Traditionally, Cayman Islands-domiciled hedge funds track share issuance, transfer, and redemption through a shareholder register, which serves as proof of ownership of shares. Now, blockchain technology is enhancing this by enabling digital representations of share ownership, or “tokenisation.” Interest is also growing in smart contracts on blockchains to automate routine governance through clear “if-then” rules. However, technology cannot always anticipate “what-if” scenarios that require thoughtful judgment from hedge fund directors, without whom, a governance gap will exist.

The “if-then” situations

“If-then” situations can be accounted for in smart contracts by codifying the rules outlined in the articles of association and prospectus for a corporate hedge fund. These include conditions for effecting share transfers, issuances, and redemptions. In addition, investor due diligence may be addressed on-chain.

Some firms that have adopted blockchain technology and are using smart contracts include BlackRock, with its BlackRock USD Institutional Digital Liquidity Fund (BUIDL), Apollo Global Management, with its Apollo Diversified Credit Securitize Fund (ACRED) and SkyBridge Capital’s tokenisation of a portion of its hedge funds.

In BlackRock’s case, a Businesswire press release¹ dated March 20, 2024, referred to the launch of BUIDL, BlackRock’s “first tokenised [money market] fund issued on a public blockchain.” This can reportedly facilitate token transfers on a 24-hour basis, all year round, for a whitelist of investors.

Regarding ACRED, it is understood to have been launched in January 2025² and is a tokenised feeder fund that provides on-chain access to Apollo Diversified Credit Fund.

Lastly, it was reported in August 2025³ that SkyBridge Capital planned to tokenise US$300 million worth of its Digital Macro Master Fund and Legion Strategies.

The trend toward tokenisation is drawing close attention from regulators, including the Cayman Islands Monetary Authority (CIMA), where 13,119 mutual funds and 17,741 private funds were registered by the end of Q3 2025.⁴ 

Regarding this, the Ministry of Financial Services, under which CIMA operates as a statutory authority, proposed amendments to the Mutual Funds Act and Private Funds Act in September 2025 to embrace tokenisation. CIMA, as the primary regulator, is expected to incorporate stakeholder comments to strengthen the regulatory framework.

While legislation is being enhanced for tokenisation, CIMA published a report on virtual asset service providers (VASPs), highlighting governance issues.⁵ 

According to the 18 September 2025 publication, some of these governance issues were as follows:

• Business risk and customer risk assessments were either not documented or did not demonstrate that all relevant risk factors had been considered and kept up to date.  
• CIMA noted that reviews for risk assessment and adequate assurance of technology solutions were lacking. These reviews are needed to ensure effective operation. Examples of such technological solutions include screening for sanctions and adverse media, e-KYC, transaction monitoring, and on-chain analytic tools.
• CIMA noted missing customer due diligence and the absence of verification on customer files. Reliable, independent source documents, data, and information were not always used.
• CIMA observed occasions of inadequate board oversight of the VASPs’ AML/CFT Compliance Function.
• CIMA noted that AML/CFT training did not always cover the regulatory framework relevant to the Cayman Islands.
• CIMA observed instances of inadequate verification of information obtained regarding originator and beneficiary information on virtual asset transfers.

While these governance deficiencies were identified for VASPs, rather than investment funds, they highlight key risks for Cayman Islands-based hedge funds that plan to adopt tokenisation. Avoiding these pitfalls requires integrating both effective technology and a strong governance framework.

What a strong governance framework looks like

A strong governance framework comprises a competent board, an effective legislative framework, an active regulator, and a robust culture of compliance.
To create a competent board, hedge funds are encouraged to seek independent directors who understand their legal and fiduciary duties and can effectively discharge them while embracing evolving technology. These duties include acting in good faith in the best interests of the hedge fund, acting for a proper purpose, not making a secret profit, avoiding conflicts of interest, not fettering discretion, and exercising reasonable skill and care, assessed subjectively and objectively.  

The specific circumstances of each transaction must also be considered when discharging these duties.  Ultimately, this means that smart contract coding is not enough, and a successful discharge of directors’ duties in an evolving environment will require a human element.

Summary 

The foregoing illustrates that tokenisation isn’t a destination; it’s a journey where blockchain illuminates the path, but independent directors hold the map. 

While this map is being shaped by proposed changes to Cayman’s Mutual Funds Act, Private Funds Act and Virtual Asset (Service Providers) Act, hedge fund managers must ensure that the governance path remains clear, with proper guardrails along the way in the form of independent boards that care deeply about the protection of investors and the hedge fund’s success.

Fundamentally, it’s not just about speed and automation but getting to the destination safely and with the hedge fund’s assets intact.
 

1. See https://www.businesswire.com/news/home/20240320771318/en/BlackRock-Launches-Its-First-Tokenized-Fund-BUIDL-on-the-Ethereum-Network

2. See https://www.prnewswire.com/news-releases/apollo-and-securitize-announce-partnership-and-launch-tokenized-access-to-credit-fund-on-aptos-avalanche-ethereum-ink-polygon-and-solana-networks-302364212.html

3. https://uk.finance.yahoo.com/news/scaramuccis-skybridge-capital-tokenize-300m-182042984

4. See https://www.cima.ky/investment-statistics

5.  See https://www.cima.ky/amlcft-on-site-and-off-site-supervision-of-the-virtual-asset-service-providers

A strong governance framework comprises a competent board, an effective legislative framework, an active regulator, and a robust culture of compliance.