BUIDL: Understanding BlackRock's tokenised fund

It's an announcement that will go down in the history of decentralised finance (DeFi). On 21 March, BlackRock made official the arrival of BUIDL (BlackRock USD Institutional Digital Liquidity Fund), a fund tokenised on the Ethereum blockchain. "This launch will speed up a lot of things concerning tokenisation", confides a French banker.

"Even though other traditional players have already launched similar products, Blackrock is bringing unprecedented media exposure and giving itself the means to integrate its product permanently into the DeFi," notes Sébastien Dérivaux, co-founder of Steakhouse Financial, a company that advises decentralised autonomous organisations (DAOs).

But BUIDL is not coming out of nowhere. BlackRock's iconic boss Larry Fink had been plotting its arrival for several months.

"We believe that digital asset technologies could have a significant impact," he wrote in March 2023 in his annual letter to investors.

"Tokenisation could make financial markets more efficient by simplifying the value chain and reducing costs for investors," insisted the world's largest fund manager ($10 trillion under management).

👉 Structuring and operation of BUIDL

The tokenised fund is accessible only to qualified investors, i.e. structures previously authorised by BlackRock. According to our information, the majority of subscribers are companies in the crypto sector.

Units in this fund can only be acquired in exchange for USDC, the dollar-backed stablecoin issued by US company Circle, which enjoys a solid regulatory reputation (read our feature on stablecoins).

Each BUIDL token corresponds to a stablecoin value of one dollar. Holding it enables it to receive dividends in the form of new BUIDL tokens, a return from its reserve invested for the vast majority in US Treasury bonds.

The advantages over a traditional investment in sovereign bonds are numerous: dividends are paid daily and investors can transfer the fund's tokens 24 hours a day, 7 days a week and 365 days a year. For the time being, only BlackRock white-listed investors can trade the token between themselves.

"What is of particular interest to institutional investors is the ability to split the receipt of returns over very short time intervals, a feature that does not exist in the traditional financial world," explains Jean-Marie Mognetti, boss of CoinShares, one of Europe's leading asset managers specialising in crypto.

BlackRock relies on a number of major players in the crypto ecosystem to make its product work. Anchorage Digital Bank, BitGo, Coinbase and Fireblocks are among its most important providers. The Securitize platform is responsible for tokenising BUIDL. US bank BNY Mellon, meanwhile, is ensuring the fund's interoperability between digital and traditional markets.

"BUIDL is still in its infancy, but its operation opens up very significant industrial prospects and paves the way for new fund management strategies," anticipates Jean-Marie Mognetti.

👉 Integration into DeFi

BlackRock's project could quickly be integrated into decentralised finance (DeFi) protocols, as it offers a number of advantages. "The fact that BUIDL is made up of very low-risk assets and that it is issued by a player like BlackRock makes it an ideal candidate for collateralising DeFi positions or diversifying the protocols' treasury," insists Sébastien Dérivaux.

One DeFi protocol has already announced the imminent integration of BUIDL. This is Mountain Protocol, the issuer of the USDM stablecoin, which has a capitalisation of almost $150 million and is one of the first subscribers to BlackRock's fund.

"In terms of stability and regulation, BlackRock's asset meets many conditions. This project could be the first major bridge between traditional finance and the world of decentralised finance," Martin Carrica, co-founder of Mountain Protocol, tells The Big Whale.

Ondo Finance, which specialises in the tokenisation of real-world assets including US Treasuries, meanwhile announced on 27 March that it would be relying on BUIDL to gain efficiencies.

Other projects, such as MakerDAO (which issues the decentralised stablecoin DAI), could also adopt it. The protocol, relying increasingly on a reserve of US Treasury bonds (around 30% of real-world assets, of which almost 3/4 are currently Treasury bonds), would thus find the ideal tool to optimise its operation. And it's not impossible that centralised stablecoins (USDC for example) will follow suit.

"The reserves of centralised stablecoins are mostly made up of US Treasuries which, by default, have therefore ended up as the first tokenised traditional world assets. It's natural that most issuers are taking a close interest in BlackRock's product," insists Marina Baudéan, France and Benelux director of 21Shares, one of Europe's leading crypto fund managers and present in the US with a Bitcoin ETF.

In the longer term, BlackRock's products could play a central role in tomorrow's DeFi ecosystem.

"BUIDL is just the beginning. BlackRock will soon be launching other tokenised products," confides a source close to Larry Fink's company. And other competitors could soon follow suit.

"It's a given that other heavyweights in traditional finance will follow suit in the coming months," anticipates Sébastien Dérivaux.

👉 And after T-bills?

It was quite natural for BlackRock to rely on T-bills, as they are the "safe" products currently offering the best yield (5.4% annual on a one-month maturity). Nevertheless, the attractiveness of this investment could fall in the coming months if central banks cut rates.

As a result, we should soon see the emergence of tokenised funds holding other types of asset in their reserves, starting with gold. The Chinese-British bank HSBC announced on 27 March the launch of a tokenised fund made up of a gold reserve, whose token will be a representation of the metal on the blockchain.

"Treasury bills are just a starting point for tokenisation, which will expand to many more traditional assets in the years to come," says Kevin Chan, vice president of US venture capital fund BlockTower, whose investments include Centrifuge and Maple Finance, two cutting-edge projects in the tokenisation of assets from the traditional world.

"These players will play a key role, as they promise to manage liquidity in tokenisation that includes more assets from the traditional world. We are just at the beginning," continues Kevin Chan.

Evidence that the trend is being taken very seriously by the whole of traditional finance, a working group set up by the UK government on 26 March called on businesses to define strategies to develop tokenisation in the UK.

Members of the committee include giants such as the London Stock Exchange, the UK Treasury, the local financial regulator...and the now-ubiquitous BlackRock.

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