Asset management is a complex business, where layers of processes add considerable delays and costs. For years, tokenisation – where asset ownership is subdivided into tradable digital tokens on a distributed ledger or blockchain – has promised fundamental transformation, enabling funds to be distributed in new ways and radically simplifying how ownership is recorded, verified and transferred.
Until now though, it’s not been possible to quantify the business case: the effect of end-to-end tokenisation on asset managers’ cost structures, from tokenising the underlying assets through to distributing the tokens as an investment vehicle. To remedy that, Calastone, in partnership with Value Exchange, a research organisation focussing on the asset management sector, worked with 26 asset managers to calculate the P&L benefits of implementing the technology, line by line.
The in-depth analysis showed operating costs would fall 23% for funds in a fully tokenised environment, equivalent to 0.13% of assets under management (AUM). Across UCITS, UK and US (40 Act) funds, this would result in aggregate savings of over $135bn.
These savings emerge because a system built on tokenisation circumvents many of the cumbersome processes managers currently rely on. Instead, they can make, record and reconcile changes on the digital ledger seamlessly and in real time, saving money on activities like data consolidation, netting of settlements across funds, checking and managing share dealing, and more.
In terms of budget lines, our respondents identified the largest opportunities in compliance monitoring, client reporting and regulatory reporting (a 24% cost saving), transfer agency (25%) and fund accounting (30%).
These and other back-office functions currently constitute nearly two thirds of asset managers’ operational costs, with fund accounting alone nearly hitting a quarter. Importantly these are also areas where asset managers anticipate the burden to rise steeply, driving an overall 32% increase in operating costs over the next three years, from an already high base of 0.73% AUM.
There is a clear opportunity for asset managers to use tokenisation to counteract or even reverse this pressure on the bottom line, but our respondents also identified several ways that it could simultaneously increase revenues, not least by allowing them to offer more competitive fees and distribute digital tokens in ways not possible for traditional funds.
Crucially, tokenisation could make it faster and more cost effective to launch new funds, which 40% (launch speed) and 33% (cost) of our asset managers identified as their most important business challenge respectively.
Fund launches typically take 12 weeks and require $50.3m in seed funding to set up on average, rising to 14 weeks and $63.5m when the fund is cross-border. With tokenisation applied to the fund structure, our asset managers expect this to fall to 9 weeks and $38.1m on average, with the most bullish respondents (38%) expecting seed funding costs to fall by between 26% and 50%.
The result would be easier and wider distribution, and a greater ability to customise for smaller investors. Altogether, a majority of asset managers expect tokenisation to drive an 11-25% AUM increase from wealth investors, with nearly a fifth anticipating more than 25% AUM growth from retail investors in larger funds.
The overall P&L benefit, taking both bottom and top lines into account, would come to 0.31% AUM for a $1bn fund, or $3.1m, hitting $7.9m when taking the assessments of the most bullish respondents.
The steps to tokenisation
Our research shows that fully adopting tokenisation would bring profound benefits to the asset management industry, but there’s clearly a long way to go before we get there: global tokenised AUM is still not substantial. Transforming the system will not happen overnight in some big bang; it will necessarily be incremental.
However, that doesn’t mean tokenisation isn’t coming. We’ve seen it before with the introduction of exchange-traded funds and digital trading in the 1990s and 2000s, just as we’ve seen it in other sectors undergoing digital transformation; it takes time to get going, but, once it does, it accelerates rapidly. Indeed, BCG projected that AUM for tokenised funds would rise to $600 billion by 2030[1], with the total AUM for all illiquid assets reaching $16 trillion.
There are already clear signs of momentum. In money market funds, for example, tokens can be distributed on public blockchains like Ethereum and Polygon, and used directly as collateral rather than having to convert to cash, among other use cases.
Franklin Templeton launched the first such fund in 2021, joined last year by Blackrock’s BUIDL, UBS’s uMINT, Hashnote (recently acquired by Circle) and a proof-of-concept fund by Citi and Fidelity that allows investors to settle multi-asset positions across different currencies in real time.
The latter, crucially, is under the auspices of the Project Guardian scheme, led by the Monetary Authority of Singapore – a sign of how it and other regulators like the UK’s FCA are exploring the potential of tokenisation.
Calastone is helping to enable fund launches like these, but this is only part of the journey. We’re supporting the industry in exploring tokenisation at every stage, from issuance to administration and distribution, as we collectively work towards the end-state that our research points to: the end-to-end issuance, administration and distribution of a tokenised fund.
This is how tokenisation will come about. Rather than some grand transformation, we expect asset managers will take a modular approach: testing, learning and optimising one use case at a time.
Each case will need to prove its own value, but the more they do, the more managers will explore other uses of tokenisation to simplify and speed up their processes, and to extend their reach.
The direction of travel
Instinctively, it doesn’t make sense that it takes three days to settle a mutual fund in the 2020s, but that’s because we’re still operating in a system that has its roots in the 1920s.
It’s been augmented by layer upon layer of new technologies, but underneath there are still ledgers to be manually updated and checks to be manually made. If we were designing the system from scratch, it wouldn’t look like it does now.
Tokenisation gives asset managers the chance to rethink that system – and solve a $135bn problem in the process. The efficiency gains are not hypothetical; they are measurable, immediate, and too significant to overlook.
Getting there won’t happen overnight. But waiting for the perfect moment means missing out on near-term gains and long-term advantage. The case is clear: by taking a pragmatic, use-case-led approach today, asset managers can begin unlocking real P&L impact – while laying the groundwork for a more scalable, efficient future.
[1] https://www.bcg.com/press/29october2024-tokenized-funds-the-third-revolution-in-asset-management-decoded
