Tokenized Treasury Funds in 2026: A Securities, Tax, and Custody Compliance Framework (BlackRock BUIDL, Franklin BENJI, Ondo OUSG, Circle USYC)

Key Takeaways

• Tokenized treasury fund shares are securities. The SEC’s March 17, 2026 interpretation, released jointly with CFTC guidance, classifies tokenized securities as “digital securities” at the Commission level and states: “A security is a security regardless of whether it is issued, or otherwise represented, offchain or onchain.” The SEC staff’s January 28, 2026 Statement on Tokenized Securities adds that the format in which a security is issued or recorded “does not affect application of the federal securities laws,” while cautioning that the rights attached to a third-party token “may or may not be materially different from those of the underlying security.”
• Custody duty disaggregates by allocator type. Investment Advisers Act Rule 206(4)-2 governs RIAs holding for SMA clients; family offices within the Family Office Rule and corporate treasury teams have no federal Custody Rule duty; the privately-offered-securities exception at Rule 206(4)-2(b)(2) is theoretically available to audited Reg D feeders but unsettled in practice.
• Tax treatment depends on the underlying fund regime, not the wrapper. BENJI/FOBXX is a Subchapter M regulated investment company taxed under IRC § 852; BUIDL is a BVI foreign corporation with PFIC overlay under IRC §§ 1291-1298 on the §V.A framing; OUSG is partnership-classified at the feeder level with § 7704 publicly-traded-partnership exposure on the §V.A framing; USYC is available to non-U.S. Persons only, on the Regulation S definition.
• The smart contract is the Securities Act § 5 compliance architecture. Allow-list-only transfer restrictions enforce the offering exemption at the protocol layer; AMM designs and shadow-class wrappers add § 5 exposure and trigger the § 7704 publicly-traded-partnership question for any partnership-taxed fund.
• The legal regime is settled; operational architecture is where launches will live or die. The issuer-side and allocator-side checklists at §VII.A and §VII.B are the operative diligence hooks.
• EU-facing allocators face a hard date. MiCA’s Article 143(3) transitional regime expired no later than July 1, 2026; the fund share itself is a MiFID II financial instrument and outside MiCA scope, but the brokers, custodians, and on-chain venues routing EU access are CASPs whose authorization status now determines whether the channel is open.

I. Why are tokenized treasury funds growing so fast?

Tokenized treasury funds crossed approximately $15 billion in aggregate assets under management by early May 2026, and the four products this article follows—chosen for their distinct legal architectures rather than by size—stood at: Circle’s USYC at roughly $2.9 billion, BlackRock’s BUIDL at roughly $2.6 billion, Franklin Templeton’s BENJI at roughly $2.1 billion, and Ondo’s OUSG at roughly $680 million.¹ Two years ago this asset class did not exist at scale. Today it is large enough to attract registered investment advisers, family offices, corporate treasurers, and offshore fund allocators—and large enough that the legal architecture surrounding it deserves the same disciplined analysis the industry brings to any other multi-billion-dollar securities market.

The fund is the legal story; the wrapper is operational. The institutions allocating here are not allocating to crypto. They are allocating to short-duration U.S. Treasury exposure with a different settlement and recordkeeping rail underneath.

The growth itself has a regulatory cause. The GENIUS Act, signed into law on July 18, 2025, established the federal framework for payment stablecoins and—critically—provides that “[n]o permitted payment stablecoin issuer or foreign payment stablecoin issuer shall pay the holder of any payment stablecoin any form of interest or yield (whether in cash, tokens, or other consideration) solely in connection with the holding, use, or retention of such payment stablecoin.”² The prohibition binds only once the Act takes effect, which it does “on the earlier of” 18 months after enactment or 120 days after the primary federal payment stablecoin regulators “issue any final regulations implementing this Act.”² That single sentence leaves a vacuum for on-chain dollar yield. Tokenized treasury funds fill it lawfully. They are securities, not stablecoins; their distributions are fund distributions, not interest payments; and they reach institutional allocators through the same Reg D, Rule 2a-7, and Reg S architectures used for every other money-market and short-duration treasury product. The regulatory line drawn against yield-bearing stablecoins points institutional demand toward a wrapper the law already understands. The wrapper that grew was the one that fit.

For EU-facing institutional allocators, a separate timing constraint applies. MiCA’s Article 143(3) transitional regime for crypto-asset service providers that were lawfully operating before December 30, 2024 ended no later than July 1, 2026—earlier on grant or refusal of authorization, and earlier still in Member States that shortened or disapplied it—since which those providers must hold MiCA CASP authorization or cease offering services to EU clients.³ Tokenized treasury fund shares themselves are financial instruments under MiFID II (transferable securities or units in collective investment undertakings), and MiCA does not apply to crypto-assets that qualify as financial instruments—but the brokers, custodians, and on-chain venues that EU institutional allocators use to access these products are CASPs whose authorization status after July 1, 2026 determines whether the access channel survived the cliff. The fund passes the test; the rails may not. EU allocator counsel should be working the CASP authorization question now, not in late June.

The growth was a regulatory routing event. The yield-bearing wrapper that fit the existing law was the one that scaled.

II. What are the four tokenized treasury fund architectures?

“Tokenized treasury fund” is a category, not a product, and four architectures dominate it. SEC staff divided tokenized securities along an issuer-versus-third-party axis on January 28, 2026, when the Divisions of Corporation Finance, Investment Management, and Trading and Markets issued a statement on tokenized securities. Those are staff views that by their own terms have “no legal force or effect”; the March 17, 2026 interpretive release with the CFTC, treated in §III, is the Commission-level action.⁴ The Statement separates “issuer-sponsored tokenized securities”—where the issuer or its agent keeps the master securityholder file on-chain, or keeps it off-chain and issues a crypto asset used to transfer the security on it—from securities tokenized by “third parties unaffiliated with an issuer,” which it divides into “custodial tokenized securities,” where “the third party issues a crypto asset representing the underlying security, such as a tokenized security entitlement,” and “synthetic tokenized securities,” where the third party issues “its own security that provides synthetic exposure to the underlying security.”⁴ The Statement assumes that transfers of the crypto asset are effective under state law “via an effective indorsement, instruction, or entitlement order, as the case may be,” citing Article 8 of the Uniform Commercial Code. It also assumes that “tokenized securities are not subject to any restriction on transfer imposed by the issuer.” Every product in the table below carries issuer-imposed transfer restrictions, so the Statement’s taxonomy applies to them by analogy rather than by its terms.

A scope caveat the table cannot carry: USYC is restricted to non-U.S. Persons as defined in Regulation S under the Securities Act of 1933, 17 C.F.R. § 230.902(k);⁶ Circle acquired Hashnote, the fund’s manager, in January 2025.⁷ We retain USYC in the title because it remains the largest tokenized-treasury product by AUM and the category-naming reference point for institutional readers, but U.S. allocators should not be acquiring USYC directly; any U.S. exposure to Hashnote’s strategy would come through a separate Reg D feeder, in which case the feeder’s tax classification governs (see §V).

A fifth architecture is in queue. F/m Investments, which describes itself as an $18 billion fixed income investment firm, filed an exemptive application with the SEC on January 21, 2026, seeking to permit shares of its F/m US Treasury 3 Month Bill ETF (TBIL) “to be recorded and held in tokenized book-entry form” on a controlled distributed-ledger recordkeeping system. F/m describes it as what it believes to be the first application filed by an ETF issuer seeking SEC relief specifically for tokenized shares of a registered investment company.⁸ The application remains pending as of publication. It should not be confused with F/m’s separately granted multi-class exemptive order, issued January 13, 2026 after notice of the application was published in the Federal Register on December 22, 2025, which permits a fund to offer an exchange-traded share class alongside one or more mutual-fund share classes and does not address tokenization.⁹

This taxonomy matters because every layer below it—securities classification, custody, tax, transfer-restriction architecture—inherits its grammar from these nine columns. The token standard is the delivery mechanism. The fund regime and the SEC staff’s issuer-sponsored-vs-third-party-sponsored distinction are the legal substance. The distribution-mechanic variant—NAV-up, rebasing, daily-in-kind, or DRIP—drives the §V tax overlay. The qualified-custodian column drives the §IV Rule 206(4)-2 analysis and the UCC Article 8 transfer mechanics the staff statement assumes are satisfied—an assumption that does not reach custodian insolvency, since the staff cautions that token holders “may be exposed to risks with respect to the third party, such as bankruptcy, to which a holder of the underlying security would not necessarily be exposed.”⁴

Read the table once. Everything that follows is a layered consequence of the row the allocator picks.

III. Are tokenized treasury funds securities?

Every row of the §II table results in a security, and a 2026 Commission interpretation and a 2026 staff statement support the conclusion. The first answers the categorical question—what kind of asset a tokenized security is. The second answers the within-category question—what tokenization does to the underlying instrument. The two sit at different levels of formal authority and are cleaner kept distinct.

The categorical anchor is the SEC’s interpretive release of March 17, 2026, issued jointly with the CFTC, “Application of the Federal Securities Laws to Certain Types of Crypto Assets and Certain Transactions Involving Crypto Assets,” Release Nos. 33-11412 and 34-105020.¹⁰ The release sorts crypto assets into five categories—digital commodities, digital collectibles, digital tools, stablecoins, and digital securities—and defines a digital security, “commonly known as a ‘tokenized’ security,” as “a financial instrument enumerated in the definition ‘security’ that is formatted as or represented by a crypto asset, where the record of ownership is maintained in whole or in part on or through one or more crypto networks.” A tokenized fund share meets that definition. Two features matter. It is a Commission-level interpretation rather than a staff product, which means it speaks for the agency. And, in the Commission’s own words, it is “the Commission’s first step toward developing a clearer regulatory framework for the treatment of crypto assets under the Federal securities laws.”

The within-category anchor is the release itself, which restates the split at the Commission level: “Tokenized securities generally fall into two categories: (1) securities tokenized by or on behalf of the issuers of such securities; and (2) securities tokenized by third parties unaffiliated with the issuers of such securities … .”¹⁰ The SEC staff’s January 28, 2026 Statement on Tokenized Securities, issued by the Divisions of Corporation Finance, Investment Management, and Trading and Markets, elaborates: under issuer-sponsored tokenization the issuer or its agent may “maintain[] the master securityholder file on one or more crypto networks,” while under third-party tokenization the rights attached to the token “may or may not be materially different from those of the underlying security.”⁴ The issuer-sponsored and third-party-sponsored taxonomy set out in §II follows that split.

For BENJI/FOBXX, the analysis is statutory. Shares of a registered open-end investment company are securities within the Securities Act’s enumerated definition at § 2(a)(1) (15 U.S.C. § 77b(a)(1)) and the Exchange Act’s parallel definition at § 3(a)(10) (15 U.S.C. § 78c(a)(10)), and the Investment Company Act’s own definition at § 2(a)(36) (15 U.S.C. § 80a-2(a)(36)) likewise enumerates, among substantially the same instruments, “transferable share” and “investment contract.” The on-chain record is the transfer agent’s recordation; the legal instrument is the registered fund share, whether ownership is held off-chain, on-chain, or both.

For BUIDL, OUSG, and USYC, the analysis runs through Howey. The partnership, limited-liability-company, or foreign-corporate interest in each fund is itself a security as an investment contract under SEC v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946), and falls within Exchange Act § 3(a)(10) independent of any wrapper. The token is a digital share certificate with embedded transfer restrictions enforced through a KYC’d allow-list—a recordation format; whether it carries the fund interest’s rights depends on the tokenization model.

One category boundary is worth surfacing because the market continually blurs it: yield-bearing stablecoins are not tokenized treasury funds. Tokenized treasury funds are securities offerings whose holders own shares in a fund that owns Treasuries; yield-bearing stablecoins are a separate—and, once the GENIUS Act takes effect, sharply restricted—category covered in §I.

The March 17 release also changed the analytical authority underneath this section. The SEC’s 2019 Framework for “Investment Contract” Analysis of Digital Assets—a FinHub staff product the Commission had neither approved nor disapproved—was expressly superseded by the release, though the release does not supersede or replace the Howey test itself, which remains binding precedent. The SEC.gov page that previously hosted the Framework now carries the title “Framework for ‘Investment Contract’ Analysis of Digital Assets (Withdrawn) [Superseded by Application of the Federal Securities Laws to Certain Types of Crypto Assets and Certain Transactions Involving Crypto Assets (Mar. 17, 2026)].”¹¹ The substantive Howey analysis is unchanged. What changed is the rung of authority on which it sits.

Tokenized treasury exposure is investment-company or private-fund securities exposure with on-chain settlement. The wrapper changes the rails, not the regime.

IV. Who is the custodian when the fund share lives on-chain?

Investment Advisers Act Rule 206(4)-2 was written before on-chain securities existed. The SEC Division of Investment Management’s September 30, 2025 no-action letter responding to Simpson Thacher & Bartlett LLP is calibrated for state-chartered trust companies holding “Crypto Assets,” which the letter defines as “assets that are digital representations of value that are recorded on a cryptographically secured distributed ledger.” The letter predates the March 17, 2026 release and does not address whether tokenized fund shares—“digital securities” under that release—are “Crypto Assets” within the letter’s meaning.¹² The allocator’s custody duty is therefore three questions, not one, sorted by who is holding.

A. Registered investment advisers holding for SMA clients

For RIAs holding tokenized treasury fund shares for SMA clients, Rule 206(4)-2 applies, satisfied by two paths that should be layered, not conflated.

The first is the rule as written: the “qualified custodian” definition includes a bank as defined in Investment Advisers Act § 202(a)(2).¹³ An RIA whose client’s BUIDL shares are maintained by a bank within that definition, in a separate account under the client’s name or in an account containing only clients’ funds and securities under the adviser’s name as agent or trustee, satisfies (a)(1) on the bank-category prong without resort to the September 30 NAL. National-bank custody authority rests on 12 U.S.C. § 24 (Seventh) and, where fiduciary, on 12 C.F.R. Part 9.¹⁴

OCC Interpretive Letter 1183 (March 7, 2025) rescinds Interpretive Letter 1179, which had imposed a supervisory non-objection process, and reaffirms that the activities addressed in IL 1170 (crypto-asset custody), IL 1172 (deposits serving as stablecoin reserves), and IL 1174 (distributed-ledger node and stablecoin payment activities) are permissible, but does not by its terms address tokenized fund shares; it is supportive context, with 12 C.F.R. Part 12 recordkeeping potentially applicable.¹⁴ The second path is the September 30 NAL, available, on the letter’s conditions, for chains whose custodian is a “State Trust Company”—a legal entity organized under state law that is “(i) supervised and examined by a state authority having supervision over banks and (ii) permitted to exercise fiduciary powers under applicable state law.”¹² (A national trust bank chartered by the OCC is not a state-chartered trust company; Anchorage Digital Bank N.A., if so chartered, satisfies Rule 206(4)-2 through the bank-category prong at Rule 206(4)-2(d)(6)(i) rather than through the September 30 NAL.) The caveat: the letter’s no-action assurances “are limited to Crypto Assets and Related Cash and/or Cash Equivalents,” and the staff “does not provide any legal conclusions on the issues presented.”¹² Whether tokenized fund shares fall within the NAL’s “Crypto Assets” frame is an interpretive question. The layered framing is defensible; it is not yet settled.

B. Family offices and treasury teams holding for own account

Rule 206(4)-2 does not reach allocators who are not RIAs holding for managed-account clients. Single-family offices structured under the Family Office Rule (17 C.F.R. § 275.202(a)(11)(G)-1) and corporate treasury teams investing the operating company’s own balance sheet have no federal Custody Rule duty.¹⁵ State-law fiduciary duties apply—prudent-investor analogues for trust structures, corporate-officer duties for treasury teams—but not Rule 206(4)-2. Many institutional family offices voluntarily hold to Rule 206(4)-2-equivalent standards as best practice rather than regulatory mandate. The distinction matters at diligence: an RIA cannot allocate before resolving the §IV.A path; a family office can.

C. Reg D feeders (allocators that themselves are RIA-managed funds)

Where an RIA’s allocator is itself a Reg D 506(c) feeder, a third path is theoretically available. Rule 206(4)-2(b)(2)‘s privately-offered-securities exception relieves the adviser of the qualified-custodian requirement at (a)(1) for securities acquired from the issuer in a non-public offering, uncertificated and recorded only on the books of the issuer or its transfer agent in the name of the client, and “[t]ransferable only with prior consent” of the issuer or holders; where the securities are held for the account of a pooled investment vehicle, the exception is available only if the vehicle is audited and the audited financial statements are distributed as paragraph (b)(4) requires.¹³ Tokenized fund shares are arguably uncertificated—the on-chain record is the books-and-records ledger—but the books-and-records prong and the prior-consent prong are both live questions: the on-chain wallet may or may not satisfy the “in the name of the client” requirement, and the issuer’s allow-list operates as a pre-authorized whitelist rather than a per-transfer consent regime. The prevailing practice treats the exception as unavailable and routes allocators back to §IV.A. Until those questions resolve, satisfying §IV.A directly is the conservative posture.

D. Issuer-side framing

Allocator-side disaggregation does not relieve the issuer. Because some non-trivial fraction of any tokenized treasury fund’s holder base will be RIAs, issuer architecture must let an RIA holder satisfy Rule 206(4)-2 even when the family-office and corporate-treasury slices have no such duty. The custodian-failure scenario is a separate analysis this article does not undertake; the holder-protection chain runs through UCC Article 8 (§§ 8-501, 8-503), the Bankruptcy Code’s stockbroker-liquidation provisions (§§ 741-753), state trust-company receivership, and—for offshore feeders—the fund’s home-jurisdiction insolvency regime.¹⁶ The January 28, 2026 staff statement frames the structure as “custodial tokenized securities” in which the third party issues a crypto asset “such as a tokenized security entitlement” representing the underlying security, and cautions that token holders “may be exposed to risks with respect to the third party, such as bankruptcy, to which a holder of the underlying security would not necessarily be exposed.”⁴ Two facts follow: SIPC coverage is structurally unavailable for Reg D 506(c) feeders (their interests are unregistered investment contracts excluded from SIPA’s “security” definition); UCC Article 8 protection is contract-driven: it applies only where the custodian maintains a “securities account” under an agreement to treat the holder “as entitled to exercise the rights that comprise the financial asset” (§ 8-501(a)) and, where the token is not otherwise a security or financial asset, only where the custodian “has expressly agreed … that the property is to be treated as a financial asset under this Article” (§ 8-102(a)(9)(iii)); and In re Celsius Network’s Earn ruling shows that contract terms can move customer assets into the estate—the court found that under the Terms of Use title to Earn assets “unequivocally transferred to the Debtors,” while expressly declining to determine ownership of assets in the Custody Program.¹⁷ Allocators should require the § 8-503(a) ring-fence opinion and a custodian-receivership walkthrough before allocating; a companion piece in the forward series will treat that analysis at length.

Custody is where tokenization stops being a ledger choice and starts being a securities-law choice. Disaggregate by who is holding, demand the written custody opinion before the trade closes, and pair it with the custodian-failure analysis—Article 8, Bankruptcy, SIPC—at the same diligence pass.

V. How are tokenized treasury fund distributions taxed?

The federal income-tax characterization of a tokenized treasury fund distribution depends first on the underlying fund’s tax regime—which is not uniform across the four products—and second on the on-chain distribution mechanic. The most common allocator error is assuming a single tax framework applies. It does not—four products generate four different regimes.

A. The fund-regime split

BENJI/FOBXX is a Subchapter M regulated investment company under IRC § 851.¹⁸ Distributions are taxed under § 852: the fund is taxed on its investment company taxable income under § 852(b)(1)-(2) and must distribute at least 90 percent of it under § 852(a)(1); a distribution the fund reports to shareholders as a capital gain dividend is treated by the shareholder as long-term capital gain under § 852(b)(3)(B)-(C); every other distribution is an ordinary dividend.¹⁸ The on-chain wrapper adds no novel tax issue because the BENJI token is the share—Franklin Templeton’s transfer agent uses the blockchain as the books-and-records ledger, but the entity-level RIC qualification and the shareholder-level distribution character are unchanged.

BUIDL is organized as a British Virgin Islands Limited Company. Under Treasury Regulation § 301.7701-3 (the check-the-box regulations), an eligible foreign entity of this type defaults to foreign-corporation classification absent an affirmative Form 8832 election.¹⁹ BlackRock’s publicly available materials—including the Securitize STEP application’s representation that “U.S. taxable investors will also receive PFIC statements”—are consistent with foreign-corporation operation and PFIC classification under IRC § 1297.⁵ U.S. holders should expect § 1291 excess-distribution treatment, with the annual interest charge on amounts deferred from prior years, absent a § 1295 QEF election. A § 1296 mark-to-market election is likely unavailable. It requires “marketable stock,” which Treas. Reg. § 1.1296-2 defines as PFIC stock “regularly traded” on a “qualified exchange or other market,” § 1.1296-2(a)(1), (b), (c), or stock of a NAV-redeemable foreign fund that meets all eight conditions of § 1.1296-2(d)(1)—among them that the class be “readily available for purchase by the general public at its net asset value” with no minimum initial investment above $10,000, § 1.1296-2(d)(1)(ii). BUIDL tokens, restricted to qualified purchasers under § 3(c)(7) and transferable only on permissioned rails, meet neither route on the regulation’s face.²⁰ Form 8832 elections are not publicly filed; the article assumes default classification, but holders should confirm before allocating.

OUSG is structured as a feeder above BlackRock and other short-Treasury funds and is partnership-classified at the feeder level per the conventional understanding of the structure (Ondo’s public documentation does not state the federal tax classification expressly; allocators should request issuer confirmation before relying). U.S. holders are taxed on the fund’s income “in their separate or individual capacities” under § 701, on the distributive share determined under § 704, reported annually on Schedule K-1, and the § 7704 publicly-traded-partnership analysis taken up in §VI applies.²¹ If OUSG turns out to be a foreign corporation, and so a PFIC, at the feeder level, the § 1291 / § 1295 framework described above for BUIDL applies instead, and the §VI § 7704 analysis is inapplicable to OUSG.

USYC is restricted to non-U.S. Persons as defined in Regulation S under the Securities Act of 1933, 17 C.F.R. § 230.902(k): Circle states that “[s]hares of the Fund and USYC are only available to non-U.S. Persons,” so the U.S. holder-level analysis in this section does not reach the Hashnote International Short Duration Fund Ltd. (Cayman) or Circle International Bermuda Limited.⁶ U.S. allocators should not be acquiring USYC directly; any U.S. exposure would come through a separate Reg D feeder, in which case the feeder’s tax classification governs.

Four products, four regimes:

B. The distribution-mechanic split

Pure NAV-up tokens (OUSG) generate no change in the holder’s wallet balance as fund yield accrues; only the underlying NAV per token increases. There is no § 1001 disposition until the holder sells, redeems, or otherwise disposes of the token. The fund’s tax classification sets the rest: a partnership-classified fund’s holders are taxed in their individual capacities on their distributive share under §§ 701 and 704 independent of any token sale, while a foreign-corporation issuer’s holders meet the PFIC § 1291 excess-distribution mechanics on disposition.²¹

Daily-in-kind distribution tokens (BUIDL) accrue yield daily and distribute it daily via in-kind issuance of additional tokens to the holder’s wallet.⁵ For a PFIC issuer, each daily issuance is a distribution tested under § 1291(b): it is an “excess distribution” only to the extent the year’s distributions exceed 125 percent of the average received during the three preceding taxable years, and the total excess distribution is zero for the taxable year in which the holder’s holding period begins (§ 1291(b)(2)(B)). The excess portion, and any gain on disposition (§ 1291(a)(2)), is allocated ratably over the holding period, taxed at the highest rate for each prior year, and carries a § 6621 interest charge under § 1291(c). The daily mechanic itself does not multiply § 1291 events; the case for a § 1295 QEF election rests on disposition treatment and on taking the holder out of § 1291 under § 1291(d)(1), in exchange for including annually, under § 1293(a)(1), “as ordinary income, such shareholder’s pro rata share of the ordinary earnings of such fund for such year” and “as long-term capital gain, such shareholder’s pro rata share of the net capital gain of such fund for such year,” with later distributions of those previously taxed earnings treated as “not a dividend,” § 1293(c).²⁰

Rebasing tokens (rOUSG; certain USDC-yield products) increase the holder’s wallet balance periodically as yield accrues even absent any sale. The treatment is contested, but the safest and most defensible characterization is ordinary-income-on-receipt under § 61 at the fair market value of the additional tokens received, by analogy to Rev. Rul. 2023-14 (staking rewards)—which, like Rev. Rul. 2019-24 (airdrop following a hard fork), times inclusion to when the taxpayer gains “dominion and control”—at the moment the rebase event places transferable tokens in the holder’s wallet.²² That analysis is for a corporate or PFIC issuer. For a partnership-classified issuer such as OUSG on the §V.A framing, the holder’s inclusion is the “[d]istributive share of partnership gross income,” § 61(a)(12), determined under § 704; a rebase changes the unit count in the wallet, not the distributive share, and should not be a second inclusion at token value. For a corporate or PFIC issuer, the alternative route is § 301, under which the portion of a distribution “which is a dividend (as defined in section 316)” is ordinary income, the balance reduces stock basis, and any excess over basis “shall be treated as gain from the sale or exchange of property,” § 301(c)(1)-(3), overlaid by § 1291 for a PFIC. Section 301 applies only to “a distribution of property (as defined in section 317(a)),” § 301(a); whether a rebase that issues additional units of the fund’s own share class is such a distribution is a threshold question. Section 1272 original-issue-discount accrual applies only to “the holder of any debt instrument having original issue discount,” § 1272(a)(1); it reaches a fund token only if the token is a debt instrument, and these tokens are equity interests in the fund.

Distribution-and-reinvest tokens (BENJI) are standard fund DRIP: reported capital-gain dividends take § 852(b)(3)(B) long-term capital-gain treatment; all other distributions are ordinary dividends.¹⁸ Tokenization is the recordation modality and adds no novel tax issue.

C. Cross-cutting issues

Section 1256 mark-to-market does not apply: tokenized treasury fund shares are not regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, or dealer securities futures contracts within the § 1256(b)(1) enumeration.²³ Section 988 does not apply either: these funds hold U.S.-dollar-denominated assets and distribute USD-equivalent tokens or USDC, with no nonfunctional-currency exposure for U.S. holders.²³

State-tax exposure deserves a flag for issuers touching California (Astraea Counsel’s home jurisdiction; comparable analyses run for other state issuer regimes). California Revenue and Taxation Code § 23101(a) defines “doing business” as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” § 23101(b) sets bright-line sales/property/payroll thresholds—each the lesser of a dollar amount or 25 percent of the taxpayer’s total, with the dollar amounts revised annually by the Franchise Tax Board ($757,070 / $75,707 / $75,707 for 2025; 2026 figures pending FTB publication), but California Office of Tax Appeals decisions have rejected treating § 23101(b)‘s factor thresholds as a safe harbor—sub-threshold issuers can still be “doing business” under § 23101(a)‘s broader test.²⁴ For foreign-domiciled tokenized funds whose transfer agent or smart-contract administration touches California, this matters.

None of Notice 2014-21, Rev. Rul. 2019-24, or Rev. Rul. 2023-14 addresses tokenized funds. Notice 2014-21 is the foundational digital-asset baseline; Rev. Rul. 2019-24 supplies the receipt-timing “dominion and control” principle; Rev. Rul. 2023-14 is narrowly limited to proof-of-stake validation rewards—instructive but not controlling for the broader on-chain-receipt category.²²

Tokenized treasury tax depends on the underlying fund’s tax regime first and the on-chain distribution mechanic second. If your product is anything other than BENJI/FOBXX, your tax counsel needs the prospectus and the smart-contract code—and rebasing tokens need that analysis regardless of the underlying regime.

VI. The smart contract is the § 5 compliance architecture

The most under-engineered legal layer in tokenized treasury funds is what happens when a permissioned token trades secondarily. The §II taxonomy, the §III securities classification, and the §IV custody architecture are settled or settling; what is not settled is whether the transfer-restriction logic actually does § 5 work. Most issuers have made architectural choices they have not fully thought through. The choice—not the chain—controls the § 5 and § 7704 exposure.

Three patterns dominate. Allow-list-only architecture, used by BUIDL, limits transfers to KYC’d wallets pre-cleared by the transfer agent; the token is effectively a Reg D restricted security with smart-contract enforcement of resale conditions. Lowest § 5 exposure; most operationally rigid. Allow-list-plus-AMM-with-whitelisted-LPs—approximated by some Ondo OUSG variants—supplies on-chain liquidity between accredited counterparties on a permissioned pool. Moderate § 5 exposure; meaningful operational benefit. The tokenized shadow class—a non-KYC’d wrapper around a KYC’d share, with an SPV holding the underlying interest—carries significant § 5 exposure and is generally inadvisable for U.S. issuers.

Two September 2026 Commission actions bear on this architecture. On September 4, 2026 the SEC proposed to modernize the transfer agent rules, with new and amended rules, revised Forms TA-1 and TA-2, and one rescission; comments close November 3, 2026. The release describes transfer agents “interacting with tokenized securities, distributed ledger technologies, and smart contracts” and names “tokenized fund administration” among the models market participants are building, so a tokenized fund’s transfer agent is inside its scope.²⁵ On September 17, 2026 the Commission’s Innovation Exemption order granted temporary, conditional relief for tokenized-securities venues trading tokenized NMS stock through permissioned automated-market-maker liquidity pools, including an exemption from the “dealer” definition for the pools’ liquidity providers; it reaches NMS stock, not fund shares, but it is the first Commission-level template for the allow-list-plus-AMM pattern described above.²⁶ The August 21, 2026 Regulation Crypto Assets proposal does not reach these products: by its own summary the safe harbor addresses investment contracts involving crypto assets, and a registered fund’s share is a security by statutory enumeration.²⁷

The § 5 question is not academic. Securities Act § 5 requires registration or exemption for every offer and sale of a security.²⁸ On-chain, the transfer is the sale—and the order to sell is the offer. The smart contract is what lets the offer-and-sale happen or refuses it; transfer-restriction architecture is what the § 5 compliance regime is asking the issuer to engineer. Framing it as KYC, user experience, or “permissioning” understates what the code is being asked to do as a matter of federal securities law.

The § 7704 publicly-traded-partnership question is the live tax overlay for any partnership-taxed tokenized fund. IRC § 7704(a) treats a publicly traded partnership as a corporation “except as provided in subsection (c),” which spares a partnership whose gross income is at least 90 percent “qualifying income”—a term that includes “interest” and “dividends,” § 7704(d)(1)(A)-(B), other than interest “derived in the conduct of a financial or insurance business,” § 7704(d)(2)(A)—for the year and every prior year of its existence, § 7704(c)(1)-(2), but not a partnership that “would be described in section 851(a) if such partnership were a domestic corporation,” § 7704(c)(3). Whether a Treasury feeder can rest on § 7704(c) is the first question for tax counsel; the Treas. Reg. § 1.7704-1 safe harbors are how a fund that cannot preserves flow-through treatment.²⁹ Section 7704 is irrelevant for BUIDL (foreign corporation under default Treas. Reg. § 301.7701-3 classification, per §V.A), BENJI/FOBXX (registered investment company, not a partnership), and USYC (a Cayman fund restricted to non-U.S. Persons, so its classification carries no U.S. holder-level consequence; § 1.7704-1(a)(1) itself reaches “[a] domestic or foreign partnership”). Section 7704 is live for OUSG (on the §V.A framing) and any other partnership-taxed tokenized fund. Beyond § 7704(c), three layered defenses apply. First, the affirmative argument: allow-list-only architecture precludes “readily tradable” status on a secondary market within the meaning of § 7704(b), because the Treas. Reg. § 1.7704-1(c) “secondary market or the substantial equivalent thereof” definition—regular broker-dealer quotations, regular public bid-and-offer quotes with stand-ready-to-transact, an ongoing opportunity to sell through a public means, or comparable-regularity buy-sell access—describes none of the features of a permissioned-counterparty ledger.²⁹ Second, the § 1.7704-1(j) de minimis safe harbor: interests are not readily tradable if “the sum of the percentage interests in partnership capital or profits transferred during the taxable year of the partnership (other than in transfers described in paragraph (e), (f), or (g) of this section) does not exceed 2 percent of the total interests in partnership capital or profits.”²⁹ High-velocity allocator rotation can breach 2 percent without anyone deciding to make it happen. Third, the § 1.7704-1(h) private-placement safe harbor: interests are not readily tradable if all interests “were issued in a transaction (or transactions) that was not required to be registered under the Securities Act of 1933” and the partnership “does not have more than 100 partners at any time during the taxable year of the partnership.” § 1.7704-1(h)(1)(i)-(ii). The count looks through a partnership, grantor trust, or S corporation holder where substantially all of that holder’s value is the fund interest and a principal purpose of the tier is to satisfy the 100-partner limit, § 1.7704-1(h)(3)—a rule that reaches the feeder allocators described in §IV.C. Minimum-investment and qualified-purchaser gates keep the count low, and § 3(c)(7) itself imposes no cap on the number of qualified-purchaser holders (the 100-person limit belongs to § 3(c)(1)), so the count must be confirmed against the fund’s actual partner roster.²⁹ Whether a Reg D Rule 506(c) offering that uses general solicitation satisfies the safe harbor is not addressed in any published authority we have located;³⁰ the better reading treats (h) as available, because § 1.7704-1(h)(1)(i) turns on whether the interests were issued in a transaction “not required to be registered under the Securities Act of 1933,” not on whether the offering was a public offering in the § 4(a)(2) sense, and a 506(c) offering is exempt from § 5 registration. The regulation does not address general solicitation, and that reading is our own.²⁹ Issuers designing on-chain secondary liquidity for any partnership-taxed tokenized fund—particularly AMM-style designs—should obtain a § 7704 opinion before launch, not after.

Issuers who treat allow-listing as a compliance feature are correct; issuers who treat it as a user-experience feature are missing the legal point. The smart contract IS the § 5 compliance architecture. Build it that way, document it that way, audit it that way.

Compliance code or litigation exhibit. Issuers pick the framing at launch; the SEC picks the framing at examination.

VII. What should issuers and allocators check before launch / before allocating?

Tokenized treasury funds reward parties who do the legal work in advance and punish those who retrofit it; both checklists below are pre-launch and pre-allocation, not post-mortem.

A. For issuers

• Pick the fund regime first—1940 Act registered, Reg D 506(c) private fund, or offshore foreign-corporation structure. The token standard is downstream of that choice, not the other way around.
• Pick the qualified custodian and the transfer agent in parallel with the regime. Both are load-bearing counterparties whose names go in the prospectus.
• Build transfer-restriction logic to satisfy § 5—which reaches any use of “any means or instruments of transportation or communication in interstate commerce or of the mails” to offer or sell a security—and the blue-sky regime of every state in which a permitted holder could reside; geofencing alone is not a § 5 compliance regime. The smart contract is the architecture.
• Document the tax distribution mechanic before the smart contract is audited. The code auditor cannot fix a tax-character flaw locked into a daily-distribution mechanic.
• Write the qualified-custody opinion before the first allocator’s diligence pack arrives. The §IV.A bank-category prong and the September 30, 2025 NAL each need addressing on the record.
• If on-chain secondary liquidity is contemplated—anything beyond allow-list-only transfer—obtain the § 7704 opinion before launch, not after the 2 percent threshold in Treas. Reg. § 1.7704-1(j) is breached.²⁹
• Plan the redemption mechanic for the foreseeable failure modes—fund liquidation, issuer wind-down, transfer-agent failure, custodian receivership. Each requires a contractual and on-chain path before launch.

B. For allocators

• Identify the fund regime by reading the prospectus—1940 Act RIC, BVI foreign corporation, partnership feeder, or Cayman fund. Do not infer it from the token standard or the issuer’s brand.
• Demand the issuer’s written custody analysis and verify the qualified custodian’s identity and charter directly. A custodian name on a website is not a custody opinion.
• Confirm that your platform’s holding mechanic satisfies Rule 206(4)-2 for your client base, or confirm that Rule 206(4)-2 does not apply via the §IV.B and §IV.C disaggregation.¹³
• Engage tax counsel on the distribution mechanic before allocating. Rebase mechanics are not what most allocators expect; for BUIDL—treated as a PFIC on the §V.A framing—evaluate a timely § 1295 QEF election to take the holder out of § 1291 (§ 1291(d)(1)) rather than face excess-distribution and disposition treatment.²⁰
• Confirm that the transfer-restriction architecture matches your operational model for secondary liquidity, redemption, and internal transfers across affiliated accounts.
• Verify the issuer’s regulatory posture in your domicile. USYC is restricted to non-U.S. Persons under Regulation S, 17 C.F.R. § 230.902(k);⁶ U.S. allocators should not acquire USYC directly, only through a separate Reg D feeder.
• For EU allocators, verify the counterparty’s MiCA CASP authorization now that the Article 143(3) transitional regime has run out (outer date July 1, 2026). The fund share itself is a MiFID II financial instrument and outside MiCA’s crypto-asset scope, but the brokers, custodians, and on-chain venues routing EU access are CASPs whose authorization is the question.³
• Demand the issuer’s written custodian-failure analysis covering UCC Article 8 security-entitlement status (financial-asset election under § 8-102(a)(9)(iii); § 8-503(a) ring-fence opinion), bankruptcy-priority chain (trust-company receivership for the charter; Subchapter III; the home-jurisdiction insolvency regime for offshore feeders), and SIPC analysis (typically unavailable for Reg D feeders, but confirm). The diligence pack is not complete without it.¹⁶

VIII. Frequently Asked Questions

Are tokenized treasury funds securities? Yes. Registered-fund shares (BENJI/FOBXX) are securities by enumeration in the Securities Act § 2(a)(1) definition, which lists “stock” and “transferable share”; the private-fund interests (BUIDL, OUSG, USYC) are interests in pooled investment vehicles holding U.S. Treasuries, satisfy each Howey prong, and are “investment contract[s]” within that same definition. Separately, the SEC’s March 17, 2026 interpretive release, issued jointly with the CFTC, confirms that tokenization does not change that answer: “A security is a security regardless of whether it is issued, or otherwise represented, offchain or onchain.”¹⁰ See §III.

Is BlackRock BUIDL a 1940 Act registered fund? No. BUIDL is BlackRock USD Institutional Digital Liquidity Fund Ltd., a BVI entity offered as a § 3(c)(7) private fund to qualified purchasers under Reg D Rule 506(c). It is not registered under the Investment Company Act of 1940. The “BlackRock” brand is asset-management, not regulatory status. See §II.

Can a registered investment adviser hold tokenized treasury funds for SMA clients? Yes, but Rule 206(4)-2 (the Custody Rule) governs. The adviser must have a qualified custodian (as defined at Rule 206(4)-2(d)(6)) maintain the shares under Rule 206(4)-2(a)(1); should obtain a written custody analysis as a diligence matter; and should evaluate whether the privately offered securities exception at Rule 206(4)-2(b)(2) is available as an alternative path. The September 30, 2025 Simpson Thacher no-action letter addressed part—but not all—of this.¹²¹³ See §IV.

Are tokenized treasury fund distributions taxed as ordinary income or capital gains? It depends on the underlying fund’s tax regime. RIC distributions (BENJI, FOBXX) are ordinary dividends except to the extent the fund reports them as capital-gain dividends under § 852(b)(3).¹⁸ Foreign-corporation distributions (BUIDL, on the §V.A framing) are § 301 distributions—ordinary income to the extent they are dividends “as defined in section 316,” then a reduction of basis, then gain, § 301(c)(1)-(3)—and trigger PFIC analysis under §§ 1291-1298, which governs excess distributions and the QEF alternative.⁵²⁰ Partnership-taxed funds (OUSG, on the §V.A framing) flow through to the holder. See §V.

Is BUIDL FDIC insured? No. FDIC insurance covers deposit accounts at insured depository institutions up to $250,000 per depositor.³¹ BUIDL is a security, not a deposit; its underlying assets are U.S. Treasury obligations held by a custodian, not deposits at a bank. The full faith and credit of the U.S. Government backs the underlying Treasuries; that is a different protection and does not apply at the fund-share level. See §II.

What happens if a tokenized fund share moves to a non-KYC’d wallet? It cannot—by design. Allow-list-only architectures (BUIDL) block the transfer at the smart-contract level; the transaction reverts. AMM-style designs route transfers through whitelisted liquidity pools and block transfers outside that whitelist by the same mechanism. The shadow-class architecture—a non-KYC’d wrapper around a KYC’d share—is the exception and carries significant § 5 exposure for the U.S. issuer. See §VI.

Are tokenized treasury funds the same thing as yield-bearing stablecoins? No. Yield-bearing stablecoins are payment instruments that pay holders; the GENIUS Act, once effective, prohibits permitted payment stablecoin issuers from paying any yield “solely in connection with the holding, use, or retention” of the stablecoin.² Tokenized treasury funds are securities offering fund distributions through 1940 Act, Reg D, or Reg S architectures—an entirely different regulatory category. See §I.

IX. Closing

The wrapper is exciting; the law is not. That is the point. Tokenized treasury funds are growing because they let institutional money operate at 24/7 settlement speed inside a regime the institutions already know how to underwrite—the same Investment Company Act, Reg D, Reg S, and money-market architectures the SEC, the OCC, and the IRS have refined across nearly a century of practice. The legal work is mostly already done. The new work is operational: build the custody architecture, the transfer-restriction logic, the § 7704 analysis, and the tax-distribution mechanic to match the law you are already inside. Issuers and allocators who do that work in advance are the ones who will own this asset class as it scales. The ones who treat tokenization as a regulatory exit will discover, at the worst possible moment, that it never was.

The custodian-failure analysis—UCC Article 8 entitlement priority, Bankruptcy Code Subchapter III, SIPC coverage, and home-jurisdiction insolvency law for offshore feeders—is the subject of the next piece in this series. It is a required companion read before allocating to any third-party-tokenized custodial product covered here.

Astraea Counsel advises issuers and institutional allocators on tokenized fund launches, securities exemption analysis, custody-rule compliance, on-chain transfer-restriction architecture, and § 7704 publicly-traded-partnership analysis for AMM-style designs. We work with issuers preparing for launch and with allocators preparing for pre-allocation diligence—engage early, before the architecture is locked. Our digital-asset regulatory counsel in California page describes how that engagement runs.

Footnotes

1. rwa.xyz, “Tokenized U.S. Treasuries” dashboard (data as of May 4, 2026), https://app.rwa.xyz/treasuries (archived at https://web.archive.org/web/20260504185559/https://app.rwa.xyz/treasuries). ↩

2. Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act), Pub. L. No. 119-27, § 4(a)(11), 139 Stat. 419, 432 (2025); see id. § 20, 139 Stat. at 466 (effective date). The prohibition runs only against a “permitted payment stablecoin issuer or foreign payment stablecoin issuer,” and only to yield paid “solely in connection with the holding, use, or retention” of the stablecoin. ↩ ↩² ↩³

3. Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets (MiCA), art. 143(3), 2023 O.J. (L 150) 40, 180, available at https://eur-lex.europa.eu/eli/reg/2023/1114/oj; see id. art. 2(4)(a), 2023 O.J. (L 150) at 62 (excluding “financial instruments”), and art. 3(1)(49) (adopting the MiFID II definition); Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (MiFID II), art. 4(1)(15), (44) and Annex I, § C, 2014 O.J. (L 173) 349, 382, 385, 481-82. ↩ ↩²

4. SEC Divisions of Corporation Finance, Investment Management, and Trading and Markets, Statement on Tokenized Securities (Jan. 28, 2026), available at https://www.sec.gov/newsroom/speeches-statements/corp-fin-statement-tokenized-securities-012826-statement-tokenized-securities. ↩ ↩² ↩³ ↩⁴ ↩⁵

5. Securitize Markets BUIDL STEP application (Arbitrum Foundation forum, public) (May 4, 2024; updated Mar. 20, 2025), https://forum.arbitrum.foundation/t/securitize-markets-buidl-step-application/23652 (quoted: “U.S. taxable investors will also receive PFIC statements”; describing daily yield accrual at 3:00 PM cutoff with daily in-kind distribution to the holder’s blockchain address per March 20, 2025 update); IRC § 1297, 26 U.S.C. § 1297 (passive foreign investment company definition, including the 75-percent passive-income test and 50-percent passive-asset test). The issuance of PFIC statements is the practitioner signal that a foreign issuer has accepted the default foreign-corporation classification under § 301.7701-3 and operates as a PFIC for U.S. federal income-tax purposes. ↩ ↩² ↩³ ↩⁴ ↩⁵

6. Circle Internet Group, Inc., USYC disclosures, https://www.circle.com/ (site-wide disclosures in the footer of Circle’s homepage, captured Sept. 10, 2026) (“USYC is issued by Circle International Bermuda Limited, regulated by Bermuda Monetary Authority (BMA), and represents an interest in a Cayman Islands mutual fund licensed by Cayman Islands Monetary Authority (CIMA)”; “Each USYC token serves as a digital representation of a share of the Hashnote International Short Duration Fund Ltd. (the ‘Fund’), a Cayman Islands registered mutual fund.”; the Fund “has appointed Circle International Bermuda Limited (‘CIBL’) … as its token administrator”; “Shares of the Fund and USYC are only available to non-U.S. Persons, as defined under the Securities Act of 1933, as amended.”). Circle’s Form 10-Q, cited at note 27, refers to the fund as the “Hashnote International Short Duration Yield Fund Ltd.”; this article uses the name Circle’s USYC disclosures give it. ↩ ↩² ↩³ ↩⁴ ↩⁵

7. Circle Internet Group, Inc., Quarterly Report (Form 10-Q) for the quarter ended Sept. 30, 2025, Notes to Condensed Consolidated Financial Statements, Note 3 (Nov. 12, 2025) (“In January 2025, the Company acquired 100% of the ownership interest in Hashnote Holdings LLC,” the fund manager of Hashnote International Short Duration Yield Fund Ltd.), https://www.sec.gov/Archives/edgar/data/1876042/000187604225000047/crcl-20250930.htm. ↩

8. F/m Investments LLC & The RBB Fund, Inc., Application for an Order of Exemption Under Sections 6(c) and 17(b) of the Investment Company Act of 1940 (Form 40-APP) (filed Jan. 21, 2026), available at https://www.sec.gov/Archives/edgar/data/1834499/000139834426000957/fp0097248-1_40app.htm; F/m Investments, F/m Investments Files First-of-Its-Kind SEC Application for Tokenized ETF Shares (Jan. 21, 2026), available at https://www.fminvest.com/news/fm-investments-files-first-its-kind-sec-application-tokenized-etf-shares; F/m Investments, F/m Investments Becomes First ETF Issuer to Launch Dual Share Class Fund (Feb. 2026) (describing F/m as “an $18 billion fixed income investment firm”), available at https://www.fminvest.com/news/fm-investments-becomes-first-etf-issuer-launch-dual-share-class-fund. ↩

9. F/m Investments LLC, Investment Company Act Release No. 35,873 (Jan. 13, 2026) (order under sections 6(c) and 17(b)), available at https://www.sec.gov/Archives/edgar/data/831114/999999999726000079/filename1.pdf; see Multi-Class ETF Fund Exemptive Relief Under the Investment Company Act of 1940, Investment Company Act Release No. 35,834, 90 Fed. Reg. 59,914, 59,915 (Dec. 22, 2025) (notice of applications); see also F/m Investments, F/m Investments Becomes First ETF Issuer to Launch Dual Share Class Fund (Feb. 2026), available at https://www.fminvest.com/news/fm-investments-becomes-first-etf-issuer-launch-dual-share-class-fund. ↩

10. SEC and CFTC, Application of the Federal Securities Laws to Certain Types of Crypto Assets and Certain Transactions Involving Crypto Assets, Release Nos. 33-11412; 34-105020 (Mar. 17, 2026), 91 Fed. Reg. 13,714 (Mar. 23, 2026); see also Press Release, SEC, SEC Clarifies the Application of Federal Securities Laws to Crypto Assets (Mar. 17, 2026), available at https://www.sec.gov/newsroom/press-releases/2026-30-sec-clarifies-application-federal-securities-laws-crypto-assets. ↩ ↩² ↩³

11. SEC, Framework for “Investment Contract” Analysis of Digital Assets (Withdrawn), available at https://www.sec.gov/about/divisions-offices/division-corporation-finance/framework-investment-contract-analysis-digital-assets. The page title encodes both the withdrawal status and the cross-reference to the March 17, 2026 release. ↩

12. SEC Division of Investment Management, No-Action Letter to Simpson Thacher & Bartlett LLP (Sept. 30, 2025) (state-chartered trust companies as qualified custodians for “Crypto Assets”), available at https://www.sec.gov/rules-regulations/no-action-interpretive-exemptive-letters/division-investment-management-staff-no-action-interpretive-letters/simpsonthacherbartlett093025; see Morgan Lewis, Crypto Custody Breakthrough: SEC Staff Grants Relief for Registered Funds, Advisers (Oct. 9, 2025), https://www.morganlewis.com/pubs/2025/10/crypto-custody-breakthrough-sec-staff-grants-relief-for-registered-funds-advisers; Sidley Austin LLP, SEC Staff Issues No-Action Relief Permitting Use of State-Chartered Trust Companies as Qualified Custodians of Digital Assets (Oct. 3, 2025), https://www.sidley.com/en/insights/newsupdates/2025/10/sec-staff-issues-no-action-relief-permitting-use-of-state-chartered-trust-companies. ↩ ↩² ↩³ ↩⁴

13. Investment Advisers Act Rule 206(4)-2, 17 C.F.R. § 275.206(4)-2 (Custody of Funds or Securities of Clients by Investment Advisers). The qualified-custodian bank category is at § 275.206(4)-2(d)(6)(i), incorporating the bank definition of Investment Advisers Act § 202(a)(2), 15 U.S.C. § 80b-2(a)(2). The privately-offered-securities exception is at § 275.206(4)-2(b)(2). Available at https://www.law.cornell.edu/cfr/text/17/275.206(4)-2. ↩ ↩² ↩³ ↩⁴

14. OCC Interpretive Letter 1183 (Mar. 7, 2025), available at https://www.occ.gov/topics/charters-and-licensing/interpretations-and-decisions/2025/int1183.pdf (rescinding IL 1179 and reaffirming the permissibility of the activities addressed in IL 1170, IL 1172, and IL 1174); see also OCC Interpretive Letter 1184 (May 7, 2025) (confirming that a bank may buy and sell assets held in custody at the customer’s direction and may use sub-custodians, subject to appropriate third-party risk management practices); 12 U.S.C. § 24 (Seventh); 12 C.F.R. Part 9 (fiduciary activities of national banks); 12 C.F.R. Part 12 (recordkeeping and confirmation requirements for securities transactions). None of these letters addresses tokenized fund shares by name. IL 1170 defines “cryptocurrency” to “also encompass[] digital assets that are not broadly used as currencies,” OCC Interpretive Letter 1170, at 1 n.3 (July 22, 2020), and notes, id. at 10 n.48, that “cryptocurrencies that are considered ‘securities’ for purposes of the Federal securities laws may be subject to” 12 C.F.R. Part 12; see also OCC Interpretive Letter 1172 (Sept. 21, 2020); OCC Interpretive Letter 1174 (Jan. 4, 2021); OCC Interpretive Letter 1179 (Nov. 18, 2021) (rescinded). ↩ ↩²

15. Family Office Rule, 17 C.F.R. § 275.202(a)(11)(G)-1 (excluding qualifying family offices from the “investment adviser” definition); Investment Advisers Act § 202(a)(11)(G), 15 U.S.C. § 80b-2(a)(11)(G). A family office that does not register as an investment adviser is not subject to Rule 206(4)-2. State-law fiduciary duties and the governing trust or partnership instruments supply the operative duties. ↩

16. U.C.C. §§ 8-102(a)(9)(iii), 8-501, 8-503 (A.L.I. & Unif. L. Comm’n 2022) (security-entitlement framework; financial-asset election; ring-fence against securities-intermediary creditors), available at https://www.law.cornell.edu/ucc/8; 11 U.S.C. §§ 741-753 (Bankruptcy Code Subchapter III stockbroker-liquidation provisions); Securities Investor Protection Act of 1970, 15 U.S.C. § 78aaa et seq.; SIPC, What SIPC Protects, https://www.sipc.org/for-investors/what-sipc-protects (excluding unregistered investment contracts from SIPA’s “security” definition). ↩ ↩²

17. In re Celsius Network LLC, 647 B.R. 631, 651-52, 657 (Bankr. S.D.N.Y. 2023) (Glenn, C.J.) (Earn-program assets presumptively property of the estate under the unambiguous Terms of Use; expressly not determining ownership of assets in the Custody Program). ↩

18. IRC §§ 851, 852, 26 U.S.C. §§ 851, 852 (Subchapter M—definition of regulated investment company; taxation of RICs and their shareholders, including the § 852(a)(1) distribution requirement, the § 852(b)(1)-(2) tax on investment company taxable income, and capital-gain dividends per § 852(b)(3)). Available at https://www.law.cornell.edu/uscode/text/26/851 and https://www.law.cornell.edu/uscode/text/26/852. ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶

19. Treas. Reg. § 301.7701-3, 26 C.F.R. § 301.7701-3 (classification of certain business entities; check-the-box election); see also Treas. Reg. § 301.7701-2 (business entities; definitions, including the per-se corporation list at § 301.7701-2(b)(8)). A BVI Limited Company is not on the per-se list and is an eligible foreign entity whose default classification, for an entity all of whose members have limited liability (§ 301.7701-3(b)(2)(i)(B)), is a foreign corporation. Available at https://www.law.cornell.edu/cfr/text/26/301.7701-3. ↩ ↩²

20. IRC §§ 1291, 1293, 1295, 1296, 1298, 26 U.S.C. §§ 1291, 1293, 1295, 1296, 1298 (PFIC excess-distribution regime and interest charge; current inclusion by a QEF shareholder of its pro rata share of ordinary earnings as ordinary income and of net capital gain as long-term capital gain, § 1293(a)(1), for the shareholder year in which or with which the fund’s year ends, § 1293(a)(2), with basis increased by inclusions, § 1293(d)(1), and previously taxed amounts distributed as non-dividends, § 1293(c); QEF election; mark-to-market election for marketable stock; and special rules, including the § 1298(f) annual shareholder report). The § 1296 mark-to-market election is available only for “marketable stock” within § 1296(e), defined at Treas. Reg. § 1.1296-2, 26 C.F.R. § 1.1296-2: stock “regularly traded” (other than in de minimis quantities, on at least 15 days each calendar quarter, § 1.1296-2(b)(1)) on a “qualified exchange or other market,” § 1.1296-2(c), or stock of a foreign fund redeemable at net asset value that satisfies each of § 1.1296-2(d)(1)(i)-(viii), including more than 100 unrelated shareholders in the class and availability “for purchase by the general public at its net asset value” with no minimum initial investment above $10,000. A § 3(c)(7) class limited to qualified purchasers and traded only on permissioned platforms satisfies neither. ↩ ↩² ↩³ ↩⁴

21. IRC §§ 701, 704, 7704, 26 U.S.C. §§ 701, 704, 7704 (partner-level taxation; partner’s distributive share; publicly-traded partnerships treated as corporations); Treas. Reg. § 1.7704-1, 26 C.F.R. § 1.7704-1 (publicly-traded-partnership safe harbors, taken up at length in §VI), available at https://www.law.cornell.edu/cfr/text/26/1.7704-1; IRC § 1001, 26 U.S.C. § 1001 (determination of amount of and recognition of gain or loss; gain measured on the “sale or other disposition of property,” § 1001(a)). ↩ ↩² ↩³

22. IRC § 61, 26 U.S.C. § 61 (gross income defined); IRC § 301, 26 U.S.C. § 301 (distributions of property; § 301(c)(1)-(3) dividend, basis-reduction, and gain tiers); IRC § 1272, 26 U.S.C. § 1272 (current inclusion in income of original issue discount; § 1272(a)(1) reaches “the holder of any debt instrument having original issue discount”); Rev. Rul. 2023-14, 2023-33 I.R.B. 484 (staking-rewards holding: cash-method taxpayer who stakes cryptocurrency native to a proof-of-stake blockchain and receives additional units as rewards includes fair market value of rewards in gross income in the taxable year in which the taxpayer gains dominion and control; holding limited to PoS validation rewards on its face); Rev. Rul. 2019-24, 2019-44 I.R.B. 1004 (airdrop following a hard fork; receipt-timing “dominion and control” principle); Notice 2014-21, 2014-16 I.R.B. 938, as modified by Notice 2023-34, 2023-19 I.R.B. 837 (convertible virtual currency treated as property). The article treats Rev. Rul. 2023-14 as instructive but not controlling for rebase-mechanic analysis and adopts the § 61 / Rev. Rul. 2023-14 analog as the safest characterization while acknowledging § 301 / § 1291 as alternative routes for corporate / PFIC issuers. ↩ ↩²

23. IRC § 1256(b)(1), 26 U.S.C. § 1256(b)(1) (enumerating section 1256 contracts: regulated futures contracts; foreign currency contracts; nonequity options; dealer equity options; dealer securities futures contracts—a closed list that does not include tokenized fund shares); IRC § 988, 26 U.S.C. § 988 (treatment of certain foreign-currency transactions; § 988(c)(1) reaches only transactions whose amounts are denominated in, or determined by reference to the value of, a nonfunctional currency). U.S.-functional-currency holders of tokens representing claims on USD-denominated assets and receiving USD-equivalent distributions have no § 988 exposure. ↩ ↩²

24. Cal. Rev. & Tax. Code § 23101 (“doing business” definition), available at https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=23101&lawCode=RTC; California Franchise Tax Board, “Doing business in California,” https://www.ftb.ca.gov/file/business/doing-business-in-california.html (2025 thresholds: $757,070 California sales; $75,707 California real or tangible personal property; $75,707 California compensation paid—revised annually by the Franchise Tax Board under § 23101(c)(1) in accordance with § 17041(h); 2026 thresholds not yet published by FTB as of mid-May 2026); see Paul Boynton, Mosey, Understanding California Nexus in 2026 (Dec. 23, 2025), https://mosey.com/blog/california-economic-nexus-test/. The California Office of Tax Appeals has rejected treating § 23101(b)‘s factor thresholds as a safe harbor: a sub-threshold issuer can still be “doing business” under § 23101(a)‘s broader “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” test. Appeal of GEF Operating, Inc., No. 18011077, 2020-OTA-057P, at 7-8 (Cal. Off. Tax App. May 9, 2019) (precedential) (rejecting the view that “subdivision (b) of R&TC section 23101 provides an effective safe harbor from the general definition of ‘doing business’ where a taxpayer’s California activities fall below the identified thresholds”); Appeal of Diet Standards LLC, No. 230613542, 2025-OTA-646, at 4 (Cal. Off. Tax App. Oct. 7, 2025) (nonprecedential) (taxpayer “doing business” under § 23101(a) “even though its inventory and sales were below the threshold amounts under R&TC section 23101(b)(2) and (3)”); see also James Brower, CBIZ, California Agency (Again) Rules that State’s Factor Nexus Thresholds Are not a Safe Harbor for Franchise Taxes (Jan. 9, 2026), https://www.cbiz.com/insights/article/california-agency-again-rules-that-states-factor-nexus-thresholds-are-not-a-safe-harbor-for-franchise-taxes. ↩

25. Transfer Agent Rules, Exchange Act Release No. 34-106246, 91 Fed. Reg. 56946 (proposed Sept. 4, 2026) (comments due Nov. 3, 2026), available at https://www.govinfo.gov/content/pkg/FR-2026-09-04/pdf/2026-18190.pdf. ↩

26. SEC Press Release 2026-90, SEC Issues “Innovation Exemption” to Facilitate the Trading of Tokenized NMS Stock and Request for Comment (Sept. 17, 2026) (order, Exchange Act Release No. 34-106402), available at https://www.sec.gov/newsroom/press-releases/2026-90-sec-issues-innovation-exemption-facilitate-trading-tokenized-nms-stock-request-comment. ↩

27. Regulation Crypto Assets, Securities Act Release No. 33-11434, Exchange Act Release No. 34-106150, 91 Fed. Reg. 54510 (proposed Aug. 21, 2026) (comments due Oct. 20, 2026), available at https://www.govinfo.gov/content/pkg/FR-2026-08-21/pdf/2026-17183.pdf. ↩

28. Securities Act of 1933 § 5, 15 U.S.C. § 77e (prohibiting the offer or sale of any security in interstate commerce absent registration or an applicable exemption); see also Securities Act § 2(a)(3), 15 U.S.C. § 77b(a)(3) (defining “sale” and “offer to sell” to include “every contract of sale or disposition of a security or interest in a security, for value” and “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value”). The Reg D 506(c) primary-offering exemption (17 C.F.R. § 230.506(c)) operates as the § 5 exemption for BUIDL and OUSG; secondary-transfer mechanics rely on the issuer’s transfer-restriction architecture either to keep the on-chain movement outside § 2(a)(3)‘s “disposition of a security or interest in a security, for value” (a recordation change between wallets of the same holder, with no disposition for value) or, for any transfer between holders, to satisfy a separate resale exemption (e.g., the Securities Act § 4(a)(1) exemption, reached through the Rule 144 safe harbor from underwriter status, 17 C.F.R. § 230.144). The §IV(D) issuer-side framing carries the operative-theory hook; a deeper § 5-secondary-sale analysis (Rule 144 holding-period and Form 144 mechanics for tokenized fund shares; Rule 144A QIB-only universe; § 4(a)(7) accredited-resale exemption) is reserved for the forward-series companion piece. ↩

29. IRC § 7704, 26 U.S.C. § 7704 (publicly traded partnerships treated as corporations, except as provided in § 7704(c)), available at https://www.law.cornell.edu/uscode/text/26/7704; Treas. Reg. § 1.7704-1, 26 C.F.R. § 1.7704-1 (publicly traded partnerships), available at https://www.law.cornell.edu/cfr/text/26/1.7704-1. Subsection (c) treats interests as “readily tradable on a secondary market or the substantial equivalent thereof” where, “taking into account all of the facts and circumstances, the partners are readily able to buy, sell, or exchange their partnership interests in a manner that is comparable, economically, to trading on an established securities market,” § 1.7704-1(c)(1), including where interests “are regularly quoted by any person, such as a broker or dealer, making a market in the interests” or any person “regularly makes available to the public … bid or offer quotes … and stands ready to effect buy or sell transactions at the quoted prices,” § 1.7704-1(c)(2)(i)-(ii); subsection (h) is the private-placement safe harbor (all interests issued in a transaction or transactions “not required to be registered under the Securities Act of 1933” and the partnership “does not have more than 100 partners at any time during the taxable year of the partnership,” § 1.7704-1(h)(1), with the (h)(3) look-through for tiered flow-through holders); subsection (j) is the lack-of-actual-trading safe harbor: interests are not readily tradable if “the sum of the percentage interests in partnership capital or profits transferred during the taxable year of the partnership (other than in transfers described in paragraph (e), (f), or (g) of this section) does not exceed 2 percent of the total interests in partnership capital or profits,” § 1.7704-1(j)(1). ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶

30. 17 C.F.R. § 230.506(c) (Reg D Rule 506(c) general-solicitation offering exemption requiring verification of accredited-investor status); see Morgan Lewis, Avoiding “Publicly Traded Partnership” Status for U.S. Federal Income Tax Purposes, in Venture Capital & Private Equity Funds Deskbook Series (2015) (restating the § 1.7704-1(h) safe harbor in the regulation’s registration-not-required terms without addressing Rule 506(c)), https://www.morganlewis.com/~/media/files/special-topics/vcpefdeskbook/fundoperation/vcpefdeskbook_avoidingptpstatus.ashx. The reading in the text is the article’s own; the 506(c) interaction is not settled by binding authority. ↩

31. Federal Deposit Insurance Act, 12 U.S.C. § 1821(a)(1)(B), (E) (net amount insured capped at the standard maximum deposit insurance amount, defined as $250,000 per depositor per insured depository institution, as raised under the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 335(a), 124 Stat. 1376, 1540 (2010)), available at https://www.law.cornell.edu/uscode/text/12/1821. ↩