From tokenisation to full adoption: will digital assets go mainstream?

Asset managers are continuing to trial tokenisation using different networks and asset classes. Are we in for a completely new universe or an evolution of the present? And how might the future funds ecosystem change to support this transformation?

Thanks to advanced blockchain technology, digital assets could impact all investment products. Sooner or later the financial world may be transformed to the benefit of asset managers and their investor clients.

It is clear there is growing appetite for the tokenisation of funds amongst asset managers. Several asset managers and their transfer agents have been piloting ‘tokenisation’ projects, aiming to enable quicker, more transparent, and more secure transactions.

Tokenisation efforts pick up pace

Two successful live trials with Allfunds Blockchain have involved the digital representation of existing fund shares that were first issued traditionally. The objective was to demonstrate how blockchain can serve as a new communication channel between investors and funds, and bring operational efficiency by replacing fax orders.

Additionally, with Allfunds Blockchain, we have trialled native tokenised funds, where the shares were issued directly in tokenised form in the fund’s register maintained on-chain. Moreover, the asset manager wanted to test a tokenised cross-border transaction. This test also proved the efficiency of the instantaneous order execution based on the net asset value (NAV) receipt, instead of today’s batch driven execution.

In a sandbox in Spain, as part of a pilot regime, we are testing the creation of secondary market trading for fund tokens with one of our asset manager clients. The goal was to test the technology’s ability to enhance fund liquidity, allowing instant trade and settlement on a 24/7 basis.

More players are moving from experimentations to real products that have the potential to deliver superior outcomes for investors and asset managers alike.

Barriers to mass market adoption of tokenisation

Currently, tokenisation is not replacing traditional funds and asset managers are accommodating both the old and the new worlds, which adds complexity and additional running costs.

“That’s why it is crucial that transfer agents evolve to support both types of assets”.

Compared with new DLT entrants, existing transfer agents can provide a seamless service to asset managers and a consolidated view between shares issued traditionally and digitally for the same fund.

The hybrid ecosystem slows down the benefits of DLT. Many tasks remain off-chain for the moment, like anti-money laundering and know-your-customer (KYC) checks – even settlement.

Other players in the value chain, like custodians or distributors, will need to support asset managers by continuing to provide added value to their institutional investor clients. This is why some custodian banks, including BNP Paribas, are exploring alternative services like secure safekeeping of keys which give an investor access to the distributed ledger, or a new one-stop-shop with dealing services to manage investor wallets in multiple blockchain networks.

What are the short and long-term opportunities for asset managers?

In the future, all transactions through the digital ledger could eventually settle instantly to reduce the settlement cycle. This is on an ‘atomic’ cash-versus-delivery basis to mitigate counterparty risk for the benefits of asset managers. It is called atomic because security and cash tokens are treated and exchanged as a single, indivisible unit. This would therefore considerably shorten the settlement cycle, which can currently be three days, although Europe is moving to a T+1 cycle in 2027.

Information about flows into or out of the tokenised asset are instantly available to asset managers, around the clock as transactions occur, with real-time access to the data’s effect.

For asset managers, tokenisation of funds should offer added value to their investors, by improving user experience, and gaining first-mover advantage. For example, for younger investors who are drawn to the convenience of a self-service model, where digital assets can be bought, held, and redeemed online through Web3 wallets and can be transferable 24/7.

Asset managers also welcome tokenisation as an opportunity to reach a wider distribution network with more or new types of investors such as crypto-users. Public blockchain will be vital to realise this goal.

They want also to offer reduced transaction costs to their investor clients. In France, for example, with fund shares being issued in DLT, direct investors are recorded in the fund’s register. Investors can deal directly with the transfer agent without going through a central securities depository as would be the case in the traditional value chain.

The slow evolution of fast-moving financial markets

In the short to medium term, I believe that the interoperability or capacity to connect to multiple blockchains will stay fragmented, with several blockchains operating in parallel. Rather than a ‘tipping point,’ adoption will creep ahead gradually at a different pace across different markets, different use cases or asset types. This is largely because the regulation framework in different countries is moving at different speeds.

Progress is also dependent on the availability of reliable forms of digital cash, such as stablecoins – a cryptocurrency that is supposed to keep a steady value by being pegged to a specific asset, a fiat currency or commodity – or wholesale central bank digital currencies (wCBDC), which need to be more widely available to be used for delivery versus payment (DvP).

We expect the dual model (tokenised and traditional assets) to co-exist for a long time while the infrastructure and regulatory framework is developed, and investor and distributor mindsets evolve. One useful analogy is with cars: while hybrid cars are growing in popularity, they are really an interim solution between traditional engines and fully electric ones. Fully electric cars are still facing some barriers to mass adoption with ongoing challenges such as the cost, and lack of comprehensive and reliable charging network in most countries.

The changing role of custodian: key safekeeping or wallet management

In the near future, I believe that the role of custodian may change from the safekeeping of shares to the management and safeguarding of the public and private ‘key’ that investors use to access investments in their digital wallet. In fact, some investors are not ready or able to operate a wallet on DLT themselves. The custodian could simplify the integration with DLT, providing a seamless, single-entry point for investors to connect to multiple DLT infrastructures. This would improve processes and settlement, ensuring minimal impact to an asset managers’ operating model.

The transfer agent role will also need to evolve. Today, a transfer agent maintains the fund register in one single, centralised ecosystem: a private network between one transfer agent and its investors’ clients only. In the future, this register will have to be maintained in multiple ecosystems. This could be across private or public networks opened between several transfer agents, investors, distributors, asset managers, with transfer agents maintaining the fund register via the tokens hosted in investors’ wallets.

So, all parties need to collaborate in order to build and connect to these emerging ecosystems, and build the volume and liquidity required. Not an overnight revolution, but a gradual evolution.