Tokenisation, the practice of representing assets as digital entities that can be easily traded and widely held, has been heralded by many as the future of asset management. To a significant degree, that future has now arrived: tokenised funds are being launched, the ASX has been developing the apparatus for trading tokens via its Synfini programme, and regulators are starting to pay close attention to the subject of tokenisation. By 2030, trillions of dollars in assets could have been tokenised, representing as much as 10% of global GDP.
Calastone’s research suggests that Australian asset managers and servicers are among the most likely in the world to be making plans to use distributed ledger technology (DLT), the infrastructure for tokenised assets, in the next 12-18 months. Federal funding has also been committed to an industry body researching the digitisation of assets.
It is not hard to see why tokenisation has been the subject of so much attention, in Australia and around the world. Its attractions are manifold: the greater accessibility and liquidity it can bring to alternative assets through fractional ownership, the operational efficiency that flows from a digitised value chain, and the scope that is created for highly personalised services to be offered to a much wider franchise of customers, with personalised portfolios created from tokenised building blocks.
The bigger and more important question is how these opportunities can and should be pursued. There is almost universal acceptance that tokenisation will be a force for change – 97% of institutional investors in a BNY Mellon survey said it will ‘revolutionise asset management’ – but far less agreement about how to define the term or implement it in practice.
With tokenised products now being brought to market, the time has come for clarity around what the industry means by tokenisation and how products should be designed and regulated. In particular it is important to distinguish between two different paths to tokenisation now being pursued: tokenising the fund unit or the underlying assets in the fund.
How to tokenise: unit or asset?
The tokenised products that have been launched in growing numbers over the last year, including bond, private equity and money market funds, have largely followed a model that focuses on the unit level. Tokens are created that represent fund units, denominated on a public blockchain that sits alongside the traditional ledger of units held by the registry.
This approach allows funds to be held and traded as tokens, delivering on at least one of tokenisation’s key promises – that it will widen access to alternative asset classes, such as the private equity funds launched in this form by KKR and Hamilton Lane.
Yet it leaves intact the traditional fund value chain, the source of much complexity and inefficiency. By doing so it misses out on one of the most important opportunities of tokenisation: unlocking the potential of DLT as a new platform for asset management, on which entire funds can be built and administered digitally, from product development to distribution.
This is the model Calastone has been building and piloting with several global asset managers, in consultation with regulators. Here tokens represent not the units of the fund but proportions of the underlying assets in it. To achieve this, the entire fund value chain must be brought onto DLT. No longer will the liquidity provider, custodian, registry, fund accountant, asset manager and distributor work together as separate, loosely connected entities. They will all participate on a common DLT platform, removing much of the friction involved in asset management operations, as data is transferred from one link in the chain to another.
This asset-level, platform-based approach has clear advantages: rather than simply changing the way investors can access the same products, it provides the foundation for more innovative product development, with the flexibility to combine asset tokens according to the needs of the individual customer, thereby offering mass personalisation. In parallel, it addresses the problems of the legacy fund value chain, harnessing the power of DLT as a shared platform to develop, distribute and administer investment products.
Tokenisation will be a missed opportunity if asset managers simply see it as a way to reinvent the wheel, without altering any of the fundamental infrastructure that determines their operations. By contrast, if it is leveraged as a catalyst for change, bringing digitisation into all corners of the funds industry, then tokenisation can become a transformative force, paving the way for a step change in efficiency, personalisation and value for money. Only then will the reality of tokenisation match the power of the idea, and the benefits of truly digital investing be felt by all.
This article was first published on Investor Strategy News: https://ioandc.com/tokenisation-is-here-and-its-time-for-asset-managers-to-choose-their-approach/