Proposal to tokenize ETFs, purchasable with Bitcoin

On July 17 Dragon Capital announced a proposal for the pilot project that tokenize exchange-traded funds in collaboration with the Vietnam Blockchain Association, which will provide technical consultation and content verification.

As of 2024 the number of digital asset accounts in Vietnam had reached 10.15 million as against 8.66 million securities trading accounts.

According to Chainalysis, Vietnam recorded more than US$100 billion worth of blockchain-based digital asset transactions in the year to June 2022 even after excluding the significant trade on centralized exchanges. For four consecutive years the country has ranked among the top five countries in the Chainalysis Global Crypto Adoption Index, including two years at the top. These indicate huge investments by individuals.

Given this situation, Dragon Capital wants to create innovative financial products backed by real-world assets under the supervision of regulatory authorities. The goal is to draw individual investors into a regulated capital market that combines innovation with safety, buying traditional financial products with the convenience of digital assets.

Asset tokenization is the process of converting the ownership or value of a physical or digital asset into tokens. These tokens represent either full or fractional value of the asset and can be traded on blockchain platforms. The process helps boost liquidity, reduce transaction costs and increase access to investment options.

Dragon Capital said the process could begin with a collaboration between itself and an index provider like a stock exchange. Subsequently, this partnership will generate two separate ETFs: traditional and tokenized.

To initiate the tokenization of the ETF, a custodian bank will possess a corresponding reserve of shares, collateralizable at a 1:1 ratio with the tokens. The asset management company would coordinate with technology providers and tokenization platforms to develop smart contracts and identify a platform for issuance. The ERC-1400 blockchain standard has been suggested due to its flexibility in recovery mechanisms, as well as its built-in know your customer verification and anti-money laundering compliance features.

Following their creation, the distribution of ETF tokens will involve cooperation with primary digital asset market makers or authorized partners. During the initial stages, the project will focus on centralized exchanges operating in Vietnam and non-custodial wallets in compliance with standard KYC requirements that govern these platforms, where over 70% of Vietnam’s digital asset flows are currently located. This approach is designed to ensure government oversight and regulatory compliance.

In the later stages Vietnam-based digital asset exchanges and non-custodial wallets will be responsible for the distribution of tokens to investors through secondary trading. Payment can be done by bank transfer, e-wallet, card, foreign payment service, or crypto mobile wallet. Once investors acquire the tokens, they have the freedom to choose their preferred custody and payment methods.

Dragon Capital said the secondary trading process is a critical stage in the life cycle of tokenized ETFs, as it enables investors to trade assets in the market. The proposal envisages trading the tokenized ETFs on the secondary market through three methods.

Firstly, investors can buy tokens directly from centralized exchanges. This is particularly crucial during the initial stages when widespread distribution is necessary for the tokens to reach a large investor base.

Secondly, investors can trade with other investors like on a stock market by paying cash. The tokens will be held in custody by the exchange and released when payment to a bank account or mobile wallet is confirmed.

Thirdly, investors can exchange other digital assets for ETF tokens through the exchange. Again, the exchange matches the buy and sell orders and executes the transactions.

Dragon Capital said the conversion of other digital assets into ETF tokens can bring significant capital inflows into Vietnam’s financial market. Now the purchase of digital assets using the dong is roughly equivalent to buying foreign assets, but by allowing investors to exchange foreign digital assets for ETF tokens, Vietnam can redirect capital back into the domestic market, it explained. “This mechanism can help retain capital within Vietnam as well as strengthen the local financial ecosystem.”

The tokenization would attract individual investors to the market and protect their interests and strengthen the financial system through a legal framework, it said. Besides, regulators would be able to maintain the integrity of token issuance, supervise secondary market transactions, regulate service providers, and protect individual investors, it pointed out.

Regulatory oversight would allow authorities to tax digital assets and manage capital flows, ensuring a stable financial market, it said. “This is key to developing a mature capital market and positioning Vietnam as an international financial hub.”