Blockchain and ETFs: It's Not Just for Crypto Anymore

Settlement delays and market inefficiencies may drive ETF issuers to explore blockchain solutions.

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DJ
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Finance Reporter
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Reviewed by: Paul Curcio
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Edited by: Kiran Aditham

Settlement delays and technological limitations in traditional ETF infrastructure are pushing the industry to consider blockchain-based solutions, according to Prometheum co-CEO Aaron Kaplan.

When dealing with digital assets, current ETF structures must navigate a complex, two-system approach where cryptocurrencies settle instantly while ETF shares take until the next trading day or longer to settle, creating potential inefficiencies, Kaplan explained in an interview with etf.com.

“You have two sets of records,” Kaplan said. “The underlying cryptocurrency exists on a blockchain, and the ETF, meaning the 20th century, electronically issued ETF exists on the traditional securities infrastructure books. They have to play with each other, and they don't interact with each other seamlessly.”

While much attention has been paid to crypto ETFs, Kaplan believes the real breakthrough could come from reimagining ETF infrastructure itself using blockchain technology. This shift could not only reduce settlement delays and intermediary costs, but also enable new features like yield generation through staking.

Navigating the Future of ETF Infrastructure

Kaplan envisions a future where ETFs exist entirely on-chain, managed through smart contracts that hold the underlying tokens and, in turn, providing transparent proof of ownership. "The smart contract holds the underlying tokens in it so you can prove that it's there," he said. "You don’t have these two systems working in parallel anymore."

This structure could reduce slippage, increase transparency, and unlock additional yield opportunities through staking mechanisms—an attractive feature for institutional investors. "When you can have an ETF that exists on-chain that provides staking, I would argue that's the holy grail," Kaplan said.

Beyond operational improvements, blockchain infrastructure could significantly lower costs for large institutional investors. “If you look at a pension fund that's investing $100 million at a time, if they're saving 30 to 50 basis points, that's good money to them," Kaplan noted.

Kaplan acknowledged that any transition would require navigating regulatory requirements, but he sees minimal regulatory hurdles since ETFs on-chain would still be classified as securities.

“With any sort of security, regardless if it's a bond, blockchain or not, you have to go through some sort of registration process," he explained. “That's a regulatory process. There's not much difference.”

Several major financial institutions, including Franklin Templeton and BlackRock, are already exploring blockchain solutions for fund operations. Kaplan compared the potential shift to blockchain ETFs to the earlier move from paper-based to electronic trading.

“It’s comparable to people who understood early that electronic trading was [going to] be a big thing,” Kaplan said. “Those people who stayed with paper for a while fell by the wayside, but it really reshuffled the hierarchy when it came to the securities universe.”

As market infrastructure evolves, Kaplan believes that issuers who embrace blockchain could gain a competitive advantage. He suggested that while the transition to blockchain-based ETFs will take time, firms that proactively embrace the technology could be positioned to capitalize on its efficiencies and cost benefits. 

A graduate of The University of Texas, Arlington with a BA in Communications, DJ has covered retirement plans, mortgage news, and financial advisor trends. His background includes producing daily content, managing newsletters, and engaging with industry experts. DJ is excited to contribute to ETF coverage and learn more about the $10-trillion-dollar ETF industry. Outside of work, he enjoys exploring New York City's food scene, anime, and video games. 

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