The potential application of tokenisation in asset management has come a long way since we wrote our white paper on the subject in 2019. Once just a concept, we are now on the cusp of transformative change.
The emerging opportunity was clear there even back then. By representing the ownership of any asset, or pool of assets – for example, a portfolio of shares or a physical piece of art – as digital tokens, investors could have more efficient access to a broader range of investment solutions. But how to apply the technology in practice and how to navigate the regulatory waters was still unknown, until now.
As regulators start to develop frameworks and allow pilots in token-based investment vehicles, we’re building the practical infrastructure to enable the move from funds to a new type of tokenised collective investment. Using our existing network as the bridge, we’re ready to make the dream of tokenised, distributed ledger technology (DLT) based investing a reality.
Since 2019, consumer expectations and technological development have accelerated rapidly.
The pandemic saw swathes of new, younger investors participating in stocks and alternative assets, and the appetite for fully digital investment products is only increasing. Modern investors want more personalised, low-cost investing, and they want access to a bigger pool of assets – with a user experience on a par with the challenger banks and lifestyle apps they’re familiar with.
At the same time, enterprise adoption of DLT and tokenisation has continued to progress. The likes of Unilever and SAP are teaming up to explore the adoption of tokenisation in supply chains, and the Industrial and Commercial Bank of China (ICBC), the largest bank in the world, has 40 blockchain applications in operation, which last year handled a total of more than $48bn worth of transactions.
Having already proved its viability in the public domain of blockchain and cryptocurrency, the technology is now showing the immense value it can bring to private markets and assets.
A lot of the action is in the back office, verifying insurance claims, facilitating real estate deals, and tracking supply chains. But in the world of asset management and investing, tokenisation and DLT have the potential to be transformative on a bigger scale, meeting the expectations of a new generation of investors and helping asset managers fulfil them.
So as investor demands for accessible, low-cost and innovative ways of investing grow, we’re applying the latest technology to build the next-gen infrastructure for the distribution and trading of a new type of collective investment product.
What we’re building at Calastone
We’ve spent the last eight years exploring, experimenting and then building using DLT.
Starting in 2014, we began testing the technology and developing approaches to complement our network. This led to releasing our own Distributed Market Infrastructure (DMI) in 2019, where we used DLT to represent market state and transactions.
Now we are partnering with Microsoft and using its Confidential Consortium Framework (CCF) to further evolve what we can do. Having seen how we can practically apply the technology to our customers’ use cases and business models, tokenisation allows us to scale it further in terms of ambition, scope and reach.
Rather than simply tinkering with the existing structure of a fund by tokenising mutual fund units, we are building a completely new way of operating: directly tokenising collectives of assets for distribution to the mass market, using our DMI.
In essence, we are building a marketplace. Here, investors, investment managers, and other participants can offer products and purchase the services required to support them. Our model isn’t looking to recreate the mechanism of a mutual fund – it’s purely digital; a multi-party structure where everyone collaborates.
The key benefit of our approach is that it leverages the scale of the existing Calastone network; instantly connecting more than 3,000 members of the global asset management ecosystem – fund managers, transfer agents, distributors, platforms, and custodians. Where other companies are building new products in isolation, we can use all our existing connectivity and infrastructure to enable fund managers to distribute new, token-based collective investment products globally from day one.
It also means our platform can be accessed via the messaging rails and protocols that exist today. Our customers on the network can realise new efficiencies and value immediately – without having to build to a new standard or undertake any costly replatforming work.
This allows fund managers to focus on building where it matters – creating innovative new products and ways of working with customers that add tangible value. So rather than wasting resources on infrastructure changes our customers gain first-mover advantage.
Managers can also still trade their existing funds with our model alongside building out new token-based collective investment products, helping manage risk and change at their own pace.
The benefits of token-based collective investments
Our tokenisation model promises to meet both the demands of investors and asset managers for a product that is more personalised, cost-effective, flexible, and aligned with the service levels modern customers receive from other natively digital services like e-commerce and streaming media solutions.
For fund managers, increased automation in processes like pricing and fund accountancy combined with greater visibility, instant settlement and improvements in data and analytics promise to save tens of basis points on the management of funds, increasing potential for alpha generation.
Investors, meanwhile, can enjoy a truly modern user experience – instant purchases and better transparency, as well as access to a broader range of investments, with the fractionalisation enabled by tokenisation allowing more people to access high-value assets that were previously out of reach.
At a higher level, tokenisation also removes barriers between managers and investors, allowing the fund manager and the customer to form a more direct relationship. Through DLT, both parties can have full visibility of the portfolio and interact directly, rather than through intermediaries, for more effective long-term collaboration.
We’re already collaborating with several major global asset managers in building our tokenisation model, and it’s currently being presented to regulators.
Because we’re building a version of DLT and token-based collective investing that uses our existing network, and therefore has all the features necessary for operating in a heavily-regulated financial services environment, we’re bullish on the prospects of it succeeding. We call this distribution “backwards-compatibility” and we think this is a fundamental enabler of investors and their agents being able to access this new model without major migration concerns.
We’re excited about the progress major regulators are making in recognising the opportunity here. The Monetary Authority of Singapore (MAS) launched a pilot in May of this year to explore tokenisation, collaborating with DBS Bank and JP Morgan. In June, Hong Kong formalised the legal framework needed to regulate virtual asset exchanges. And the EU has just finalised laws for a DLT pilot regime for tokenised securities, to come into effect in March 2023. We also fully support the Investment Association’s (IA) move to push the Financial Conduct Authority (FCA) to enable DLT-traded funds. If regulatory approval is expedited, blockchain-traded funds could be rolled out as early as the end of the second quarter of 2023 in the UK.
The sooner the regulatory frameworks are in place, the sooner the industry can fully explore the digital asset ecosystem and start working through the potential opportunities and risks that come with new technologies – to consumers, investors and the financial system at large.
The future of tokenisation
We expect to see the first stages of this new model becoming a reality within a year, and we have the capability, expertise and global network to help the investment ecosystem apply it practically and reap the benefits from day one.
By using our existing network as the foundation to realise the asset management industry’s digital transformation ambitions, we can reduce risk and boost opportunity. The effect is potentially revolutionary, but the practical implementation is simply an evolution of what’s gone before – enhancing the collective investment model with tokenisation of the underlying assets.
And as tokenisation evolves, and the regulatory frameworks are established, the opportunity to expand the tech to enable personalisation at scale will gather pace, meaning a more accessible, personalised, streamlined investment future for investors and asset managers alike.
So far, the examples of DLT and tokenisation we’ve seen have been picking away at small aspects of industries, but a new model for collective investments, distributed through an existing global network, has the chance to change the way the investment industry works, without disrupting current business models. Revolution through evolution.
It paves the way for the future of collective investments that Calastone believes in – one that is fully digital, delivered at low cost and accessible to all.