Asset managers offer fund tokens despite the crypto crisis

Representations of cryptocurrencies Bitcoin, Ethereum and Dash plunge into water in this illustration taken May 23, 2022. REUTERS/Dado Ruvic/File Photo

LONDON, Aug 26 (Reuters) – Investors in crypto have endured wild moves in recent months, but that hasn’t fazed asset managers who are preparing to use the blockchain technology behind cryptocurrencies to break up funds into bite-sized units, or tokens, for to sell to small savers.

Bitcoin fell 7.7% in just a few minutes in one day last week, following a 15% drop in one day in June, as aggressive rate hikes by major central banks and ultra-high inflation prompted investors to ditch high-risk assets. read more

The sector also faces other problems, with Celsius suing a former chief investment officer this week for allegedly losing or stealing tens of millions of dollars in assets before the crypto lender went bankrupt last month. read more

However, private markets investment firms Hamilton Lane ( HLNE.O ) and Partners Group have tokenized funds in the past year and said they are considering additional products.

Mainstream asset manager abdn ( ABDN.L ) hopes to launch a tokenized fund this year, according to a source familiar with the matter, and rival Schroders ( SDR.L ) is also investing in the sector.

In such funds, tokens are issued through a securities offering that gives the investor the right to participate.

Blockchain allows tokens, or fractions of funds, to be managed securely, advocates say, and can help small investors buy illiquid assets like private equity, which tend to yield higher returns but can be difficult to trade in and out quickly.

“Any asset manager with ambitions to offer private markets to their clients and be a leader in this area will look into blockchain technology,” said Magnus Burkl, principal at consultants Oliver Wyman.

However, some potential investors are wary of the close link between the technology and cryptocurrencies. Fred Shaw, Hamilton Lane’s global chief operating officer, said the firm has helped investors understand that crypto and blockchain are not the same.

“Blockchain is the underlying technology, but (crypto) is just one use of it.”

A Partners Group spokesperson said the firm saw the understanding of the difference between tokenization and cryptocurrencies “slowly improving”.

ASSOCIATION RISK

Crypto woes prompted a U.S. private market manager client to hold off on launching a tokenized fund earlier this year because of the reputational risk, but it now plans to move forward soon, said Carlos Domingo, CEO of investment platform Securitize, which launched tokenized fund tracking two S&P indices late last year.

Because of the risks associated with illiquid assets, many funds that invest in such assets are open only to professional investors and require minimum investments of $10 million.

Using blockchain technology, fund managers can offer fractional shares of these assets, for a fraction of the initial outlay.

The tokens will enable secondary markets to develop and provide more liquidity, industry specialists say, although the Financial Stability Board has warned that this still leaves retail investors exposed to the underlying illiquid assets, which are difficult to exit quickly if prices fall.

The technology can also cut costs for both asset managers and investors, say the specialists.

Fund managers and exchanges are trying to improve the market infrastructure to make it easier to offer tokenized funds.

Euronext owns a stake in Luxembourg’s tokenization platform Tokeny, and the Singapore Exchange has a stake in ADDX, where Partners Group and Hamilton Lane launched their tokenized offerings.

London Stock Exchange (LSEG.L) is working with fund technology firm FundAdminChain on a pilot for several tokenized funds. read more

Obstacles remain. Arun Srivastava, partner at law firm Paul Hastings, said regulators may continue to be reluctant to allow retail investors to invest in illiquid assets, whether tokenized or not. read more

“Saying ‘we have this blockchain product’ sounds good and sounds like you’re keeping up with the crypto world, but how is it different or better?”

Reporting by Carolyn Cohn; Editing by Emelia Sithole-Matarise

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