The exchange-traded fund (ETF) industry is on the cusp of a technological transformation. While much of the spotlight has been on crypto-backed ETFs, a deeper, more structural evolution may be unfolding beneath the surface—one that reimagines the very infrastructure of how ETFs operate. According to Aaron Kaplan, co-CEO of Prometheum, blockchain technology could soon redefine the way ETFs are issued, settled, and managed.
Traditional ETF systems face persistent challenges: settlement delays, fragmented record-keeping, and reliance on multiple intermediaries. These inefficiencies become even more pronounced when digital assets are involved. Cryptocurrencies settle nearly instantly on decentralized blockchains, but ETF shares often take T+1 or longer to clear through legacy financial systems. This mismatch creates operational friction and potential risks.
“You have two sets of records,” Kaplan explained in an interview. “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 seamlessly.”
The Case for On-Chain ETFs
Kaplan argues that the real innovation isn’t just adding crypto to ETFs—it’s rebuilding ETFs themselves using blockchain technology. An on-chain ETF would exist entirely within a decentralized network, managed by smart contracts that automatically execute trades, track ownership, and distribute returns.
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In this model, the smart contract holds the actual digital assets—whether Bitcoin, Ethereum, or tokenized stocks—and issues redeemable shares directly on the blockchain. Investors gain provable, real-time ownership without relying on third-party custodians or clearinghouses.
“The smart contract holds the underlying tokens in it so you can prove that it's there,” Kaplan said. “You don’t have these two systems working in parallel anymore.”
This unified system eliminates reconciliation delays, reduces counterparty risk, and enhances transparency. Every transaction is immutably recorded, allowing regulators and investors alike to verify holdings at any time.
Unlocking New Investment Opportunities
Beyond efficiency, blockchain-based ETFs open doors to previously inaccessible features—most notably, yield generation through staking. Traditional ETFs generate returns primarily through price appreciation and dividends. But on-chain ETFs could allow investors to earn additional yield by participating in network consensus mechanisms.
For example, an ETF holding Ethereum could stake those assets to support the network and earn staking rewards—returns that could be passed directly to shareholders. This integration of passive investment with active yield strategies represents a paradigm shift.
“When you can have an ETF that exists on-chain that provides staking, I would argue that's the holy grail,” Kaplan stated.
Such capabilities are especially appealing to institutional investors managing large portfolios. A pension fund allocating $100 million to an ETF might save 30 to 50 basis points annually by cutting intermediary fees and settlement costs through blockchain automation—a significant sum at scale.
Cost Efficiency and Institutional Adoption
The cost-saving potential of blockchain-based ETFs extends beyond staking yields. By streamlining post-trade processes—clearing, settlement, reconciliation—blockchain reduces dependency on brokers, custodians, and central depositories.
These intermediaries add layers of complexity and expense to traditional fund operations. Removing them doesn’t just lower fees—it accelerates settlement from days to minutes or seconds.
“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.
Financial giants like Franklin Templeton and BlackRock are already experimenting with blockchain for asset management, signaling growing institutional confidence in distributed ledger technology (DLT). These efforts include tokenizing mutual funds, exploring private market settlements, and piloting DLT-based custody solutions.
Kaplan likens the current moment to the transition from paper-based trading to electronic systems in the late 20th century—an inflection point that reshaped Wall Street.
“It’s comparable to people who understood early that electronic trading was going to be a big thing,” he said. “Those who stayed with paper for too long fell by the wayside. It really reshuffled the hierarchy in the securities universe.”
Regulatory Clarity and Path Forward
One common concern about blockchain-based financial products is regulatory uncertainty. However, Kaplan emphasizes that ETFs built on blockchain would still be classified as securities—subject to the same registration and compliance requirements as traditional funds.
“With any sort of security, regardless if it's a bond or blockchain-based, you have to go through some sort of registration process,” he explained. “That's a regulatory process. There's not much difference.”
This means existing frameworks like SEC oversight, KYC/AML protocols, and investor protections remain intact. The innovation lies not in bypassing regulation but in modernizing the infrastructure beneath it.
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As regulators become more familiar with DLT applications, Kaplan expects clearer guidelines to emerge—paving the way for broader adoption.
Frequently Asked Questions
Q: What is a blockchain-based ETF?
A: A blockchain-based ETF is an exchange-traded fund whose shares and underlying assets are recorded and managed on a distributed ledger using smart contracts, enabling faster settlement, greater transparency, and new features like staking.
Q: Are blockchain ETFs only for cryptocurrencies?
A: No. While many early use cases involve crypto assets, the technology can support tokenized stocks, bonds, commodities, or any asset class that can be digitized and verified on-chain.
Q: Do blockchain ETFs eliminate all intermediaries?
A: Not entirely. While custodial and clearing roles may diminish, regulated entities such as issuers, auditors, and compliance officers remain essential for legal and operational integrity.
Q: Is there regulatory approval for blockchain-based ETFs?
A: As of now, fully on-chain ETFs are still emerging. However, regulators have approved crypto-linked ETFs and are actively engaging with firms developing DLT solutions, suggesting a path toward formal recognition.
Q: Can individual investors access blockchain ETFs today?
A: Direct access remains limited, but investors can gain exposure through crypto ETFs or platforms offering tokenized funds. Broader availability will depend on regulatory developments and market infrastructure readiness.
Q: How does staking work in an ETF context?
A: In an on-chain ETF, staking involves locking up proof-of-stake assets (like ETH) within a smart contract to support network operations and earn rewards. These yields can be distributed proportionally to fund shareholders.
The Future Is On-Chain
The shift toward blockchain-based ETF infrastructure isn't a question of if, but when. As legacy systems struggle with speed and cost inefficiencies, firms that adopt decentralized solutions early stand to gain significant competitive advantages.
From reducing settlement times to enabling real-time transparency and generating yield through staking, the benefits are compelling. And with major institutions already exploring these technologies, momentum is building.
Kaplan’s vision—a future where ETFs live natively on-chain—may soon move from concept to reality. For investors and issuers alike, understanding this transition isn't just about keeping up with technology—it's about positioning for the next era of finance.
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