds.
Products with suspiciously high returns or an obscured investment strategy deserve heightened scrutiny.
Product structure also tells a story. A security issued natively on-chain at origination should be more efficient and slash operational overhead. On the other hand, a tokenized security is an existing asset mirrored onto a blockchain that often mirrors TradFi costs by retaining the product’s off-chain processes and attributes. Issuers need to be clear about the structure of their on-chain products and what it means for costs, shareholder rights, and liquidity.
True democratization of capital markets means wider access and lower barriers of entry for investors without sacrificing investor protections. But don’t take the industry’s word for it – watch for cost compression and participation from trusted, legacy institutions. One recent example of the latter is credit-rating agency Moody’s testing a proof-of-concept project to embed its municipal bond ratings into tokenized securities. A simulated municipal bond was tokenized with a credit rating attached to the on-chain asset, demonstrating how off-chain data can help on-chain securities products scale with greater transparency. Integrating an industry-standard ratings system within a new and novel product set provides investors with a familiar and trusted touchstone.
In April 2025, SEC Chair Paul Atkins stressed the importance of “harnessing blockchain technology to modernize aspects of our financial system,” and underlined his expectation of “huge benefits from this market innovation for efficiency, cost reduction, transparency, and risk mitigation.” But this must be done against a backdrop of the SEC’s goal of maintaining investor protections. SIFMA reiterated the importance of preserving investor protections amidst market modernization in September.
While early returns on blockchain technology do promise these benefits and more cost efficient markets, it’s no cure-all for the spectrum of charlatans, from run of the mill opportunists to bona fide bad actors. Investors must bring the same vigilance to digital markets that they apply in traditional markets: read fund prospectuses, interrogate expense ratios, and demand neutral third-parties to infuse the required market data and trust that is foundational in traditional markets.
If issuers, investors, and other market participants are mindful of these standards as markets are modernized, digital markets have the potential to deliver the efficiency and genuine innovation that “democratization” has promised.
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