Growth Accelerator for Investment Managers

Our recent Signals industry survey shows that 42% of asset management participants are working on Tokenisation discovery projects, indicating that these are extremely exciting times in the move to a tokenised environment with increased investment in digital assets.

The Sionic team was delighted to welcome 24 attendees to its latest forum to discuss the survey findings and industry developments. We were provided with insights from abrdn, Archax and State Street, who are helping to lead the way by making significant investments in creating infrastructure, realising the benefits of digital asset investment and a more efficient streamlined operating environment.

Operational opportunities? 

The opportunities can be grouped into four key areas: Investments, Operations, Collateral, Funding & Financing. Tokenised funds increase efficiency, reduce cost, create new distribution channels, and provide the environment for improved liquidity within illiquid asset classes, all whilst significantly reducing settlement times and the associated funding costs. Digital representation of cash and non-cash collateral presents opportunities for atomic or near atomic settlement of margin requirements. Within the right framework, CCPs (central counterparty clearing houses) may, for example, be able to do away with intra-day margin calls, long called out as the Achilles heel for Pension Funds cleared derivative strategies. 

Rehypothecation opportunities are a key factor, as the 1 trillion dollars a month being traded on Broadridge DLT (Distributed Ledger Technology) attest to. The panel agreed disintermediation is feasible through tokenisation, and the swift pace of volume development at Broadridge is one such excellent example. 

Fractionalisation of tokenised assets allows for onward distribution to a wider group of investors, diversifying into those that may not be able to access certain products today due to minimum investment requirements, thereby contributing to the democratisation of investment opportunities. Given the impressive performance of Private Assets over the years, opening this asset class to a wider demographic could be of tremendous benefit.

Investment Opportunities 

Fund Tokenisation has been a topic of discussion for a few years. However, something feels different now. As we discovered in our survey, many Buy Side firms are working on discovery projects and proof of concept. Additionally, household names in the traditional Investment Management space, such as abrdn, Franklin Templeton and WisdomTree, have already launched tokenised funds. When we consider the opportunities aplenty, we can understand why.

This is not just about finding a better way of doing things. Efficiency and cost reduction are, of course, important. However, there are other significant factors. The changing needs and demographic of the end investor being one. I always ask Investment Managers, when we discuss this topic, to think about the next 100 million investors. Who are they likely to be? What will they want from their investment strategies, and how can they best be served?

In the past, ETFs (Exchange Traded Funds) moved the dial, providing an alternative to the traditional investment management model, and their growth was phenomenal. Today, almost $10 trillion is invested in ETFs globally. I see tokenised funds and assets as the next phase in the development of financial services markets. The palatable combination of maximising returns whilst minimising costs is an extremely powerful proposition and that could, in the short to medium term, see a significantly reshaped investment management landscape powered by those who are bold in their strategies.

How is the landscape developing?

It is understood that all this needs to be conducted within a rigorously regulated environment within frameworks that market participants are familiar with. There are significant differences between today’s model and the on-chain model. Three examples of areas that will be markedly different are post trade processing, reconciliations, and reporting. This will undoubtedly reduce costs for Investment Managers, their clients, and shareholders.

It has long been a viewpoint of mine that the inflection point for Buy Side adoption of Digital Assets will occur when their partners and service providers start to play in this space. Supporting this view, 67% of survey participants believe it is critical that the names we are all familiar with today have a major part to play as the Buy Side begins to think about strategies in this space. Whether that happens independently or in conjunction with emergent firms and their wonderful technologies remains to be seen.

Next Steps

These are fascinating times, and Sionic is here to support clients as they embark on their discovery projects. Please get in touch if you would like to hear more; there is much to learn and more to plan.

I am reminded of an African proverb I once heard…if you want to go fast, go alone, if you want to go far, go together!

About the author

I look forward to helping Sionic deliver intelligent solutions across a diverse range of topics and geographies to ensure optimal outcomes for clients.