Tokenisation – insights from across the funds industry ______

Blog / 23 Mar 2020

Ed Lopez, Chief Revenue Officer

Calastone hosted a live video webinar on “Tokenisation and the Future of Funds” in March, which drew in hundreds of viewers from across the globe. The broadcast was moderated by Chris Wade, Co-founder at Isomer Capital and featured an array of distinguished panellists including Daniel Andemeskel, Head of Innovation Management at Universal Investment; Jane Karczewski, Head of Global Custody at HSBC; Alex Shelkovnikov, Co-founder of Semantic Ventures and Adam Belding, CTO at Calastone. Ed Lopez, Chief Revenue Officer, looks at some of the key themes from the webinar. 

Demystifying tokenisation

Technological disruption, the rapid rise of passive funds, increasing regulatory oversight and changing investor demographics – namely the emergence of millennial savers – are already driving asset managers to rethink their business models. Although rationalising operational processes will incur cost savings, experts – speaking at our webinar – believe that tokenisation could provide a solution to help the industry weather some of its challenges.

In summary, tokenisation is the fractionalisation of the ownership of an asset or pool of assets into ‘tokens’.  “The actual concept of tokens denoting value in an underlying asset or good is nothing new and has existed for millennia,” Adam said. However, he added that the rise of digital tokens has been heavily influenced by the spectacular growth of crypto currencies such as Ethereum and Bitcoin.

Tokenisation and the democratisation of funds

As tokenised assets can be fractionalised multiple times over, it could become much simpler and cheaper for retail investors to invest in assets through a pool of tokens, many of which traditionally might have been off-limits to them due to their high fees or minimum investment criteria.

In addition to making collective investments more inclusive to people on lower incomes, tokenisation could also give investors easier access to illiquid assets such as private equity and SMEs (small to medium sized enterprises), according to Jane Karczewski. “Illiquid assets typically have higher yields, which would be attractive in this current low yield market environment,” she added. If tokenisation enables private markets to become more accessible to retail consumers, then this could help inject vast quantities of liquidity into illiquid asset classes which have been closed off to all but the largest of investors.

Generating efficiency benefits

Moreover, tokenisation could introduce meaningful efficiency benefits for investors. Right now, the process of buying a fund is heavily intermediated and costly, which is often a deterrent for many investors, especially younger people. If tokenisation is managed through distributed ledger technology (DLT), trading and post-trading activities could become more frictionless and automated paving the way for cost savings at the investor level. “One of the fundamental benefits of tokenisation will be the efficiencies it generates,” added Jane.

If the funds industry digitalises and makes it more straightforward for people to invest, then it will likely widen its appeal among young investors and grow overall AuM (assets under management). “At the moment, we have a lot of intermediation in the fund buying process. One of the primary advantages of DLT is that it would reduce the number of counterparties which clients interact with. If our industry successfully digitalises, then there is no reason why buying a fund should be anymore difficult than purchasing a book on Amazon,” added Daniel Andemeskel.

Moving beyond the theory

If tokenisation is to thrive, then there will need to be fully-agreed upon industry standards underpinning it. Standardisation is essential for several reasons but primarily because it allows for interoperability across multiple platforms and infrastructures. It also provides comfort to the users themselves in that they will not be left behind should they choose the wrong platform. In fact, efforts are underway to standardise tokenisation – most notably through schemes such as the Token Taxonomy Initiative (TTI), which is currently attempting to provide greater clarity around tokens, including their potential use cases and taxonomy.

Essentially, there also needs to be regulatory buy-in if tokenisation is to move beyond the fringes into the mainstream. While it is true some regulators have adopted a fairly hostile attitude towards digital tokens, Adam said others have been more accommodating. “The Monetary Authority of Singapore (MAS) and the UK Financial Conduct Authority (FCA)  have even produced comprehensive papers looking at digital tokens, while a few national competent authorities (NCAs) even operate their own fintech sandboxes” he continued.

Generally speaking, most experts accept that some sort of regulatory oversight is necessary if institutions are to become comfortable with tokenisation. “We do not advocate for zero regulation but regulatory clarity. We want to ensure people interacting with these services are doing so in a safe way,” commented Alex Shelkovnikov.

Making it happen

Without regulation or industry-wide standardisation, our panellists thought that it would be some time before tokenisation truly takes off, especially in heavily regulated marketplaces such as banking and asset management. That said, intermediary providers have reported that they are fielding more requests from institutional clients about how they can service digital assets. “We have seen a lot more demand for digital assets. In fact, HSBC went live three months ago with a digital vault, a blockchain-enabled custody platform which will digitalise the transaction records of private placements. There are also a number of tokenisation initiatives underway at some of the leading stock exchanges,” Jane commented.

Other panellists are equally pragmatic, accepting that today’s crop of mutual funds will probably be unable to fully tokenise. “If the question is whether or not we can tokenise existing mutual funds, then the answer is no. This is because there is always a need to connect the old world with the new world. Today’s mutual funds still need to reconcile, even if they have a digital share class. I believe the right way to approach tokenisation would be to create a digital fund from scratch with digital assets. This is something we are working on right now, namely creating a digital fund with a digital wrapper with regulatory approval,” Daniel commented.

Although our panellists accepted that tokenisation will not appear overnight, they broadly agreed that the concept could dramatically democratise the investment universe by making it more accessible, even to those who are unbanked.

Given the possible impact this concept could have on the future of funds, the industry must pay close attention to any developments as they happen. At Calastone we are always looking to explore new ideas and concepts that could transform our industry, and we look forward to sharing further insights with you on this topic over the course of the year.

 

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