Is the future tokenised funds?

This week (30 March), US private markets firm Hamilton Lane launched a "tokenised" share class of its Global Private Assets fund and while this is the first time this firm has taken the move, it is far from the first tokenised fund. 

Indeed, while some jurisdictions, such as the US, have allowed for this use of blockchain technology, in the UK there is not yet a regulatory environment for it. However, the UK may see them soon as the Investment Association is in discussions with firms and the regulator.  

John Allan, fund operations specialist at the Investment Association, explained that "it is vital that the UK domicile is able to keep pace with innovations such as these".

So what are tokenised funds and what is the point of them?

A tokenised fund, which may also be known as a digital fund or a BTF (blockchain-traded fund), is one where shares or units in the fund are digitally represented and can be traded and recorded on a distributed ledger.

The difference between investing in a fund and owning the tokens that represent shares or units in the fund are not substantial, according to a paper by the IA and law firm CMS. However, there are benefits such as costs associated with maintaining investor registers and in secondary market trading.

"Tokenised funds have the potential to bring benefits to consumers in delivering quicker settlements, and to firms in making back-office processes more efficient," Allan explained.

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Along with quicker, and potentially cost-saving benefits, tokenisation could improve transparency on transactions and help provide liquidity for traditionally illiquid assets.

Indeed, Serge Weyland, CEO of Edmond de Rothschild Asset Management (Luxembourg), noted at the ALFI European Asset Management Conference in Luxembourg earlier this month that the tokenisation of private assets is where there "might be a huge opportunity" for this technology.

First-hand experience

At the conference, Marco Cora, a board member of Azimut Investment Management Singapore, spoke about his firm's experience of being one of the first firms to "tokenise a traditional financial asset" and what he expects for the future.

In March last year, Azimut partnered with Sygnum Bank to tokenise the first portfolio of loans to Italian small and medium businesses worth €5m.

Cora explained one challenge Azimut is keen to solve is that while there is a lot of money in the financial system this has not found its way to the "real economy" such as small and medium companies.

He said part of the problem is that regulators, understandably, have high minimum investments for illiquid assets. He said that over time, using the blockchain technology, they hope to work with the regulators to reduce the minimum investments.

He noted that an additional challenge with some areas of the market, such as asset backed securities, is transaction costs on the secondary market are also very high. However, he said these can be dramatically lessened through the use of blockchain.  

Cora went on to highlight that while he never expected these investments to be "as liquid as Apple shares" there could be significant improvements.

The main challenge Azimut had with the development of its fund was not technology, but regulation. Cora said there was difficulty about "figuring out the consequences of what they were doing" and if "it was compatible with the regulatory framework".

"Once the regulator clarifies the situation this industry will thrive, I have no doubt," he added.