Can the BUIDL on the BlackRock chain achieve real-time settlement? Why is it a significant step for industry development?

Researcher RyanCiz.eth has analyzed the recent launch of the tokenized fund BUIDL by Blackrock, focusing on its vision of “real-time settlement.” The article also examines the difficulties traditional financial institutions face in achieving real-time settlement in the DeFi native context, and concludes that the launch of BUIDL has more significance for industry development rather than tangible value.

BUIDL, which stands for Blackrock USD Institutional Digital Liquidity Fund, is Blackrock’s first attempt at tokenization in the industry. It provides investors with the opportunity to participate in traditional investments through Web3 encrypted cryptocurrencies. The fund accepts deposits in USDC and USD and invests in RWA through the on-chain contract of BUIDL. Investors receive BUIDL tokens equal in value to the US dollar and earn investment interest, which is automatically distributed to the BUIDL token holding address. The tokens can only circulate in whitelisted addresses.

The fund’s investment targets are U.S. government bonds and repurchase agreements in the traditional trading market, with a portion of cash reserved for liquidity. Currently, the product is only open to qualified investors, with a minimum subscription amount of $5 million. The participation of Web3 institutions is rare, and there has been no observed behavior of USDC subscription in the on-chain situation; buyers are predominantly traditional institutions.

Securitize, Blackrock’s blockchain industry partner, is responsible for on-chain interaction and tokenization. Securitize Markets holds an ATS license in the U.S. and is a securities dealer regulated by the U.S. Financial Industry Regulatory Authority (FINRA). Securitize LLC is also a Transfer Agent registered with the SEC, and its system is built on the blockchain.

Blackrock, as a fund management company entering the Web3 space, needs to find institutions like Securitize to assist in tokenization. Other institutions involved include BNY Mellon Bank, which assists in traditional asset custody, and BitGo, which engages in ecological cooperation, supporting custody and asset distribution for such assets.

RyanCiz.eth believes that compared to previous types of RWA assets, the highlight of BUIDL is the ability to subscribe and redeem more immediately, which is what traditional institutions like Blackrock are eager to achieve. In the Web3 world, assets on AAVE enjoy a 10% annual return, and funds can be entered and exited in real-time, which is the most attractive aspect of public chain technology for financial institutions: real-time settlement.

However, in the traditional process, due to the lack of unified ledgers among institutions, settlement and clearing must be performed, involving various external institutions and internal processes. As the chain becomes longer, T+2, T+3, or even T+5 settlement periods are common. Therefore, Blackrock hopes to improve existing financial efficiency through tokenized funds.

Although Blackrock claims that BUIDL’s subscription and redemption can be done in real-time, there are still frictions in settlement and clearing due to the involvement of the traditional fiat system. There are too many checkpoints and prerequisites. RyanCiz.eth has summarized the current situation and unresolved issues of such traditional channels:

Securitize currently supports the subscription and redemption of USDC and USD. If users choose to subscribe using USDC, they still need to go through Circle for conversion. Currently, Circle only has a customer bank. Unless Securitize and Blackrock both have accounts in that bank, or there is an instant interbank transfer network, real-time subscription is not possible.

If users choose to subscribe using USD, they need to first deposit it into the Securitize platform. If it is not the same bank, there will be time differences and losses due to interbank transfers. If the bank transfer between Securitize and Blackrock is within the same bank, it can be done in real-time.

Real-time subscription is based on the premise that Blackrock can instantly mint new fund shares. However, it takes time for the invested USD to purchase underlying assets, similar to stETH, which dilutes the overall APR.

For large redemptions that exceed the cash held in the fund, selling underlying assets takes more time. However, as the largest asset management company, Blackrock has ample liquidity to provide.

From the above, it can be seen that BUIDL is only tokenizing fund shares, and the actual processes are still off-chain. Achieving real-time settlement relies on the ability of Blackrock to instantly mint new shares through Securitize, with the aforementioned integration between the two parties. The redemption depends on Blackrock’s own liquidity arrangements.

The entire structure is basically traditional institutions using various pre-funded schemes and system automation integration to achieve real-time settlement through extensive negotiations and collaboration. Although BUIDL is larger compared to DeFi, achieving real-time functionality requires significant effort and ten years of work to achieve the handshake of Web3.

RyanCiz.eth believes that previously, BTC spot ETFs were essentially Web3 assets sold to the Web2 market in a Web2 form, while the BUIDL fund sells Web2 assets to both the Web2 and Web3 markets in a Web3 form.

These types of products need to consider both the Web2 and Web3 systems. Therefore, the two have similar regulatory integration processes. Both require continuous refinement of compliance and technical processes. Although currently only professional investors can participate, the difficult parts of constructing the process and framework have already been completed, undoubtedly benefiting industry development.

Regardless of the complexity involved, this is a very good attempt and a significant step in the integration process between Web2 and Web3. The specific scale that can be achieved is not important; the key is the ability of different participants to promote the integration of traditional channels and emerging infrastructures.

(References: BlackRock, BNY Mellon Bank, BUIDL, Securitize)