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How digital tokens will revolutionise investing

Most fund managers have experienced difficult times recently, with record fund outflows across the globe in 2022. The bear market delivered the biggest fall in assets under management (AUM) since the GFC and the US$14.7 trillion decline was down 21% from 2021’s record.

Combined with rising interest rates, inflationary pressures, and a retraction of fiscal stimulus, it makes for a tough macro environment.

In the face of these headwinds, asset managers must look for ways to enhance their proposition for their clients and increase profitability. Mutual funds have been the vehicle of choice for 100 years, and then ETFs arrived, offering investors more choice and accessibility.

What is tokenisation?

Tokenisation represents the ownership of an asset, or pool of assets, as digital tokens. It offers asset managers a new opportunity to benefit their clients and the management of their assets.

For investors, tokenisation can unlock a truly modern user experience: instant purchases, better transparency, and access to a broader range of assets through fractionalisation.

For asset managers, it facilitates new digitally native investment models and helping to defend margins. For instance, tokenisation digitalises the manual processes that exist today, end-to-end, creating a streamlined intermediary chain. This is all the more important in the current environment, where firms are looking for ways to deliver strong returns while removing friction from their operations.

The industry recognises the opportunity. In a recent BNY Mellon survey, every asset manager with more than $1 trillion AUM was interested in investing in tokenised products, and 97% of the 271 institutional investors surveyed agreed that tokenisation will revolutionise asset management and be good for the industry.

Reducing the cost of investing 

Tokenisation, and the distributed ledger technology (DLT) that underpins it, helps automate processes like pricing and fund accountancy. It brings greater visibility, instant settlement, as well as improvements in data and analytics, saving many basis points on the management of funds. This increases the potential for alpha generation across both existing and new propositions, handing asset managers the key to reduced costs and increased margins.

At the FT Future of Asset Management conference in September 2022, Jonathan Steinberg, Founder and CEO of fund management company WisdomTree, gave the example of a US Treasury fund from his firm using tokenisation to pass on zero management fees to the investor.

"[It] will not have an expense ratio. It will make its money on transactions, as well as net interest income […] We’ll be keeping more of the economics, and net-net for the end customer, they will be paying less."

Business transformation through tokenisation

Tokenisation, however, offers more than simply reduced costs. It has the power to help asset managers achieve a wider transformation mission: creating an efficient, scalable business, with a more flexible and controllable cost base.

First, tokenisation allows asset managers to expand their universe of products, without an increase in cost. With the appetite for fully digital investment products only increasing, and modern investors demanding access to a larger pool of assets, this is key.

While this would usually require a significant overhaul to an investment management system, tokenisation should be geography, distribution channel and product agnostic and handle traditional mutual funds and digital assets within the same infrastructure.

This is important because institutional investors expect to mix both traditional and digital assets in their portfolio, according to BNY Mellon’s survey, with nearly three quarters of those surveyed having a strong preference for a fully integrated provider for all their digital asset needs.

Rather than a Big Bang approach to digital transformation, asset managers can set their own pace, bringing their distributors and clients with them without asking them to make major technology investments to access the new tokenised products.

Second, tokenisation, by converting both the asset and the payment associated with the asset into individual digital tokens, streamlines reconciliation and settlement. It optimises core platform operations, reducing friction and increasing liquidity. 

Third, a fully digital, tokenised model simplifies and automates many fund administration workflows. This not only boosts asset managers’ margins, but also frees up their time, so they can focus on what they do best: research and execution. In addition, the immutability and transparency of data on an open ledger provides regulators and auditors with a single source of information they can request data from on demand, shortening the supervision process.

Tokenisation, then, is a powerful tool that asset managers can leverage in their cost transformation strategy. A typical mid-tier asset manager with AUM in the $500 billion to $1 trillion range, and a total expense base of around $2 billion, stands to achieve cost savings of up to 15% with such a transformation, according to a recent report from EY

A tokenised tomorrow

Tokenisation should be a core focus for all asset managers trying to build alpha now, and for tomorrow, on behalf of their clients. It ensures they can continue to deliver value for their investors in the face of the current macro headwinds and capitalise on technological advancements and shifting investor demographics, all while streamlining operations and trimming costs.

 

Adam Belding is Chief Technology Officer at Calastone. This article is for general information only.

 

6 Comments
michael
April 02, 2023

I don't see what tokens add to the investment landscape.
Until you answer that basic issue, there is no point talking about it.
1. Decreasing manager costs doesn't actually add anything.
2. "For investors, tokenisation can unlock a truly modern user experience: instant purchases, better transparency, and access to a broader range of assets through fractionalisation." This statement is promotional waffle, not an explanation.

Anonymous
April 02, 2023

Linked article does not talk about cost savings of 15% using 'tokenisation'. It states costs could be cut by 15% by focussing on six different categories, one of which is digital transformation which doesn't even talk about digital tokens. 

Alex
April 02, 2023

Well, at least the links go to other background material for anyone interested, so I appreciate the sources without repeating all their content in the article.

Peter
April 02, 2023

Tokenisation and digital currencies are here already. My BHP share is a token bought with digital currency my current bank provides. I can sell that token for a fraction of a penny using a broker and have the digital currency sent to my account. We don’t do bearer stock anymore and use cash.

Barry
March 31, 2023

This is what the FTX exchange wanted to do. They wanted to tokenise every asset on the planet and allow these tokens to trade in their exchange.

The pitch went: give us something real like cash or bitcoin and we will exchange it for a token representing an asset but this token is not the real asset.

No thanks.

John
March 30, 2023

Until the digital online hackers catch up with the protocols and gain access to accounts. Which will be quick

 

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