Security Tokens and Financial Innovation: Evidence from the BlackRock USD Institutional Digital Liquidity Fund (BUIDL)

Abstract

Security tokens are digital representations of securities under capital market regulations that are issued and traded using distributed ledger technology (DLT). Unlike tokens issued through Initial Coin Offerings (ICOs), security tokens are classified as investment products and are therefore subject to securities laws and financial regulations. The unique characteristics of security tokens—including fractionalization, composability, and programmability enabled by smart contracts—are expected to facilitate the development of hybrid financial products and services while transforming existing financial and monetary systems. Based on an extensive review of the domestic and international literature, this study examines the concept and economic benefits of security tokens, the issuance process of Security Token Offerings (STOs), and recent regulatory developments across major jurisdictions. Furthermore, this study presents a case study of the BlackRock USD Institutional Digital Liquidity Fund (BUIDL), a tokenized liquidity fund managed by BlackRock, the world's largest asset manager. Through this case study, the paper derives practical implications for the issuance and secondary trading of security tokens and discusses their potential role in promoting financial innovation.