The Hidden Dangers of On-Chain Investment Funds: A Cautionary Tale

The emergence of new financial products brings familiar risks, and blockchain-based investment funds are no exception. The assets in these funds have nearly tripled in a year, rising from $11.1 billion to nearly $30 billion, with new entrants like VanEck, Fidelity, BNP Paribas, and Apollo launching their own on-chain investment funds. However, as history has shown, investors must be cautious not to fall prey to the same pitfalls that have defined past market trends. The SPAC boom, non-traded REITs craze, and crypto's ICO wave all promised increased access and financial democratization but ultimately left investors with significant losses. These events highlighted the importance of vigilance when new distribution channels converge with hype, as opportunists often introduce riskier, costlier, or less transparent products. The risk for investors in digital markets lies in how new technology will be utilized. While blockchain has the potential to reduce costs, increase transparency, and unlock novel investment vehicles, it can also be used to recycle failed strategies or justify high fees under the guise of 'digital innovation.' This could result in products that offer no real improvement over their traditional counterparts or, worse, saddle investors with higher costs and weaker protections. Investors should be cautious of products that invoke blockchain's promise merely to rebrand old financial structures without delivering meaningful benefits. A useful test is the fee structure, as post-trade processes executed on blockchain should replace intermediaries and reduce costs. If the total expense ratio is higher than traditional counterparts, it is a cause for concern. Investors should be discerning about which products are migrating on-chain and why. Is the issuer tokenizing a product because it offers genuine benefits, or is blockchain merely a new distribution channel for complex and opaque products? Products with suspiciously high returns or an obscured investment strategy deserve heightened scrutiny. True democratization of capital markets means wider access and lower barriers to entry for investors without sacrificing protections. However, this must be done against a backdrop of maintaining investor protections, as emphasized by the SEC and SIFMA. While early returns on blockchain technology promise efficiency, cost reduction, transparency, and risk mitigation, investors must remain vigilant and bring the same scrutiny to digital markets as they do to traditional ones, reading fund prospectuses, interrogating expense ratios, and demanding neutral third-party data to infuse trust.