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Understanding fund tokenization

Fund tokenization is the process of converting traditional fund units or bond interests into digital tokens on a blockchain. This transformation enables fractional ownership, increases liquidity, significantly reduces settlement times, and enhances transparency while ensuring regulatory compliance. For fund managers, tokenization means broader distribution channels, more efficient operations, and the potential to attract a more diverse investor base.

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Overview of Cobo’s solution for fund tokenization

Cobo provides an integrated infrastructure stack to help fund managers issue and manage tokenized representations of fund interests. Our comprehensive solution bridges traditional finance with blockchain technology, enabling secure, compliant, and efficient digital asset management. Our solution includes:
  1. MPC Wallets: Institutional-grade security for both investors and fund managers
  2. Tokenization app: For smart contract deployment, token access control, and administrative operations
  3. Compliance-enforced token standards: Support for CoboERC20 smart contracts (ETH, BSC) and Token-2022 Program (Solana), ensuring continuous regulatory alignment
  4. Risk control and segregation of duties: Internal approval workflows for token management operations, ensuring every action requires Admin authorization to reduce risks of misuse or error
Key benefits for fund managers:
  1. Security
    • Token issuance, burning, and transfers are strictly controlled by contract-level permissions, preventing unauthorized actions.
    • Customizable multi-layer approval flows reduce both human and technical risks.
  2. Convenience
    • Unified interface simplifies token lifecycle management (issuance, minting, burning, etc.).
    • Deep integration with institutional-grade MPC custody enables seamless asset and token management within the same system.
  3. Compliance
    • Tokens are embedded with compliance controls to meet diverse regulatory requirements.
    • Full auditability and traceability provide transparent, verifiable compliance assurance.
  4. Role-based management
    • Permissions are designed around organizational roles (finance, compliance, operations, etc.), ensuring clear responsibilities and avoiding over-centralization of authority.

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Step-by-step workflow for EVM-based fund tokenization

Example: A securities firm plans to launch a tokenized version of a money market fund (MMF) for qualified investors, with tokens representing fund units. You are the fund manager.

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1. Fund setup and governance design

As a fund manager, you first establish the governance framework for the tokenized fund:
  • Register the fund in the target jurisdiction and define its nature (e.g., a regulated MMF).
  • Build governance and compliance frameworks covering KYC/AML, investment restrictions, and liquidity management.
  • Appoint custodians and auditors to ensure on-chain tokens align with off-chain fund assets.
  • Define operating roles, responsibilities, and SOPs, for example:
    • Product & Investment team: Fund product design, subscription planning, issuance framework
    • Operations team: Manage token liquidity and daily subscriptions/redemptions
    • Compliance & Risk team: Verify investor KYC/AML, handle regulatory filings
    • Executive team: Approve major decisions (fund transfers, contract permissions, upgrades, etc.)
    • Finance team: Reconcile on-chain/off-chain accounts, ensure total token supply matches records, perform settlements
    • Tech & Security team: Configure MPC wallet keys, set up governance and security processes, without business decision-making authority

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2. Token creation and initial setup

The following content provides best practice recommendations. For more detailed steps (such as how to create an MPC Wallet or download the Tokenization app), see Introduction to Tokenization).

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1. Initial setup

Before creating tokens, complete the basic setup of MPC Vaults and wallet addresses to ensure security and compliance.
  • Deployment Vault
    • Managed by the tech & security team with MPC nodes and high-security/cold storage.
    • Used only for high-risk, low-frequency operations (deployment, pausing, upgrading, modifying core contract permissions). Typically initiated by the security team, approved by executives, and signed by nodes.
  • Operations Vault
    • Managed by the security team, ensuring daily signatures are executed securely under MPC architecture.
    • Used for day-to-day token operations (minting, burning, maintaining allow/block lists), typically initiated by the operations team, approved by risk/compliance and executives, then signed by nodes.

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2. Create tokens with Cobo’s Tokenization app

  1. Define core token parameters (name, symbol, etc.) and set operational permissions.
  2. Initiate token creation using an address under the Deployment Vault and complete contract deployment.
  3. After deployment, review and configure steps 3, 4, and 5 to ensure security and compliance requirements are met.

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3. Manage token contract permissions

You can configure contract-level signing addresses, granting them specific operational permissions on the contract level.
  • Principles:
    • Segregation of duties: Spread signing authority across different Vaults according to risk level to avoid single points of failure.
    • High-security Vault setup: For high-risk operations, at least one offline or cold-backup node should be included to mitigate online compromise risks.
  • Best practices:
    • Admin: Contract deployment or modification of core permissions; high risk, low frequency; managed by Deployment Vault.
    • Manager: Compliance-related operations such as allow/block list updates or forced burns; managed by Operations Vault.
    • Minter: Token minting; daily operations; managed by Operations Vault.
    • Burner: Token burning; daily operations; managed by Operations Vault.
    • Pauser, Upgrader, Salvager: Low-frequency operations (pause, upgrade, asset recovery); managed by Deployment Vault.

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4. Enforce token access restrictions

Enforce contract-level controls on token ownership and transfers, ensuring only eligible wallets may hold and transfer tokens. Best practices:
For regulated MMFs, tokens must be restricted to qualified investors, with transferability limited to addresses on an allowlist.

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5. App approval workflows

Internal approval workflows for token management operations, ensuring every action is authorized to prevent errors or misuse.
  • Principles:
    Different approval thresholds by risk level:
    • High-risk operations: require majority Admin approval.
    • Routine operations: require approval from at least two Admins.
  • Best practices:
    • High-risk permissions: Require approval from a majority of executives and security team members.
    • Minting/Burning (routine): Approved by one or more operations team members.
    • Transfer restrictions & allow/block list updates (medium risk): Approved by a majority of compliance/risk team members.
    • Pausing/Resuming contracts & advanced operations (high risk): Approved by a majority of executives and security team members.

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3. Onboard investors

As a fund manager, you will guide investors through a compliant onboarding process:
  1. Conduct complete KYC/AML verification.
  2. Facilitate the signing of subscription agreements and token-related disclosures.
  3. Receive subscription funds into the designated fund account.
  4. Update your internal ledger with key information:
    • Record investor names and allocated units
    • Link wallet addresses with tokens to be issued

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4. Set up investor wallets

Investors can receive and manage tokens in two ways:
  • Provide their existing wallet address
  • Have the fund manager generate and assign an MPC wallet via Cobo for secure custody (with risk-control rules for transfers)
As a fund manager, you must verify investor wallets and add them to the allowlist in the Tokenization app.

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5. Mint, distribute, and manage tokens

Once off-chain subscriptions are funded and compliance confirmed, use the Tokenization app to mint and distribute tokens.
  • Centralized minting & distribution
    • Use an MPC “Issuance Vault” as a unified token repository (with risk-control rules).
    • Mint tokens into the Issuance Vault, then distribute to investor wallets via operations or finance teams for internal checks and control.
  • Direct minting & distribution
    • Mint tokens directly into verified investor wallets to reduce transfers and improve efficiency.
You must mint the exact number of tokens corresponding to investor subscriptions, with each token representing the investor’s beneficial interest in the fund.

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6. Ongoing token management

As a fund manager, you will continuously manage the tokenized fund:
  1. Enable investors to:
    • View token balances via Cobo’s dashboard or integrated interfaces
    • Monitor NAV updates via reporting channels
    • Submit redemption or transfer requests in line with fund terms
  2. Maintain transfer controls:
    • Restrict transfers strictly to KYC/AML-qualified investors
    • Continuously update allow/block lists to prevent unauthorized wallets
  3. Permissions & approval workflows:
    • Regularly review and adjust contract permissions and approval thresholds (per step 2)
    • Dynamically optimize approval rules to balance compliance requirements and operational efficiency
  4. Ledger consistency:
    • Ensure off-chain unit records match on-chain balances in real time
    • Establish automated reconciliation and periodic audits

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7. Process investor redemptions

When investors request redemption, as a fund manager, you will:
  1. Receive and review redemption requests through established channels
  2. Approve eligible redemptions based on fund terms, liquidity, and lock-ups
  3. Instruct investors to transfer tokens back to your designated redemption wallet (optionally an MPC “Burn Vault” with risk-control rules for added security and traceability)
  4. Verify receipt of tokens and confirm transaction completion
  5. Burn returned tokens through Cobo’s platform to ensure supply accuracy
  6. Update your internal ledger to reflect changes in fund units
  7. Transfer redemption proceeds directly to investor bank accounts

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Conclusion

Cobo’s infrastructure and Tokenization app provide fund managers with a comprehensive solution for issuing and managing tokenized fund interests. By following these best practices, you can leverage blockchain technology to enhance operational efficiency, improve investor experience, and maintain compliance across the fund lifecycle.
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