Regulatory Sandbox Approaches for Tokenized Funds

Regulatory Sandbox Comparison for Tokenized Fund Products

The tokenized treasury market has grown from approximately $100 million in January 2023 to $11.70 billion across 73 products and 55,520 holders by March 2026 — a 7,400% increase in three years, and regulatory sandboxes have played a critical role in this growth — providing controlled environments where fund managers can test tokenized products with modified regulatory requirements before committing to full compliance. Seven major jurisdictions currently operate sandbox programs relevant to tokenized fund development, each representing a distinct regulatory philosophy about how innovation should be nurtured, tested, and transitioned to permanent authorization.

This comparison examines each sandbox program’s scope, conditions, effectiveness, and transition pathway, providing fund sponsors with a structured framework for jurisdictional strategy decisions.

Sandbox Program Comparison

EU DLT Pilot Regime: The Most Ambitious Experiment

The EU DLT Pilot Regime, operational since March 23, 2023, is the most comprehensive regulatory sandbox for tokenized securities globally. Unlike traditional sandboxes that provide temporary exemptions for individual firms, the Pilot Regime creates entirely new categories of regulated market infrastructure: DLT multilateral trading facilities (DLT MTF), DLT settlement systems (DLT SS), and DLT trading and settlement systems (DLT TSS) that combine both functions.

Scope and constraints: The Pilot Regime allows tokenized securities — including UCITS fund shares — to be traded and settled on DLT infrastructure with exemptions from certain MiFID II and CSDR requirements. However, significant constraints apply: individual security market capitalization is capped at EUR 500 million for UCITS (EUR 200 million for bonds, EUR 500 million for equities); total market value on any single DLT infrastructure cannot exceed EUR 9 billion; and the Pilot Regime expires in March 2029, requiring transition to permanent regulation.

Operator authorizations: As of early 2026, ESMA reports that approximately 5 DLT market infrastructure operators have received Pilot Regime authorization across EU member states. These include traditional exchange operators expanding into DLT (SIX Digital Exchange in cooperation with European partners), crypto-native infrastructure providers seeking regulatory recognition, and new entrants building DLT-specific market infrastructure.

Effectiveness assessment: The Pilot Regime’s ambition — creating new regulated infrastructure categories — is both its strength and weakness. The scope is comprehensive, covering trading, settlement, and combined infrastructure. However, the market cap limits constrain institutional-scale adoption. A EUR 500 million cap on individual UCITS effectively excludes large ETFs from Pilot Regime trading, limiting the program to smaller or newly launched tokenized fund products. ESMA publishes Pilot Regime progress reports at esma.europa.eu.

Singapore MAS Sandbox: Institutional Collaboration Model

Singapore’s MAS Sandbox has produced the highest number of institutional-grade tokenized fund pilots among all sandbox programs globally. The sandbox’s effectiveness is driven by Project Guardian — a collaborative initiative between MAS and over 40 financial institutions (expanded from 17 initial participants) including JPMorgan, DBS, SBI, Standard Chartered, HSBC, Citi, T. Rowe Price, Wellington Management, S&P Global, Moody’s, and WisdomTree — that tests tokenized asset transactions in a supervised environment. In August 2025, the Investment Management Association of Singapore (IMAS) and UK Investment Association joined Project Guardian, broadening its scope to cross-border distribution frameworks.

Project Guardian structure: Unlike sandboxes where individual firms apply independently, Project Guardian organizes institutional participants into industry pilots testing specific use cases. Completed and ongoing pilots include: tokenized money market fund creation-redemption using smart contracts and DvP settlement; cross-border tokenized fund distribution between Singapore and Japan; multi-currency tokenized fund settlement using tokenized bank deposits; and tokenized fund collateral management for institutional lending.

Sandbox Express vs. Sandbox Plus: MAS Sandbox Express provides pre-defined regulatory parameters for common use cases, enabling faster approval (21 days) with lower compliance burden. Sandbox Plus provides customized regulatory relief for complex experiments that do not fit pre-defined parameters, with longer approval timelines but broader scope. Tokenized fund experiments typically use Sandbox Plus due to the complexity of fund regulation.

Transition pathway: MAS uses sandbox outcomes to inform permanent regulatory framework development. Project Guardian’s findings have influenced MAS guidance on: digital asset custody requirements for licensed fund managers; oracle network governance standards for on-chain fund valuation; and interoperability requirements for cross-border tokenized fund distribution.

Hong Kong SFC Sandbox: Direct Path to Authorization

Hong Kong’s SFC Regulatory Sandbox is unique in that it functions as a supervised on-ramp to permanent fund authorization rather than a temporary testing environment. Fund managers entering the sandbox with the intent to launch tokenized fund products receive supervised operational experience that directly feeds into the SFC authorization process.

Sandbox-to-authorization pipeline: The SFC sandbox has produced 7 authorized tokenized fund products as of early 2026, most notably the ChinaAMC tokenized money market ETF ($546.1 million AUM, launched February 28, 2025) — the first retail-accessible tokenized fund in the Asia-Pacific region — the highest conversion rate of any sandbox program. This effectiveness reflects the SFC’s approach: sandbox participants receive detailed SFC feedback on technology governance, smart contract security, and operational procedures during the sandbox period, enabling them to refine their applications before formal submission. The sandbox experience effectively pre-clears the enhanced due diligence that the SFC conducts on tokenized fund authorization applications.

Professional investor limitation: SFC sandbox experiments are typically limited to professional investors (defined in Hong Kong as individuals with $8 million+ in portfolio assets or institutional investors), constraining the scope of retail-accessible tokenized fund testing.

UK FCA Innovation Sandbox: The Crypto ETP Constraint

The FCA’s Innovation Sandbox provides case-by-case regulatory relief for financial services innovation, but its utility for tokenized fund products is constrained by the FCA’s January 2020 ban on retail crypto exchange-traded products (ETPs). This ban prevents UK retail investors from accessing tokenized fund products that hold crypto assets, regardless of the fund’s regulatory status.

Scope limitation: The FCA sandbox can accommodate tokenized fund structures that do not involve crypto assets (e.g., tokenized equity or bond ETFs where the underlying assets are traditional securities represented on blockchain), but the crypto ETP ban eliminates the most commercially significant tokenized fund use cases. The FCA’s regulatory position on crypto ETPs may evolve following the UK government’s stated intention to position London as a global crypto hub, but no timeline for retail crypto ETP authorization has been published. See fca.org.uk for current FCA position statements.

Switzerland FINMA: Permanent Framework, Not a Sandbox

Switzerland’s FINMA framework is technically not a sandbox — it provides permanent DLT authorization through the Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology (DLT Act), effective since August 2021. Fund managers seeking tokenized fund operations in Switzerland apply for standard authorization with DLT-specific provisions, rather than entering a temporary testing environment.

Regulatory architecture: The DLT Act introduced: DLT-registered securities (tokenized securities that can exist without CSD involvement); DLT trading facility authorization (a new license category for tokenized securities exchanges); and integration of DLT securities into existing FINMA authorization categories (banking, securities dealer, fund management).

SIX Digital Exchange (SDX), built on Avalanche subnet technology, operates as a fully licensed exchange and CSD for tokenized securities, including fund products. SDX provides the infrastructure for full-lifecycle tokenized fund operations: issuance, trading, settlement, and custody — all under FINMA regulation.

Template effect: Switzerland’s approach has influenced regulatory design across jurisdictions. The DLT Act’s principle — “same activity, same risk, same regulation,” applying existing securities regulation to tokenized products rather than creating entirely new frameworks — has been adopted as a guiding principle by Hong Kong’s SFC, Singapore’s MAS, and the EU’s legislative approach to the DLT Pilot Regime.

Brazil CVM Sandbox: Emerging Market Innovation

Brazil’s CVM (Comissão de Valores Mobiliários) Regulatory Sandbox permits tokenized fund and capital markets experiments for up to 36 months. Brazil’s approach reflects the country’s broader digital financial innovation strategy, which includes the Drex (digital real) CBDC pilot and progressive crypto asset regulation.

Market context: Brazil’s fund market ($2+ trillion in AUM) is the largest in Latin America, and CVM has authorized several tokenized fund pilots involving FIDC (credit rights investment funds) tokenization. These experiments test tokenized fund share issuance, secondary market trading, and settlement using the Drex CBDC platform.

US Regulatory Gap

The United States notably lacks a formal regulatory sandbox for tokenized fund products. The SEC’s FinHub provides informal engagement — fund sponsors can request meetings with FinHub staff to discuss innovative product proposals — but FinHub does not offer regulatory relief, testing permissions, or modified compliance requirements. Former Commissioner Hester Peirce’s proposed Token Safe Harbor (versions 1.0 and 2.0) would have created a de facto sandbox for digital asset token development, but was never adopted by the full Commission.

This sandbox gap means that US fund sponsors must navigate full regulatory compliance from day one — filing Form N-1A registration statements, satisfying Rule 6c-11 requirements, obtaining exchange listing approval, and meeting FINRA review standards — without the benefit of supervised experimentation. This is a higher barrier than sandbox jurisdictions impose, but one that Franklin Templeton ($1.01 billion BENJI AUM), BlackRock ($2.01 billion BUIDL AUM), and WisdomTree ($742.8 million WTGXX AUM, which received SEC exemptive relief on February 24, 2026, for 24/7 trading — the first tokenized mutual fund with this authorization) have demonstrated is navigable for well-resourced fund sponsors. The SEC has also received 155 crypto ETP filings covering 35 different tokens as of 2025, suggesting the full-compliance pathway is becoming well-trodden.

The absence of a US sandbox may actually favor large, established fund sponsors (who can absorb the compliance costs of full regulatory filing) over smaller, innovative entrants (who would benefit from sandbox testing before committing to full compliance investment). This dynamic concentrates tokenized fund innovation among the industry’s largest players — a structural outcome that sandbox jurisdictions are designed to avoid.

Sandbox-to-Production Transition Assessment

The critical measure of sandbox effectiveness is how many pilot programs transition to permanently authorized, commercially operational products:

Hong Kong’s high conversion rate reflects the SFC’s sandbox-as-onramp design, where sandbox participation is explicitly designed to accelerate rather than delay permanent authorization. Singapore’s approach — using Project Guardian to inform systemic regulatory framework development rather than produce individual authorized products — defies simple conversion measurement but has arguably produced the greatest systemic impact on regional regulatory design.

For fund sponsors evaluating jurisdictional strategy, sandbox availability and transition pathway should be weighted alongside: target market access, tax efficiency, service provider ecosystem, custody infrastructure, and operational infrastructure maturity. The Asia-Pacific regulatory comparison provides additional context for regional sandbox evaluation. The institutional investor guide addresses how sandbox status affects institutional allocation decisions.

EU DLT Pilot Regime: Lessons from the First Two Years

The EU DLT Pilot Regime, operational since March 2023, provides the most instructive case study for sandbox-to-permanent-regulation transition design. The Pilot Regime’s distinctive features include:

Explicit sunset provision: The Pilot Regime includes a six-year operational window (extendable) after which ESMA must report to the European Commission on whether the Pilot should be made permanent, modified, or discontinued. This sunset mechanism creates urgency for both regulators and participants — unlike open-ended sandboxes that can persist indefinitely without producing regulatory conclusions.

Cross-border application: Unlike national sandboxes (such as Australia’s ERS or the DIFC’s ITL), the DLT Pilot Regime operates across all 27 EU member states under a harmonized framework. A DLT trading system authorized under the Pilot Regime in Luxembourg can provide services throughout the EU single market — giving the Pilot significant scale advantages over national sandboxes.

Volume caps: The Pilot Regime imposes volume caps on DLT market infrastructure (EUR 9 billion in market capitalization for DLT trading systems), designed to limit systemic risk during the pilot phase. These caps constrain the scale of tokenized fund products that can operate under the Pilot, potentially limiting the commercial viability of high-volume tokenized ETF products during the pilot period.

Infrastructure integration: Pilot Regime participants must demonstrate interoperability with existing EU market infrastructure, including settlement links to Euroclear and national CSDs. This interoperability requirement ensures that DLT-based settlement does not create isolated liquidity pools disconnected from the broader EU securities market.

The Pilot Regime’s design reflects lessons from earlier sandbox experiments in Asia-Pacific and the UK, incorporating features that address common sandbox limitations: clear graduation criteria, cross-border scope, and systemic risk controls. For UCITS-compatible tokenized fund products, the Pilot Regime provides a pathway to demonstrate operational viability within the EU’s regulated market infrastructure framework.

The UK’s Digital Securities Sandbox

The UK’s Financial Services and Markets Act 2023 authorized the FCA and the Bank of England to establish a Digital Securities Sandbox (DSS), designed as the UK’s post-Brexit equivalent of the EU DLT Pilot Regime. The DSS is expected to become operational in 2026, with features that differentiate it from both the EU Pilot and Asia-Pacific sandboxes:

• Combined FCA-BoE oversight: The DSS operates under joint supervision by the FCA (for market conduct) and the Bank of England (for systemic risk), reflecting the UK’s “twin peaks” regulatory architecture.
• Settlement finality: DSS participants can apply for settlement finality protections under modified UK settlement finality regulations, providing legal certainty for DLT-based settlement that most sandbox programs do not offer.
• No predetermined volume caps: Unlike the EU Pilot Regime, the DSS does not impose predetermined volume caps, allowing market forces to determine the scale of tokenized product activity during the sandbox period.

The DSS represents the UK’s attempt to maintain competitiveness with the EU in digital securities innovation while leveraging post-Brexit regulatory flexibility. For tokenized ETF products targeting the UK market, the DSS could provide the operational testing environment needed to demonstrate viability before permanent FCA authorization.

See ESMA’s DLT Pilot Regime guidance at esma.europa.eu and the SEC vs. ESMA comparison for further regulatory context.

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