Tokenisation in asset management is a fast-growing reality. We’re starting to see proofs of concept and experimental tokenised products come to market, and analysis by Boston Consulting Group has forecast that, as we saw in our white paper, even in a ‘highly conservative’ scenario, $16tn of assets will be tokenised by 2030 – an aggregate 10% of global GDP.
Tokenisation is the process of converting rights to an asset, or pool of assets, into a digital token, which can be held and traded on a distributed ledger (i.e. a blockchain). This process enables assets to be divided, bought, and sold much more easily, and it adds a layer of security and transparency due to the nature of distributed ledger technology (DLT).
When applied to the asset management industry, this means that an investor’s holding is represented not by units of a fund but by direct, transparent holdings of the underlying assets – or fractions of those underlying assets – in the form of tokens. Instead of having a portfolio of, say, five blocks of units in five mutual funds, the investor’s portfolio would consist of a larger number of separate, identifiable assets (whether equities, fixed income, or alternatives) managed for them by their adviser or by the fund manager. This would signal the end of the unitised fund structures that have defined a large part of the investment management industry for almost a century. It would also focus asset managers more firmly on their central role: asset allocation and investor outcomes.
Tokenising the underlying assets – rather than just tokenising the existing units of a fund – is more than just a technical distinction. If you tokenise at the unit level, the fund continues to operate as before, via the traditional value chain, encompassing the custodian, transfer agent, fund accountant, asset manager, and distributor. What changes is that a new layer of record-keeping is created: a register of tokens recorded on a public blockchain, which sits alongside the register of units maintained by the transfer agent. While this may help deliver wider access to alternative assets for investors, it maintains the value chain as it currently stands and perpetuates its core inefficiencies. Data is still being passed from one organisation to another, rather than being available to all in real-time as is the case when an entire fund is built and administered on DLT, running digitally end-to-end.
Applying tokenisation at the asset level changes a fund’s fundamental structure. For the assets to be rendered and distributed as tokens, the entire value chain of the fund must be brought onto a common DLT platform: enabling much fund administration to be automated, and facilitating real-time flow of data, including pricing. Having the data in one place will significantly boost collaboration between providers, the speed of product development, the ability to automate elements of administration, and to analytics. It will introduce much greater transparency into relationships across the fund management value chain, and between managers and their customers – who can look forward to instant settlement, increased choice and improved visibility into their portfolios. Importantly it will also significantly reduce costs, further supporting asset managers in their mission to deliver alpha to the end investor.
At Calastone, we have been building our tokenisation model for several years. Our Distributed Market Infrastructure (DMI) – which leverages DLT amongst a number of other technologies – now connects nearly 4,000 industry participants, enabling them to access and share data in real time. Now, we are collaborating with Schroders and the Monetary Authority of Singapore to explore the capabilities of a tokenised investment vehicle, with the ultimate aim to manufacture and distribute this new type of collective investment through our DMI. A tokenised future is closer than ever.