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The institutionalisation of tokenised funds
April 2026
David Lloyd, CEO of CV5 Capital, considers how institutional capital will not be unlocked by technological novelty alone, but by the development of robust, regulator-aligned infrastructure that meets the governance, custody, and compliance standards investors require
Image: CV5 Capital
The digital asset industry has spent the better part of a decade focused on innovation. New protocols, new token models and new approaches to decentralised finance have each been positioned as the development that would finally bring institutional capital into the space at scale. That capital has not arrived as anticipated. The reason is not a lack of opportunity or interest. It is the persistent absence of the institutional-grade infrastructure that professional allocators require before they will deploy.
As digital assets mature, this reality must be confronted directly. The managers and platforms that succeed in the coming decade will not be those who innovate fastest; they will be those who build most durably. Nowhere is this tension more clearly illustrated than in the evolution of tokenised funds and nowhere has the infrastructure argument been more decisively validated than in the Cayman Islands, whose comprehensive statutory framework for tokenised fund structures came into force on 24 March 2026.
Tokenisation is a layer, not a solution
Tokenisation has long been framed as an endpoint: the digitisation of assets enabling fractional ownership, continuous liquidity, and frictionless transferability. The proposition is intellectually compelling, but operationally incomplete. What tokenisation addresses is the representation of ownership. What it does not address, in isolation, is governance, custody, regulatory compliance, or investor protection. These are not secondary considerations; they are the preconditions under which institutional capital is deployed. A token may represent an asset. It does not guarantee the enforceability of rights across jurisdictions, assure proper valuation or ensure that the underlying structure aligns with the regulatory frameworks within which institutional allocators operate.
Without those elements, tokenisation remains a technical feature layered over an otherwise fragile structure.
What institutions actually require
Institutional investors do not deploy capital on the basis of innovation alone. Pension funds, sovereign wealth funds, endowments, and large family offices allocate on the basis of certainty, control, and governance. The institutional checklist is consistent regardless of asset class: clarity on legal ownership and the rights it confers; independent valuation and reporting; segregation and protection of assets; compliance and anti-money laundering (AML) frameworks; and credible regulatory oversight from a recognised authority.
These requirements do not diminish because the instrument is digital. The novelty of the asset class often raises the bar further. Tokenised funds must therefore be integrated into the institutional framework rather than positioned as a replacement for it. Technology should enhance efficiency and transparency; it cannot substitute for the underlying architecture that institutions depend on to meet their own fiduciary obligations.
The Cayman legislative breakthrough
Jurisdictional choice plays a determinative role in enabling tokenised funds to meet institutional standards, and no development in 2026 illustrates this more clearly than the statutory framework for tokenised fund structures introduced by the Cayman Islands Government. Three coordinated pieces of legislation came into force simultaneously on 24 March 2026: the Mutual Funds (Amendment) Act, 2026; the Private Funds (Amendment) Act, 2026; and the Virtual Asset (Service Providers) (Amendment) Act, 2026. To understand the significance of this framework, it is necessary to understand the problem it resolved.
The regulatory ambiguity problem
The Cayman Islands has operated a virtual asset regulatory regime since the introduction of the Virtual Asset (Service Providers) Act (the VASP Act), which established a registration and licensing framework for entities engaged in virtual asset business. The VASP Act defines “virtual asset issuance” broadly. As tokenisation of fund interests gained traction, a material question arose: did the issuance of digital tokens representing interests in a regulated Cayman fund constitute a virtual asset issuance under the VASP Act?
If the answer was yes, the implications were significant. Fund managers would face dual regulatory obligations: registration and oversight under both the VASP Act and either the Mutual Funds Act or the Private Funds Act.
That dual burden would introduce higher compliance costs, greater operational complexity and, critically, uncertainty about which regulatory framework governed the fund.
For institutional investors evaluating a tokenised fund, this ambiguity was a material obstacle.
In practice, it deterred high-quality tokenised fund launches in Cayman and suppressed a market the jurisdiction was well-placed to lead.
The May 2025 amendment
The legislative response came in stages. In May 2025, an initial amendment to the VASP Act revised the definition of “issuance of virtual assets” to exclude two specific categories: equity interests as defined under the Mutual Funds Act, and investment interests as defined under the Private Funds Act.
This was the first concrete signal that the Cayman Islands Government and Cayman Islands Monetary Authority (CIMA) had concluded that tokenised fund interests belong within the funds regulatory framework, not the virtual asset regime. It addressed the immediate legal uncertainty, but the broader operational framework for tokenised funds still required development.
The full framework
Following the May 2025 amendment, the government published a consultation paper alongside further Amendment Bills, seeking industry input through September 2025. The bills addressed how the Mutual Funds Act and Private Funds Act should be updated to expressly accommodate tokenised structures and govern their operation. The framework that entered into force on 24 March 2026 operates on several interconnected levels.
The Mutual Funds (Amendment) Act, 2026 and Private Funds (Amendment) Act, 2026 introduce express statutory provisions for tokenised funds, defined as mutual funds with equity interests represented by digital equity tokens and private funds with investment interests represented by digital investment tokens respectively. Tokenisation is expressly treated as a technological overlay rather than a new category of regulated fund. Tokenised funds remain subject to exactly the same regulatory regime as their traditional counterparts. The legal register of interests continues to constitute the authoritative record of ownership; the token is the representation, not the record.
The Virtual Asset (Service Providers) (Amendment) Act, 2026 provides the corresponding clarification on the VASP side: the issuance, transfer or redemption of tokenised fund interests by regulated funds does not constitute a virtual asset issuance under the VASP Act, and no VASP approval or registration is required solely by virtue of a fund issuing tokenised interests.
One boundary is clearly maintained. Tokenised funds that provide virtual asset services to third parties, such as exchange, custody or transfer services offered externally, remain fully subject to the VASP Act. The carve-out applies to the issuance of fund interests in token form; it does not create a broad exemption for funds operating as virtual asset service businesses.
Key operational provisions
The framework introduces several targeted obligations that reflect the specific characteristics of digitally represented interests. Offering documents must include disclosures addressing token-specific risks, including cybersecurity, transferability and operational technology risks, along with the measures in place to address them. Token transfers are subject to a significant restriction: interests may only be transferred with the consent of the fund’s operator, whether its board of directors, general partner or trustee.
This preserves the operator’s control over the investor base and supports ongoing regulatory compliance.
CIMA’s supervisory powers have been expressly extended to cover inspections of the underlying technology and token transactions. A new registration pathway allows funds to register with CIMA as tokenised funds alongside their existing licensing. Perhaps the most operationally significant provision is retrospective effect.
Structures that issued tokenised fund interests before the legislation commenced, and therefore operated in the regulatory grey area that had existed, are brought within the new framework without being treated as non-compliant. This is an unusual legislative provision and a deliberate policy choice to provide certainty to those who had structured their arrangements in good faith.
The overall effect is to place tokenised fund structures definitively within a regulatory perimeter that institutional investors already understand. CIMA regulates the fund. The token is the mechanism of representation. The legal, governance and investor protection standards are those of the established fund regulatory framework, backed by a regulator with a decades-long track record of international recognition.
The platform model
As the operational complexity of digital asset funds increases, the platform manager model is gaining traction.
Rather than each fund constructing its own governance, compliance, and administrative infrastructure independently, the platform model provides a shared institutional foundation across multiple strategies and managers. Infrastructure costs that would be prohibitive for an emerging manager in isolation become manageable when distributed across a platform.
Governance standards that would take months to build from scratch are available from day one.
For tokenised funds specifically, the new Cayman framework introduces concrete operational requirements: token-specific risk disclosures, transfer consent mechanisms, technology audit readiness and CIMA notification obligations. A manager launching a tokenised fund onto a platform that already has these systems in place is materially better positioned than one building them independently while simultaneously running a fund and raising capital.
Conclusion
The digital asset industry is entering a phase in which what is technologically possible must be matched by what is institutionally sustainable. Tokenisation offers genuine efficiency and transparency benefits within the right structural context. The Cayman Islands has now confirmed, in statute, that those benefits can be accessed within a regulatory perimeter that institutional capital already accepts.
The infrastructure is in place. What remains is for managers and platforms to build the operational capability that matches it.
Those who invest in this layer, prioritising governance, transparency and regulatory alignment over novelty and speed, will define the terms on which institutional capital enters this space on a lasting basis.
Innovation may capture attention.
Infrastructure will capture capital.
As digital assets mature, this reality must be confronted directly. The managers and platforms that succeed in the coming decade will not be those who innovate fastest; they will be those who build most durably. Nowhere is this tension more clearly illustrated than in the evolution of tokenised funds and nowhere has the infrastructure argument been more decisively validated than in the Cayman Islands, whose comprehensive statutory framework for tokenised fund structures came into force on 24 March 2026.
Tokenisation is a layer, not a solution
Tokenisation has long been framed as an endpoint: the digitisation of assets enabling fractional ownership, continuous liquidity, and frictionless transferability. The proposition is intellectually compelling, but operationally incomplete. What tokenisation addresses is the representation of ownership. What it does not address, in isolation, is governance, custody, regulatory compliance, or investor protection. These are not secondary considerations; they are the preconditions under which institutional capital is deployed. A token may represent an asset. It does not guarantee the enforceability of rights across jurisdictions, assure proper valuation or ensure that the underlying structure aligns with the regulatory frameworks within which institutional allocators operate.
Without those elements, tokenisation remains a technical feature layered over an otherwise fragile structure.
What institutions actually require
Institutional investors do not deploy capital on the basis of innovation alone. Pension funds, sovereign wealth funds, endowments, and large family offices allocate on the basis of certainty, control, and governance. The institutional checklist is consistent regardless of asset class: clarity on legal ownership and the rights it confers; independent valuation and reporting; segregation and protection of assets; compliance and anti-money laundering (AML) frameworks; and credible regulatory oversight from a recognised authority.
These requirements do not diminish because the instrument is digital. The novelty of the asset class often raises the bar further. Tokenised funds must therefore be integrated into the institutional framework rather than positioned as a replacement for it. Technology should enhance efficiency and transparency; it cannot substitute for the underlying architecture that institutions depend on to meet their own fiduciary obligations.
The Cayman legislative breakthrough
Jurisdictional choice plays a determinative role in enabling tokenised funds to meet institutional standards, and no development in 2026 illustrates this more clearly than the statutory framework for tokenised fund structures introduced by the Cayman Islands Government. Three coordinated pieces of legislation came into force simultaneously on 24 March 2026: the Mutual Funds (Amendment) Act, 2026; the Private Funds (Amendment) Act, 2026; and the Virtual Asset (Service Providers) (Amendment) Act, 2026. To understand the significance of this framework, it is necessary to understand the problem it resolved.
The regulatory ambiguity problem
The Cayman Islands has operated a virtual asset regulatory regime since the introduction of the Virtual Asset (Service Providers) Act (the VASP Act), which established a registration and licensing framework for entities engaged in virtual asset business. The VASP Act defines “virtual asset issuance” broadly. As tokenisation of fund interests gained traction, a material question arose: did the issuance of digital tokens representing interests in a regulated Cayman fund constitute a virtual asset issuance under the VASP Act?
If the answer was yes, the implications were significant. Fund managers would face dual regulatory obligations: registration and oversight under both the VASP Act and either the Mutual Funds Act or the Private Funds Act.
That dual burden would introduce higher compliance costs, greater operational complexity and, critically, uncertainty about which regulatory framework governed the fund.
For institutional investors evaluating a tokenised fund, this ambiguity was a material obstacle.
In practice, it deterred high-quality tokenised fund launches in Cayman and suppressed a market the jurisdiction was well-placed to lead.
The May 2025 amendment
The legislative response came in stages. In May 2025, an initial amendment to the VASP Act revised the definition of “issuance of virtual assets” to exclude two specific categories: equity interests as defined under the Mutual Funds Act, and investment interests as defined under the Private Funds Act.
This was the first concrete signal that the Cayman Islands Government and Cayman Islands Monetary Authority (CIMA) had concluded that tokenised fund interests belong within the funds regulatory framework, not the virtual asset regime. It addressed the immediate legal uncertainty, but the broader operational framework for tokenised funds still required development.
The full framework
Following the May 2025 amendment, the government published a consultation paper alongside further Amendment Bills, seeking industry input through September 2025. The bills addressed how the Mutual Funds Act and Private Funds Act should be updated to expressly accommodate tokenised structures and govern their operation. The framework that entered into force on 24 March 2026 operates on several interconnected levels.
The Mutual Funds (Amendment) Act, 2026 and Private Funds (Amendment) Act, 2026 introduce express statutory provisions for tokenised funds, defined as mutual funds with equity interests represented by digital equity tokens and private funds with investment interests represented by digital investment tokens respectively. Tokenisation is expressly treated as a technological overlay rather than a new category of regulated fund. Tokenised funds remain subject to exactly the same regulatory regime as their traditional counterparts. The legal register of interests continues to constitute the authoritative record of ownership; the token is the representation, not the record.
The Virtual Asset (Service Providers) (Amendment) Act, 2026 provides the corresponding clarification on the VASP side: the issuance, transfer or redemption of tokenised fund interests by regulated funds does not constitute a virtual asset issuance under the VASP Act, and no VASP approval or registration is required solely by virtue of a fund issuing tokenised interests.
One boundary is clearly maintained. Tokenised funds that provide virtual asset services to third parties, such as exchange, custody or transfer services offered externally, remain fully subject to the VASP Act. The carve-out applies to the issuance of fund interests in token form; it does not create a broad exemption for funds operating as virtual asset service businesses.
Key operational provisions
The framework introduces several targeted obligations that reflect the specific characteristics of digitally represented interests. Offering documents must include disclosures addressing token-specific risks, including cybersecurity, transferability and operational technology risks, along with the measures in place to address them. Token transfers are subject to a significant restriction: interests may only be transferred with the consent of the fund’s operator, whether its board of directors, general partner or trustee.
This preserves the operator’s control over the investor base and supports ongoing regulatory compliance.
CIMA’s supervisory powers have been expressly extended to cover inspections of the underlying technology and token transactions. A new registration pathway allows funds to register with CIMA as tokenised funds alongside their existing licensing. Perhaps the most operationally significant provision is retrospective effect.
Structures that issued tokenised fund interests before the legislation commenced, and therefore operated in the regulatory grey area that had existed, are brought within the new framework without being treated as non-compliant. This is an unusual legislative provision and a deliberate policy choice to provide certainty to those who had structured their arrangements in good faith.
The overall effect is to place tokenised fund structures definitively within a regulatory perimeter that institutional investors already understand. CIMA regulates the fund. The token is the mechanism of representation. The legal, governance and investor protection standards are those of the established fund regulatory framework, backed by a regulator with a decades-long track record of international recognition.
The platform model
As the operational complexity of digital asset funds increases, the platform manager model is gaining traction.
Rather than each fund constructing its own governance, compliance, and administrative infrastructure independently, the platform model provides a shared institutional foundation across multiple strategies and managers. Infrastructure costs that would be prohibitive for an emerging manager in isolation become manageable when distributed across a platform.
Governance standards that would take months to build from scratch are available from day one.
For tokenised funds specifically, the new Cayman framework introduces concrete operational requirements: token-specific risk disclosures, transfer consent mechanisms, technology audit readiness and CIMA notification obligations. A manager launching a tokenised fund onto a platform that already has these systems in place is materially better positioned than one building them independently while simultaneously running a fund and raising capital.
Conclusion
The digital asset industry is entering a phase in which what is technologically possible must be matched by what is institutionally sustainable. Tokenisation offers genuine efficiency and transparency benefits within the right structural context. The Cayman Islands has now confirmed, in statute, that those benefits can be accessed within a regulatory perimeter that institutional capital already accepts.
The infrastructure is in place. What remains is for managers and platforms to build the operational capability that matches it.
Those who invest in this layer, prioritising governance, transparency and regulatory alignment over novelty and speed, will define the terms on which institutional capital enters this space on a lasting basis.
Innovation may capture attention.
Infrastructure will capture capital.
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