The tokenization revolution: beyond a piecemeal approach – Ledger Insights

This is a guest post from Adam Belding, CTO of Calastone.

Tokenization has become the subject of increasing interest for asset managers in recent years as they respond to changing investor expectations. The ability to reconstruct and distribute any number of complex assets as digital entities, reducing both barriers to entry and the cost of trade, is attractive on several levels. It promises to meet the appetite for more personalized products from a new generation of customers, as well as tackling long-standing pain points around the efficiency and cost of investing in mutual funds.

It’s no surprise that the tokenization debate has started to enter the mainstream, with more than half of asset managers in Europe now exploring it as a possibility. Regulators are also coming to the party, with pilot projects around tokenized assets variously underway or planned in Singapore, Hong Kong and the EU. The question is no longer whether tokenization will be adopted by the asset management industry, but how and which approaches provide the greatest benefit to the funds and their investors.

Tokenization is a broad church where interpretations can vary on exactly what the goal is and how deep the digitization must go. It is a minimalist approach, already present in the market, that focuses on tokenizing the units of a traditional mutual fund. By allowing these to be traded on a blockchain, with all transactions recorded on a digital ledger, which in theory introduces a greater level of administrative efficiency, but without addressing the deeper-rooted issues of fund structure and distribution. It’s a step forward, but perhaps just a taste of what tokenization can offer.

More ambitious, but no less achievable, is the maximalist approach, which claims that not only the shares in a fund should be tokenized, but also the underlying assets. The benefits of this begin with much wider access to a more diverse pool of assets, and shared ownership of entities from private equity funds to high-end real estate and investments such as wine and art. Tokenization could help bring these alternative assets, once largely confined to institutions and the wealthiest individuals, into the mainstream, at a time when interest in them continues to grow – a recent survey found that UK and European investors are increasingly seeing towards alternatives as they seek to diversify their portfolios and protect them against inflation.

The benefits of tokenization go beyond this broader menu. Once the assets themselves have been tokenized, the way is open for automation and transparency across the value chain, from pricing to settlement, analytics and fund management. This is not just optimizing the mutual fund, but fundamentally rebuilding it for the digital, on-demand world: where what the customer orders at the push of a button can be delivered almost as quickly.

It is this maximalist view of tokenization that Calastone has advanced through our Distributed Market Infrastructure (DMI), which connects over 3,500 organizations in asset management, enabling them to access and share real-time data – underpinned by secure permission – that underpins digitization across of the fund’s value chain. This is our operating model for tokenization, one that we are now presenting to regulators and collaborating on with three major global asset managers. While we continue to invest heavily in technology to optimize traditional mutual funds, we are also building for a future where funds can be built on a new platform for collective investment, enabled by tokenization.

While tokenization in any form will represent progress for both asset managers and their clients, its full benefits will only be realized when the urge for digitization is applied to all aspects of how a fund operates and is structured. The benefits of digital and real-time trading should be extended across the value chain, targeting inefficiencies in the complex operational web that is the mutual fund ecosystem, as well as opening the door to new asset classes for all.

The maximalist approach promises not only efficiency and transparency, with the cost benefits that follow. It also points to a future where asset managers can dramatically revise their client offering, tailor products to the individual and draw on a broad base of assets to satisfy an investor’s interests and risk tolerance. An industry built around one-size-fits-all products can increasingly consider how to provide each customer with the tailored service that has until now only been affordable to ultra-high-net-worth individuals.

All of this is moving quickly from theory to reality as regulators get involved in tokenization efforts and major asset managers advance their plans. The potential of tokenization is increasingly recognized. Yet it will only be unleashed through a comprehensive approach that goes beyond tinkering around the edges. Asset managers that take an ambitious approach to tokenization are likely to be best placed as the landscape changes. This is a revolution that will reward those brave enough to build from the bottom up.