Investment managers, having previously swerved digital assets, such as security tokens and crypto currencies, are slowly beginning to change course, as Bill Prew, Kobus Cronje and Joost Mees discuss.
Asset tokenisation – A multi-trillion dollar market in the making?
Asset tokenisation, i.e. when an issuer creates digital tokens on a distributed ledger (DLT) denoting value in a real-world asset (e.g. an equity security, a physical asset, a fund, etc.), is making waves across the funds’ industry.
This comes following a recent report by McKinsey, which forecasts that the market capitalisation of tokenised assets could reach between $2 trillion and $4 trillion by 2030, although these figures are admittedly less bullish than some of the consultant’s earlier estimates[1].
Realising the opportunity of tokenisation
Asset managers, banks, and fin-techs, are already beginning to articulate some of the main benefits of tokenisation.
As tokenisation allows for fractionalisation to take place, assets can be broken down into smaller units or digital tokens, meaning they are less expensive for people to buy. For instance, purchasing a share in Microsoft (July 4, 2024) will set an investor back $460, but if the same investor were to buy a tokenised version of that Microsoft share, then the cost to hold an investment in Microsoft would be significantly lower.
“The same is true for mutual funds and even private capital products, where fractionalisation can lower the cost of investing. This could help democratise the investment process and improve liquidity, especially in private markets. Tokenisation could also help the industry attract ia younger, tech-savvy generation of future investors.” noted Bill Prew, Group Director – ICS Strategic Execution, at JTC Group.
Together with attracting more retail money, tokenisation might also enable smaller or mid-sized institutions such as local county pension funds to access private market funds directly, instead of going through intermediaries such as consultants or via funds of funds.
Other advantages of tokenisation, according to Joost Mees, Managing Director – Head of Luxembourg, include better transparency and potential cost savings for investors.
“In a tokenised framework, multi-party workflows involving activities such as transfer agency (TA), fund administration and distribution can be automated, leading to savings. As all this activity happens on DLT infrastructure, there are transparency benefits too. I think tokenisation will unlock all sorts of opportunities in private markets,” continued Joost.
But what is happening?
Tangible progress is happening on fund tokenisation.
On the mutual fund side, there have been some notable breakthroughs. Following its debut in March, it took only six weeks for BlackRock’s tokenised treasury fund BUIDL to become the largest tokenised fund in the world, accumulating $375 million in the process[2].
It is noted that Calastone, the global funds network, is working closely with Schroders to see if it is possible to tokenise a Variable Capital Company (VCC), a Singapore fund structure, before distributing it on its network.
Similarly, UBS Asset Management recently launched a pilot exploring the viability of issuing a VCC fund on a digital asset network. Other major financial institutions, including Citi and J.P Morgan, have also conducted their own proofs of concepts into tokenising private funds.
Regulators supportive of tokenisation
“The increased interest in tokenisation is also supported by regulators, several of whom are planning for, and in some cases encouraging, the technology’s wider adoption,” according to Kobus Cronje, Managing Director – Guernsey.
Singapore’s regulator, MAS (Monetary Authority of Singapore), for instance, has been one of the most enthusiastic backers of tokenisation. Through its Project Guardian initiative, MAS has collaborated with a number of financial institutions to explore potential use cases for tokenisation in asset management, but also foreign exchange and fixed income.
The UK’s Financial Conduct Authority (FCA) and HMT also tacitly endorsed fund tokenisation back in November 2023, and since then they have been actively participating in an industry working group looking at possible applications for the technology.
After a slow start, tokenisation is finally gathering momentum, as the use cases become more relevant, and regulators introduce new rules to facilitate its development – and ultimately growth.
Crypto – is it getting accepted?
Notwithstanding its volatility, the lack of price fundamentals, the limited selection of quality service providers, the high-risk of fraud and questionable cyber-security safeguards at a number of crypto-exchanges, crypto-currencies are still very much in favour – arguably against all odds.
“While not all investors are comfortable with having direct exposure to crypto currencies, there has been a notable spike in the number of people obtaining indirect exposure to the asset class through exchange traded funds (ETFs) and exchange traded notes / products (ETN/Ps)P),” said Bill.
According to data provider ETFGI, the global listed crypto ETF and ETP market saw its asset base grow by 16.7% from $70.47 billion at the end of April to $82.27 billion at the end of May[3].
This comes following the decision at the beginning of the year by the US Securities and Exchange Commission (SEC) to allow – albeit very begrudgingly so – 11 Bitcoin ETFs to begin trading. Since then, inflows have exceeded even the most bullish expectations, with BlackRock’s iShares Bitcoin Trust, for instance, reaching the $10 billion milestone faster than any US ETF in history[4].
More recently in May 2024, the London Stock Exchange went live with Crypto exchange traded notes (a form of ETP) and since then nine crypto ETNs backed by Bitcoin or Ethereum have listed.
As things stand, most experts believe the flows going into crypto ETFs and ETPs will only continue to accelerate.
A new breed of service providers
The tokenisation and crypto-currency ETF/ETP markets both need to be underpinned by credible service providers and equally robust governance standards if they are to grow even further.
“Service providers themselves, in particular TAs, administrators and depositaries, need to be forward thinking and adapt their existing systems and processes to support digital fund and underlying asset ownership,” concluded Bill.
[1] McKinsey – From Ripples to Waves: The Transformational power of tokenising assets
[2] Coin Desk – April 30, 2024 – BlackRock’s BUIDL becomes largest tokenised treasury fund hitting $375 million , toppling Franklin Templeton’s
[3] ETFGI – June 26, 2024 – ETFGI reports crypto ETFs and ETPs listed globally gathered net inflows of 2.23 billion US Dollars during May
[4] Financial Times – March 10, 2024 – Bitcoin rally pushes BlackRock ETF over $10 billion in record time
