Tokenised funds were the talk of the town, and unsurprisingly so, given the aptly timed draft legislative updates published in early February heralding a clear regulatory framework for tokenised funds set up in the Cayman Islands.

To add context, let’s briefly summarise a traditional fund – an investment vehicle pooling capital from a number of investors. Investors typically will hold their interests in the fund by subscribing for shares in the fund vehicle (in the case of a company), limited partnership interests (in the case of a limited partnership), or membership interests (in the case of an LLC). The concept of a tokenised fund, fundamentally, is an investment fund which allows investors to subscribe for interests in the fund by acquiring tokens on a blockchain. The fund would mint and send tokens to an investor who has successfully subscribed for fund interests and sent capital to the fund (usually via a smart contract).

Conceptually, in the ideal of a tokenised fund, the tokens issued by the fund vehicle would be the sole representation of fund interests (investors would not need to hold shares or other forms of interest), and the fund would operate entirely on-chain. In practice, due to other requirements and regulations applicable to operating an investment fund (as well as investor readiness), for now the most typical “tokenised fund” would issue tokens which represent/mirror the more traditional shares which are also issued. While investors in such a fund will likely consider the tokens to be the representation of their ownership interest in the fund, in reality there would be a conventional share register behind the scenes as well, which would reflect the ownership of those shares mirrored by the tokens.

Tokenised funds are not new in Cayman or the offshore world generally, and many prominent tokenised funds already operate in Cayman. That said, many such funds to date have been set up within the constraints of frameworks designed for traditional funds, with solutions to issues raised by tokenisation being developed to fit without a clear framework or certainty as to expectations of the regulator. The proposed legislative changes[1] (once in force) will provide a definitive and clear framework allowing for certainty in setting up in Cayman, boosting confidence for both managers and investors.

Critically for offering certainty for tokenised fund launches in Cayman, the issuance, creation, sale, transfer or other disposition of tokenised equity or investment interests by regulated private and mutual funds will not constitute the ‘issuance of virtual assets’ under the Virtual Assets (Service Providers) Act, and will therefore not be a regulated activity under that Act. The changes add clarifications and additional requirements specific to digital tokens to the existing funds regime. The key operational requirements and considerations to comply with the licensing regime as tokenised funds formed in the Cayman Islands are set out below:

• Comprehensive token records and availability to the Cayman Islands Monetary Authority (CIMA). Tokenised funds must obtain and securely maintain all records of the issuance, creation, sale, transfer and ownership of tokenised interests (including any additional data CIMA may require), and make them available within periods specified by CIMA. For mutual funds, licensed administrators must be satisfied these records exist and are accessible; for private funds this is framed as a registration‑stage and  ongoing obligation.
• Annual operator confirmation. The operator must confirm to CIMA annually that all token‑related records have been properly kept and maintained in compliance with the relevant Act.
• Transfer approvals. A tokenised equity/investment interest is only transferable with the operator’s approval in accordance with the offering document.
• Offering document disclosure and mitigation. Token specific risks, including at least cybersecurity and transferability risks, plus any additional risks identified by CIMA, must be disclosed, and the offering document must explain how those risks are addressed or mitigated for investors.
• CIMA power to set token characteristics. CIMA may impose specific restrictions on the characteristics of the digital tokens representing fund interests, and the fund must ensure compliance with any such restrictions.
• Periodic reporting. Tokenised funds must comply with any periodic reporting requirements that CIMA specifies under the Acts.
• Supervisory reach (technology and transactions). CIMA’s supervision is expressly extended to inspections of the underlying technology and token transactions for tokenised funds, in addition to its existing powers.

[1] Reference is to the Mutual Funds (Amendment) Bill, 2026, the Private Funds (Amendment) Bill, 2026 and the Virtual Asset (Service Providers) (Amendment) Bill, 2026

One of the major benefits often touted in discussion of tokenised funds is that the ability to transfer or redeem tokens at any time, on-chain, will allow for instant liquidity pools. This can absolutely be true to a certain extent; however, it is not an absolute.

In a fund operating a highly liquid strategy anyway (for example, money market funds (MMF) which have been one of the most prominent strategies managers have sought to tokenise to date), then it is true that the distributed ledger technology on which tokens are held and transferred can allow more constant liquidity. For example, an investor could redeem interests in a tokenised MMF for equal value of, for example, USDC over weekends and evenings through operation of smart contracts. In reality though, this 24/7 liquidity is only possible due to the liquid nature of the underlying investments.

In funds operating less liquid strategies, the enhanced liquidity would theoretically come from easier access to a secondary market, so that investors can easily transfer their fund interest to other prospective investors, thereby liquidising their interest. While the ease  of transfer will be enhanced by tokenisation, all investors in a tokenised fund will be subject to the same investor suitability and “know your customer” requirements as those in a traditional fund. In practice, this means that for Investor A to transfer to Investor B, Investor B would also need to be known to the fund in advance and have demonstrated that they meet all requirements and have provided all KYC information. This premise is embedded in the Cayman framework for tokenised funds, in the requirement for the fund to approve all transfers.

The typical approach is for tokenised funds to maintain a “whitelist” of approved investors so that transfers to those already pre-approved as investors (and certainly to other existing investors) can be made without delay or additional steps. This may therefore allow for some increased liquidity, however the extent of this will very much be dependent on the whitelisted pool of investors who have already completed KYC screenings and satisfy investor suitability requirements.

There are a number of other potential benefits of tokenising funds often discussed, including:

• Broadening access to high-value asset classes (such as real estate).
• Increased transparency and ease of audit – a benefit not unique to tokenising funds, blockchain technology offers transfer/transaction history in live time and with reduced risk of fraud.
• Operational efficiencies through automated onboarding, transfer and redemption processes.

While certain aspects of the potential benefits are very much tangible now, others will become more apparent as the infrastructure needed to support these structures grows, better achieving the efficiencies promised by this sector evolution for the benefit of managers and investors alike.

In bringing in much needed regulatory clarity, the Cayman Islands’ government has ensured that Cayman will continue to lead the way as the funds market evolves to realise the benefits promised and be the jurisdiction at the forefront of the tokenised fund movement.