Tokenized Credit Fund: BNY Mellon Expands into CLOs

BNY Mellon is expanding its blockchain-based asset tokenization strategy by launching a collateralized loan obligation fund.

This marks the latest step in the custody bank’s measured approach to bringing traditional financial products on-chain.

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BNY Mellon’s Tokenization Strategy: From Money Markets to CLOs

The Securitize Tokenized AAA CLO Fund, announced on Wednesday, will provide institutional investors access to AAA-rated floating-rate collateralized loan obligations on the Ethereum network. BNY will serve as custodian while its subsidiary, Insight Investment, handles portfolio management.

BNY Mellon’s approach reflects a deliberate sequencing strategy adopted by several large financial institutions entering the tokenization space. The bank partnered with Goldman Sachs three months ago to launch tokenized money market funds on Goldman’s Digital Asset Platform.

This enabled institutional clients to hold blockchain-based representations of fund shares from BlackRock, Fidelity, and other asset managers. The move revealed a methodical progression from simpler to more complex instruments.

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Money market funds represent a relatively straightforward tokenization use case. Their underlying assets are liquid, standardized, and subject to well-established regulatory frameworks, making them a logical entry point for institutions testing blockchain infrastructure.

Collateralized loan obligations present additional complexity. CLOs bundle corporate loans into tranches with varying risk profiles. They require sophisticated monitoring of loan performance, cash flow structures, and credit quality metrics. The $1.3 trillion global CLO market involves multiple parties, including originators, servicers, trustees, and rating agencies. Each requires coordination and data access.

By moving from money market funds to CLOs, BNY demonstrates confidence in managing more intricate tokenized structures. The bank maintains institutional custody and compliance standards expected by regulators and investors.

Structured Credit Tokenization and Risk Management

Traditional financial institutions face distinct challenges when implementing blockchain technology compared to crypto-native firms. Legacy systems must integrate with new infrastructure. Regulatory frameworks designed for conventional markets must be adapted. Institutional clients require the same security standards they expect from traditional products.

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BNY’s structured credit tokenization approach addresses these concerns through controlled expansion. The bank maintains traditional recordkeeping systems alongside blockchain-based tokens, ensuring continuity if technical issues arise.

Custody arrangements remain under established legal frameworks, providing institutional investors with familiar protections. Settlement occurs through permissioned networks rather than fully public blockchains, allowing for oversight and intervention if necessary.

This approach allows banks to capture efficiency benefits—faster settlement, reduced reconciliation costs, and programmable features—while maintaining risk controls. Smart contracts can automate cash flows and corporate actions, but ultimate authority remains with regulated custodians. The model contrasts with rapid experimentation, which is common in decentralized finance. Protocols there launch with minimal barriers but face heightened security and regulatory risks.

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Tokenized Credit Market Outlook and Industry Competition

The CLO fund launch positions BNY within a broader competitive landscape around institutional tokenization. Goldman Sachs plans to eventually spin off its Digital Asset Platform as an industry-owned infrastructure. Citigroup has established itself as a tokenization agent and custodian on Switzerland’s SDX exchange. BlackRock’s tokenized Treasury fund has grown significantly across crypto-linked products.

Prominent asset managers and custody banks are converging on similar tokenized credit strategies. They begin with liquid, standardized instruments, develop operational expertise, and then expand to more complex products. Carlos Domingo, chief executive of Securitize, which has issued $4.5 billion in tokenized assets, characterized the CLO fund as a step toward making high-quality credit more accessible. The company announced plans to merge with Cantor Equity Partners II at a $1.25 billion valuation this week.

Boston Consulting Group and Ripple estimated the tokenized real-world asset market could reach $18.9 trillion by 2033, up from approximately $35 billion currently.

However, significant challenges remain, including cross-border regulatory coordination, evolving legal frameworks, and operational risks. These include network congestion and key management security. The measured pace of institutional adoption reflects these realities. Banks pursue targeted use cases where blockchain provides clear advantages while risks remain manageable.