the case for tokenisation
Investors
driving yield through 70% cost reductions
Speak to any market participant and they will tell you that (institutional) investors don’t yet see the value of tokenisation. Although issuers, banks, brokers and financial market infrastructures (FMIs) have begun to realise significant P&L benefits from tokenisation, most would admit that they still struggle to relay the value of these benefits to their investor clients.
Historically fund managers and their asset owner clients have paid little attention to their (post) trade infrastructures – reliant as they have been for some time on their custodians and service providers for this. As a result, the perceived value of infrastructural savings holds little appeal to the majority of investors (with the exception of tier one asset owners).
"There’s a massive asymmetry in liquidity today between tokenised and [old] securities – and so digital assets need to have their own compelling case"
Yield =
Performance – Costs
“Our pricing for digital asset custody is 30% of the cost of traditional assets”
The central role of an investor is to generate yield on their investments and – simply put – their yields are based on market returns, net of costs.
When presented with the choice of a tokenised and a traditional asset, most investors are aware of the significant liquidity differences in the two assets. Whilst a traditional asset today may be tradable amongst thousands of counterparties, a token’s ecosystem may be limited to only a few names.
Tokens need a new narrative for investors.
Whilst investors may not fully grasp the micro-benefits of tokens, they quickly grasp the impact that tokenisation’s cost improvements can have on overall yields. As investment banks and asset servicing partners begin to approach investors with products that deliver 70% cost efficiencies (built on all of the savings highlighted above), they are finding a more receptive ear.
By creating a positive jaw effect (between returns and costs), tokenisation can directly drive not only funds’ total expense ratios (TERs) but also their overall performance.
But there is much more happening than blanket cost savings amongst informed investors today.
Driving liquidity and transferability in fund trading
As product manufacturers, many fund managers (and distributors) have begun turning to tokenisation as a means of automating and driving liquidity in the trading of fund units (both mutual funds and alternative funds). Replacing vast quantities of unstandardized faxes and emails, providers such as CAIS, FundsDLT, Allfunds and Iznes have begun to use tokenisation as a means of achieving STP on what are today some of the most manual trades in our markets.
And beyond the simple treatment of fund units as tradable, mobile securities lies a question over the future of the fund vehicle itself. Could an omnibus account and a smart contract replace the need for complex and costly fund structures tomorrow?
Improving trade execution
Beyond operating costs, investors are beginning to see benefits emerge today from improved pricing transparency and greater market liquidity – in the form of narrower bid/offer spreads (see Intermediaries section).
Tokenised assets are helping to increase the quality of price discovery and of trade execution and drive value for Portfolio Managers as well.
From passive valuations to active, data-driven management
Portfolio valuations are today a major source of cost and risk for investors – just at a time when demands for evermore flexible data access are accelerating.
The potential impact of instant, coherent and highly configurable fund valuations and reporting is well known and transformative – replacing armies of fund accountants and data reporting platforms with smart contracts.
Yet tokenisation is transforming fund reporting from a passive activity into an active function. Already, fund managers are beginning to use tokenisation to automatically manage portfolio investments and fund shareholders on the basis of complex data rules. Yesterday’s (post-trade) mandate compliance monitoring is becoming a dynamic, ESG-score-driven rules engine that can actively invest or divest holdings as soon as key criteria are met.
That this level of sophistication is already a reality amongst complex private equity and alternative investment funds is evidence of the vastly transformative nature of tokenisation today.