Funds Europe speaks with Alastair Sewell of Aviva Investors, who believes tokenisation has the potential to spark growth in the money market funds sector
Over 150 years, the funds industry has seen milestones including the invention of collective investment schemes, mutual funds, money market funds (MMFs) and ETFs. Tokenisation could prove to be the next one due to the great potential for increased efficiencies, faster processes and greater access to markets for many investors.
Alastair Sewell, investment director at Aviva Investors, describes these benefits as “powerful tectonic changes, particularly at a time of significant wealth transfer”.
Tokenisation could also drive growth in the MMF industry, says Sewell.
There are currently a number of ways of tokenising funds in general, all of which are likely to continue in the immediate future. Some funds are only digital in the distribution element, with a tokenised share class. Others are digital representations of real-world assets, such as tokenised bonds. Others, however, are fully tokenised offerings with background operations entirely on-chain.
Although he describes demand for tokenised MMFs as currently limited, there are not one, but two key use cases.
First, there are digitally native companies that want to raise debt. To do this they generate fiat or digital cash which creates cash management needs. To meet those needs they could either hold a stablecoin or put cash into a tokenised MMF.
Uncertainty about the regulatory framework for stablecoins and the ability to charge interest has led to some reticence for stablecoin usage here, whereas should funds opt to put digital cash into a tokenised MMF, they will generate some yield.
The second use case arises from making digital representations of real-world assets – including MMFs – and then using these as collateral.
In July, a UK-first initiative saw tokenised units of Aberdeen Investments’ money market fund and tokenised gilts used as collateral for foreign exchange trades with Lloyds Banking Group.
In official statements around the launch, Lloyds head of digital finance, Peter Left, called the move a “groundbreaking initiative” that can enhance collateral efficiency. He added that wider adoption of tokenised funds as collateral could also help reduce systemic risk during periods of market stress by enabling digital transfers instead of forced asset sales, thereby reducing volatility.
Aberdeen Investments chief product officer Emily Smart said the successful demonstration of real-world application of on-chain collateral movements using tokenised assets shows how digital assets can streamline processes and increase efficiency.
Biggest potential benefit
For Sewell at Aviva Investors, the successful initiative may also serve to generate more demand by promoting collateral management as the biggest potential benefit of tokenised MMFs.
“Through tokenisation, you are able to trace the collateral on an intraday basis and that allows for more efficient and effective risk management,” he says. “There is instant visibility of the collateral assets compared to the end-of-day netting and risk management processes that are widely used today. “Collateral mobility also increases, enabling real-time tracking and a more efficient and more fungible process.”
Inevitably, there are steps needed for these benefits to be properly realised. Some are regulatory-related, some are around demand, some are around market structure. And while there is progress in turning proof-of-concept into use cases, there is also a ‘chicken and egg’ scenario when it comes to supply and demand, says Sewell.
“We need a supply of tokenised MMFs, the right market structure, the involvement of intermediaries such as brokers to manage the collateral schedule, and developments on the market side to provide the demand.”
Sewell at least says “green shoots” in all this can be seen.
Concerning regulation, Sewell says it is encouraging to see a “unique period of collaboration between regulators and market participants”, but the fiduciary duty on investment managers means the passing of necessary rules may slow down momentum. In theory, though, tokenised MMFs should be more efficient and cost-effective in meeting their regulatory and compliance obligations.
The crypto-friendly stance of the current US regime after years of circumspection has helped to accelerate this process and encouraged other regulators and national supervisors to engage with the topic. These include the EU and the UK – the latter of which, Sewell says, is “in a good place”.
Co-existence and cooperation
Also on the plus side, there is not much change to market structure required, nor is there the prospect of rapid disintermediation for brokers and other third parties. For example, brokers and collateral agents will still be required to manage the collateral involved in tokenised MMFs. Even if there will be a significant long-term impact on the value chain – as noted by the likes of consultants Boston Consulting Group and McKinsey – these scenarios will take more time to play out, says Sewell.
“I think we will see a period of co-existence or coopetition for some time. There will be shades of grey and a lot of proof-of-concepts and experimentation,” he says.
But he described tokenisation as spelling a “golden time for MMFs” and “the key to creating an active MMF market in the UK”.
