Original author: Will Awang (X: @Will_7th)
Original source:Web3 small rules
When we talk about RWA, we pay more attention to underlying assets such as U.S. bonds, fixed income, and securities. In fact, apart from stablecoins, the RWA project with the largest asset size is money market funds. The top three projects by asset size are: Franklin Templeton: US$312 million (government bonds); followed by Centrifuge: US$247 million (asset mortgage); Ondo Finance: US$183 million (government bonds).
Franklin Templeton is entirely a tokenized fund, Ondo Finance also has two tokenized funds, and Centrifuge has also established a tokenized fund in the RWA project in cooperation with Aave. We can see the importance of tokenized funds in connecting TradFi and DeFi. We believe that the asset form of funds is the best carrier of RWA assets because (1) it is subject to supervision; (2) it is a relatively standardized digital expression.
The RWA we are talking about at present is more about Crypto (or DeFi)’s unilateral value capture demand in the real world. From the perspective of traditional financial TradFi, funds are tokenized through blockchain and distributed ledger technology. Finally, greater value can be released.
Therefore, this article will gradually analyze the value of funds after they are tokenized through cases currently observed in the market, as well as the active exploration and practice of market participants.
1. Tokenization of funds
Tokenization is usually the expression of assets on the blockchain after digitization, and uses the advantages of distributed ledger technology for accounting and settlement. Assets used for tokenization can include not only financial instruments such as stocks, bonds, and funds, but also tangible assets such as real estate, and intangible assets such as music streaming copyrights. The tokens generated after assets are tokenized are the carrier of asset value and the certificate of asset rights.
This kind of innovation and subversion also applies to funds. After tokenizing the fund, a Tokenized Fund is formed, which means that the fund shares are recorded in the blockchain distributed ledger in the digital form of tokens. Tokens are available for secondary market trading. This kind of tokenized fund is different from the crypto fund (Token Fund) that only invests in the primary and secondary markets.
The global asset management industry is facing many challenges. While the industrys overall AUM has grown as the market has risen, fund management fees have been compressed by peer competition and the industrys shift to passive investment strategies. In addition to investment pressure, the market has also placed higher demands on funds’ digital capabilities to meet investors’ growing demands for online distribution, asset reporting, regulatory compliance and personalization. Fund management costs are rising faster than revenue, and fund profit margins are being squeezed.
For private equity funds, due to their poor liquidity and high investment threshold, their investors have been limited to a small number of institutional investors for a long time. The private equity fund market urgently needs to lower the investment threshold, and through appropriate product design and launch, it can meet the requirements of small and medium-sized institutions, families Alternative products for the investment needs of non-institutional customers such as offices and high-net-worth individuals.
The tokenization of funds can solve many problems in the current global asset management industry. Advocates of tokenized funds firmly believe that future funds based on blockchain and distributed ledger technology will not only increase the fund’s asset under management (AuM) but also invest in a wider range of asset classes (RWA tokens diversification of assets); it can also attract new types of investors (investors in the Unbanked region of Asia, Africa and Latin America invest through encrypted assets), improve users’ investment experience (KYC embedded in smart contracts); and can help funds in the industry Win the competition for digital upgrades (digital upgrades) while significantly reducing their operating and marketing costs (blockchain and distributed ledger advantages).
2. Tokenization will have a profound impact on the fund market
2.1 Tokenization helps promote the digitization of the fund market
Currently, funds and investors are separated by a large number of intermediaries. Fund Distributors include: financial advisors, Fund Platform and Order-Routing Networks; fund servers include: Payment Paying Agents, Custodian Banks and Fund Accountants.
Transfer Agents assist the fund by coordinating both ends and are responsible for screening and verification of Know Your Customer (KYC), Anti-Money Laundering (AML), Combating the Financing of Terrorism (CFT) and economic sanctions, settlement of fund subscriptions and redemptions, Report to management and maintain investor registration records.
（Source: SS&C, Tokenization of Funds - Mapping a Way Forward）
The operation process of traditional funds is inherently inefficient: (1) Fund shares are established to meet subscriptions and canceled to meet redemptions; (2) Fund pricing is not based on buying and selling, but is set by fund accountants (3) The transfer agent performs pricing by receiving and integrating orders on the basis of the net asset value, and settles the orders by entry in the centralized register, and then checks the orders with the cash positions of investors and funds; ( 4) In the three days before the release of fund shares and cash settlement, the fund and investors will face market fluctuations and counterparty risks; (5) The flow of funds also forces fund managers to retain capital positions to bear the cost of rebalancing the net value of the fund .
In contrast, tokenization can greatly simplify the above complex process: (1) When tokenized funds are issued and traded on the blockchain, the subscription and redemption links will be directly settled through fund tokens and payment tokens And enter the investors account (electronic wallet), the transaction has settlement finality, thereby eliminating market and counterparty risks; (2) Because all transactions are recorded on the distributed ledger of the blockchain, any change in ownership It will be recorded automatically, thus eliminating the need for centralized registration; (3) Since all intermediaries can access and view data on the blockchain, there is no need for multi-party reporting and reconciliation.
At the same time, tokenization will help fund managers and investors realize the digitization of interaction: (1) Due to the integration of KYC, AML, CFT and economic sanctions screening and verification, the speed of investor account opening will increase; (2) Based on The more efficient atomic settlement of the blockchain enables all-weather real-time pricing and real-time settlement; (3) Access to multi-party unified ledgers enables real-time sharing of data, and investors can directly obtain fund data and trade; (4) Fund managers will receive Richer investor information and transaction information.
2.2 Solv Protocol’s on-chain fund issuance and fundraising platform
Founded in 2020, Solv Protocol is committed to providing blockchain-based financial tools and diversified asset management infrastructure for the encryption industry. It recently completed US$6 million in financing. Solv Protocol’s latest product, Solv V3, sets a new standard for on-chain fund issuance. Tokenized funds created through Solv Protocol can realize on-chain fundraising, issuance, subscription, redemption, trading and settlement of funds, achieving efficient financing of tokenized funds.
We can see from the official website that Solv Protocol has implemented the issuance and fundraising of 74 tokenized funds (including Open-end Funds and Close-end Funds), served more than 25,000 investors, and managed more than 1.6 billion in assets.
（Source: app.solv.finance/earn）
The core mechanism of Solv Protocol is to allow fund managers to create on-chain funds, deposit the raised funds (stable coins, BTC, ETH, etc.) into the smart contracts of the Solv Protocol, and generate corresponding NFTs representing fund share certificates for investors. /SFT certificate enables fund managers to use the raised funds to make investment arrangements according to their own investment strategies.
For example, we see that Blockin GMX Delta Neutral Pool is an open-end fund that manages approximately US$2.6 million in assets and is laid out according to the investment strategy of the fund manager Blockin; in addition, another open-end fund RWA: Generate Yield On Your Stable Coins , initiated by fund manager Solv RWA, raises USDT stable currency and invests in U.S. debt RWA assets, providing stable currency holders with interest-earning income from U.S. debt.
Open-end funds mean that when a fund manager establishes a fund, the total size of the fund units or shares is not fixed. The fund can issue shares at any time and allow investors to redeem them regularly. Fund managers who use highly liquid investment portfolios as their investment strategies usually Establish a fund using an open corporate structure.
The full-chain tokenized fund issued through Solv Protocol raises funds from BTC/ETH/stable coins, and the assets invested are also native crypto assets or tokenized assets (such as U.S. debt RWA). Such a full-chain tokenized fund structure can enjoy the value brought by tokenization to the greatest extent. For example, Solv Protocols tokenized funds (1) allow fund managers to face investors directly and obtain more investor data and transaction information; (2) eliminate the friction of many fund service intermediaries and reduce costs; (3) The collection, issuance, trading and settlement of tokenized funds are all realized through the blockchain and recorded in the distributed ledger, which is efficient and transparent; (4) The net fund value NAV of the fund is updated in real time, and fund share subscription/redemption can be done anytime and anywhere 7 /24, and many other advantages.
Solv Protocol stated: Currently, most crypto asset management services come from CeFi institutions whose asset creation and fund management processes are opaque, creating trust issues. Better decentralized solutions provide a transparent and secure investment experience while helping asset managers gain trust and liquidity. Solv is building the infrastructure and ecosystem to provide a full range of services, including creation, distribution, marketing and risk management. This lowers the barriers to participating in Web3 while promoting the maturity of the crypto market.
Solv Protocol investor Nomura Securities Olivier Deng said: Solv has built a trustless, institutional-grade DeFi platform that integrates brokers, underwriters, market makers and custodians, creating the first bridging DeFi on the blockchain. , CeFi and TradFi’s liquid financial infrastructure.”
3. Settlement of Tokenized Funds
Tokenized funds can replace some intermediaries (such as fund distributors) to a certain extent and improve the digitalization level of the fund market, but the market does not happen overnight. The most realistic point for fund managers and investors is that tokenization will inevitably change the settlement method of fund subscription and redemption.
3.1 Settlement of Tokenized Funds
Current funds are generally priced based on net asset value. The fund manager collects or pays cash through the banking system and settles the funds three days later (T+3) by issuing or canceling fund shares. The price of tokenized funds is calculated more than once per day, and since subscriptions and redemptions will be automatically settled on the blockchain, settlement based on the banking system (T+3) will be replaced. We can see in the case of Solv Protocol that tokenized funds based entirely on blockchain can achieve real-time pricing and real-time settlement in an all-weather market (7/24).
This settlement method using blockchain and distributed ledger technology is called Atomic Settlement, which means that the transaction of cash equivalents and fund shares is directly related, that is, when one asset transfer occurs, another The transfer of assets occurs simultaneously. In other words, the prerequisite for settlement is that the buyer and seller have cash and fund shares in their electronic wallets for exchange, and settlement ultimately depends on simultaneous exchange. If cash or shares are not delivered, the transaction does not occur. This settlement method not only eliminates counterparty risk, but also enables real-time settlement, which greatly improves the efficiency of transactions.
Bitcoin was originally designed to implement a decentralized peer-to-peer electronic cash payment system. Bitcoin payments allow direct transfers between users without going through third-party institutions such as banks, clearing centers and electronic payment platforms, thus avoiding high fees and cumbersome transmission processes. The application of this atomic settlement method in the field of cross-border payments can solve the problems of high fees, low cross-border transfer efficiency, and high costs in traditional cross-border payments.
Another interesting use case is enabling more efficient settlement of exchange-traded funds (ETFs) through tokenization. Because ETFs are subscribed and redeemed in kind, and if the underlying securities are tokenized (a basket of securities in the ETF), the settlement process of the underlying securities of the ETF can be greatly simplified and real-time settlement can be achieved.
3.2 Settlement use cases for tokenized funds
This atomic settlement transaction method has been approved by the US SEC and has been applied in the Franklin OnChain US Government Money Fund with an asset size of US$310 million. At the same time, we saw that the Monetary Authority of Singapore also has a similar pilot project with UBS Tokenization Fund. Although these funds are not purely tokenized funds on the chain, they take advantage of the accounting and settlement advantages of blockchain and distributed ledger technology to build a tokenized fund model.
3.2.1 Franklin OnChain U.S. Government Money Fund
We have seen that Franklin Templeton has launched Franklin OnChain US Government Money Fund (FOBXX) in 2021. This fund is the first tokenized fund in the United States approved by the SEC to use Stellar blockchain technology to process transactions and record ownership. In April this year, it expanded to Polygon, and may later be released on the Avalanche and Aptos blockchains, as well as Arbitrum, the second-layer Ethereum solution.
As of now, its assets under management have exceeded US$310 million, and investors can enjoy an annualized return of 5.19%. One share of the fund is represented by one BENJI token. Currently, BENJI tokens have not been seen interacting with the application of the DeFi protocol on the chain. Investors need to conduct compliance verification through Franklin Templetons App or website to enter its whitelist to meet KYC/AML/CTF compliance requirements.
Franklin Templeton’s Head of Digital Assets said: “We believe blockchain technology has the potential to reshape the asset management industry, providing greater transparency and lower operating costs for traditional financial products. Blockchains like Stellar are very important to the future of assets. Management is very important, and tokenized assets built on the blockchain will eventually be interoperable with other parts of the crypto asset ecosystem.” It is reported that the overall cost of Franklin’s tokenized fund is only 1/10 of the cost of traditional funds. .
3.2.2 Compound founder’s Superstate Fund
Fund managers with rich DeFi experience and background will give full play to the advantages of blockchain and distributed ledger technology. For example, Compound founder Robert Leshner announced the establishment of a new company, Superstate, on June 28, 2023, dedicated to bringing regulated financial products from the traditional financial market to the chain.
According to Superstate’s filing with the U.S. Securities and Exchange Commission (SEC), Superstate will use Ethereum as an auxiliary accounting and settlement tool, and create funds that invest in short-term government bonds, including U.S. Treasury bonds, government agency securities, etc. In short, Superstate will establish an off-chain SEC-compliant fund to invest in short-term U.S. Treasury bonds, and use the Ethereum blockchain to handle the funds bookkeeping, settlement, and track the funds ownership shares. Superstate will implement an investor whitelist system, so fund tokens cannot be used in DeFi such as Uniswap or Compound.
In a statement from Blockworks, Superstate said: “We are creating an SEC-compliant investment product that will allow investors to obtain a record of your ownership of this mutual fund. ), just like holding stablecoins and other crypto assets.”
Although Superstate did not talk about composability with DeFi, the conceivable path is that Superstate fund tokens can be pledged in Compounds lending pool to lend stablecoins to build DeFi Lego.
3.2.3 UBS Tokenized Fund Pilot
（Source: UBS Asset Management launches first blockchain-native tokenized VCC fund pilot in Singapore）
On October 2, 2023, UBS Asset Management announced the launch of a tokenized fund pilot project. Through UBSs internal tokenization service (UBS Tokenize), fund tokens appear in the form of smart contracts on Ethereum, representing rights and interests in the underlying money market funds. Tokenization can help improve the issuance, distribution, and subscription of funds. and redemption process.
The project is part of Project Guardian, a broader variable capital company (VCC) umbrella initiative led by the Monetary Authority of Singapore, which aims to tokenize various real-world assets. . For UBS, the project is part of its global distributed ledger technology strategy focused on leveraging public and private blockchain networks to enhance the issuance and distribution of funds. In November 2022, UBS launched the world’s first publicly traded tokenized bond. In December 2022, UBS issued $50 million in tokenized fixed-rate notes and in June 2023, it issued C$200 million in tokenized structured notes for third-party issuers.
The person in charge of the project said: “This is a key milestone in understanding the tokenization of funds, building on UBS’s expertise in the tokenization of bonds and structured products. Through this exploratory move, we will work with traditional financial institutions and Working with fintech providers to help understand how to improve market liquidity and market access for customers.”
3.3 Technical barriers to tokenized fund settlement
Tokenization represents a significant change in the way funds are settled, changing the way funds currently rely on transfer agents to record subscriptions and redemptions in a register of fund holders for settlement. This atomic settlement method is similar to cash transactions. There is no middleman. If neither cash nor tokens are delivered, the transaction will not happen. In other words, tokenized transactions only exist in settleable form; they cannot be agreed to and recorded and then canceled. The biggest advantage here is that the counterparty risk of the buyer failing to deliver cash equivalents or the seller failing to deliver shares is eliminated.
However, the atomic settlement method also brings a technical difficulty: in most cases, the electronic wallet on the blockchain must be fully funded before settlement, otherwise the transaction will not occur. Unlike delivery failures in traditional transactions, there is no grace period for the failed party to purchase or borrow the missing assets, and the transaction does not enter a pending state waiting for repair, but simply stops. This imposes additional costs on issuers and investors, who must maintain excess balances in their wallets. The wallets of buyers and sellers must be prepared with fund tokens or cash equivalents in advance. Pre-financing comes at a cost. There is a risk that the cost of maintaining a fund wallet outweighs the cost savings from trading.
But there are other ways to reduce costs, including: sharing data ledgers via blockchain instead of multilateral reporting and reconciliation; registering transfers without a transfer agent; replacing centralized ledgers with self-maintaining distributed ledgers; and using intelligence Contract to ensure that fund token holders obtain corresponding rights and interests in a timely manner.
4. Issuance of Tokenized Funds
Although tokenization can bring many benefits such as real-time settlement, the issuance of tokenized funds is only applicable to new funds. Because if an existing fund is tokenized, it means that the fund shares may be recorded on the distributed ledger of the blockchain, or may be recorded on the traditional register by the transfer agent, which will cause the cost of repeated classification registration. Moreover, original fund share holders will also conflict with tokenized fund share holders.
As of mid-2021, there were 127,913 existing funds globally (with $68.6 trillion in assets under management), and rather than migrating them all to blockchain, tokenized asset classes could be added to existing funds (such as The Fund No. 9 license after completing the virtual asset business upgrade to the Hong Kong Securities and Futures Commission allows the fund to invest 100% of its quota in crypto assets), or provide tokenized versions of existing asset classes (i.e. tokenize real assets, such as tokens (including tokenized stocks, tokenized debt, and tokenized funds).
4.1 Tokenization of money market funds – Franklin OnChain, Ondo Finance, Centrifuge
In addition to stablecoins, the current tokenized RWA project with the largest asset size is money market funds. Ranking first is Franklin Templeton: US$312 million (government bonds); Centrifuge: US$247 million (asset-backed); Ondo Finance: US$183 million (government bonds).
Franklin Templeton is entirely a tokenized fund, Ondo Finance also has two tokenized funds, and Centrifuge has also established a tokenized fund in the RWA project in cooperation with Aave. This shows the importance of tokenized funds in connecting TradFi and DeFi.
（Source: RWA.xyz）
4.1.1 Ondo Finance OUSG / OMMF
（Source: Ondo.Finance）
Ondo Finance launched tokenized funds in January 2023 and is committed to providing institutional-level investment opportunities and services to professional investors on the chain. It brings risk-free/low-risk interest rate fund products to the chain, allowing stablecoins to Holders are able to invest in government bonds and U.S. Treasuries on-chain. The underlying assets of Ondo Finances two tokenized funds, OUSG and OMMF, are BlackRocks short-term U.S. bond ETF and money market fund respectively.
Investors first need to pass the official KYC and AML verification process of Ondo Finance before they can sign the subscription document. Investors who meet the requirements will invest the stable currency into Ondo Finances tokenized fund, and then Ondo Finance will make legal currency deposits and withdrawals through Coinbase Custody, and then Trades in U.S. Treasury ETFs are executed through Clear Street, a compliant broker.
For regulatory compliance reasons, Ondo Finance adopts a strict whitelist system for investors and is only open to qualified purchasers (Qualified Purchaser). Investors first need to pass Ondo Finances official KYC and AML verification process before they can sign the subscription documents. Investors who meet the requirements will invest stable coins in Ondo Finances tokenized fund.
4.1.2 Centrifuge & Aave Treasury RWA Allocation
As the top player in the RWA mortgage lending model, Centrifuge helped Aaves treasury assets capture the income value of U.S. debt in the recent RWA tokenization plan designed for Aave. Tokenized funds are also used in this solution.
In this plan, Anemoy Liquid Treasury Fund is an off-chain fund registered in the BVI. First, its fund is tokenized through the Centrifuge protocol; secondly, Aave invests the treasury funds in the Centrifuge Pool corresponding to the Anemoy tokenized fund and generates Fund token certificates; then, Centrifuge Pool allocates the assets invested by Aave to the Anemoy Fund through the agreement; finally, the Anemoy Fund purchases U.S. Treasury bonds through deposits and withdrawals, custody, and brokers, realizing the return of U.S. debt on the chain.
（Source: [ARFC] Aave Treasury RWA Allocation）
4.2 Tokenization of private equity funds—Hamilton Lane, KKR
Historically, there has been a certain threshold for retail investors to invest in private equity funds, and the market has been limited to large institutional investors and ultra-high net worth individuals. Additionally, a clear goal of the asset management market is to increase allocations to retail investors. The reasons for this continued underallocation are high investment barriers, long holding periods, limited liquidity (including the lack of developed secondary markets), lack of value discovery means, complex manual investment processes, and lack of investor education.
While it’s still early days for the tokenization market, some private equity fund managers are testing the waters by launching tokenized versions of their flagship funds. We can see the attempts of well-known private equity giants Hamilton Lane, KKR, and Apollo in tokenized funds.
Due to some restrictions on existing funds, if only part of the fund shares of an existing fund are tokenized, this means that the same share of the fund may be recorded on the distributed ledger of the blockchain, or may be recorded on the traditional ledger by the transfer agent. Centralized register, which will cause the cost of repeated classification registration. One solution is for the transfer agent to be responsible for the collection and aggregation. Another solution is to implement tokenization through a feeder fund.
Private equity funds directly tokenize the upper-level feeder fund (Feeder Fund) through the master-feeder structure to realize the tokenization of part of the fund shares of the entire private equity fund. In the master-joint structure, the fund manager can raise funds from different types of investors to create a Feeder Fund, and the Feeder Fund invests the funds in a master fund (Master Fund). Investors invest and pay management fees at the Feeder Fund level, while trading and investing occur at the Master Fund level.
The master-joint structure is the preferred structure for large financial institutions to issue funds. It usually faces investors from different jurisdictions to meet the regulatory requirements of different jurisdictions and formulates different commercial terms such as management fees, subscription terms, investment strategies, etc.
4.2.1 Hamilton Lane
Hamilton Lane is a leading global private equity investment firm with $823.9 billion in assets under management. The company tokenized some shares of its funds on the Polygon network and opened them to investors on the trading platform Securitize. In partnership with Securitize, the fund tokenizes a portion of its fund shares in the form of a Feeder Fund and is managed by Securitize Capital (filed under SEC Reg D 506 (c)).
Securitize’s CEO said: “Hamilton Lane offers some of the best-performing private markets products, but historically they have been limited to institutional investors. Tokenization will enable individual investors to participate in private equity digitally for the first time Invest and create value together.”
From the perspective of individual investors, although tokenized funds provide an affordable way to participate in top private equity funds, with the minimum investment threshold greatly reduced from an average of US$5 million to only US$20,000, individual investors still have to There are still certain thresholds for passing the Securitize platforms qualified investor verification.
（Source: Securitize.io）
4.2.2 KKR
Similarly, KKR, which manages nearly $50 million in assets, partnered with the trading platform Securitize in October 2022 to tokenize part of its closed-end fund Health Care Strategic Growth Fund II on the Avalanche network through Feeder Fund .
From the perspective of private equity funds, the advantages of tokenized funds are self-evident. Not only can they directly provide real-time liquidity for part of the fund shares of private equity funds (compared to the 7-10 year lock-up period of traditional private equity funds); Achieve LP diversification and flexibility in funding sources. This advantage may be able to solve the current market dilemma of projects acquired during the era of loose liquidity and high valuations being unable to exit during the current period of tight liquidity and reduced risk appetite.
From an investors perspective, the tokenization of private equity funds provides them with a low-threshold opportunity to invest in top private equity funds (the return performance of private equity funds is much higher than 70% of the SP index return). The threshold requirements for large institutional investors and ultra-high net worth individuals to participate in KKR funds are usually millions of dollars, but this time through this tokenized Feeder Fund, the minimum investment threshold for individual investors has been reduced to $100,000.
（Source: Securitize.io）
5. Transactions and Investments in Tokenized Funds
5.1 Secondary market transactions of tokenized funds
（Source: SS&C, Tokenization of Funds - Mapping a Way Forward）
Perhaps the most exciting thing brought about by tokenization is not the settlement and issuance based on the blockchain, but the trading of fund tokens in the secondary market.
As the tokenization market matures, the price of fund tokens fully traded in the secondary market can more accurately reflect the value of the fund, which is conducive to price discovery and provides a basis for fund pricing, rather than just based on ETFs like ETFs. Trade at published NAV. Not only does this allow investors to view transactions, portfolio valuations and investment performance in real time, it also allows them to adjust their risk exposure themselves. Fund tokens will also trade based on investor demand, currency movements and arbitrage, where arbitrageurs will eliminate any price differences between the tokenized fund and the non-tokenized version.
In addition, fund tokens circulating in the secondary market can also serve as a liquidity supplement for fund redemptions. Funds can reduce low-yielding cash reserves held in response to redemptions. Once investors can sell tokens instead of redeeming shares, the funds asset size stabilizes and the cost of rebalancing falls. If the funds underlying assets are also tokenized, fund managers will no longer need to sell the underlying assets or borrow from banks to cover the liquidity mismatch between subscriptions and redemptions. Instead, the underlying underlying assets can be sold directly in tokenized form on the secondary market.
Tokenization does not actually add liquidity to some inherently illiquid asset classes such as private equity and credit, infrastructure, real estate, art, and timberland, but tokenization can leverage direct access to the investor community Interaction, increasing the application of DeFi scenarios and other advantages, reducing the high discount of assets caused by the issuance of assets due to lack of liquidity. At the same time, tokenization can fragment assets and divide unit assets into smaller denominations. This lowering of investment thresholds can allow investors who were previously unable to participate due to high thresholds to participate and bring additional liquidity. . The importance of these features has already been demonstrated in the cryptocurrency and DeFi markets.
The current shrinkage of publicly listed company shares, and the accompanying growth of the private equity industry, has cut off a range of investment channels for retail investors. Tokenization could allow them to re-enter an asset class currently only open to institutional investors.
Unfortunately, most tokenized funds currently do not allow permissionless transactions based on public chains due to compliance reasons such as KYC/AML/CTF. For example, the Franklin OnChain US Government Money Fund, currently the largest tokenized fund under asset management, is also based on the Stellar blockchain to process transactions and record ownership, but has not yet seen any transaction operations on the public chain. Moreover, tokenized private equity funds such as Hamilton Lane and KKR can only conduct fund subscription and redemption operations through the platforms entrance (with strict KYC), and more transaction operations may be in the form of OTC. In the future, secondary market transactions may be conducted through permissioned blockchain.
5.2 Tokenization will accelerate the development of personalized investment
The higher investment threshold in traditional investment reflects the higher cost of capital. Tokenization significantly lowers the investment threshold by reducing the costs of fund issuance, subscription and redemption, registration and services. Tokenization options may also be applied to small investor funds, which can invest in areas such as commercial and residential real estate, infrastructure projects, private equity and debt, art and collectibles, but are currently excluded from traditional investments.
In the long term, the impact of tokenization may be far more profound than lowering transaction costs, improving price discovery, increasing liquidity and expanding a fund’s investor base. Tokenization has the potential to create investment portfolios that are fully aligned with the needs, desires and values of individual investors.
Currently, funds are generic products that promise to deliver income or capital growth, or meet a set of environmental, social and governance (ESG) criteria. Millennials have grown up with the digital economy. They have never known a world without smartphones. What they need is direct, simple and transparent fund products. To them, mutual funds are complex products that are difficult to understand, slow to purchase, and difficult to personalize.
Tokenization can remove these barriers. Fund tokens are cheaper, easier and faster to buy and sell than traditional fund shares. Smart contracts can be embedded in fund tokens to complete due diligence quickly and easily, allowing young investors to open accounts (e-wallets) in minutes instead of days, similar to what they have to trade and hold crypto Currency wallet.
Most importantly, tokens enable fund portfolio personalization. Its ability to tokenize and fragment any asset expands the range of investable assets, allowing even small amounts of money to be invested, customized to an investor’s personal preferences. Over time, tokenized funds may offer each investor a customized portfolio package, much like investors manage their own bank accounts. Most importantly, the personalized investment of tokenized funds has an intuitive appeal to a large number of young investors.
According to Newzoo, there are 2.9 billion video game players worldwide. The crossover between video gamers and cryptocurrency enthusiasts means that use cases for cryptocurrencies already exist, enabling video gamers to buy and sell in-game items on the blockchain. NFTs are actually an invention of video gamers. Technically speaking, tokenized funds are already a part of life for Millennials and Generation Z.
（Source：www.tbd.website/）
5. Supervision of Tokenized Funds
Traditional funds are basically subject to stricter supervision in local jurisdictions, and there are clearer operational guidelines and implementation paths in this regard. But after the fund is tokenized, who will regulate it? Still a brand new topic. One thing that tokenized fund participants need to adapt to is that after tokenization, the fund can be circulated globally based on the public blockchain (although currently only limited licensed circulation scenarios are seen), so it may face all major global fund markets. regulatory agencies, and the regulatory framework for global crypto assets.
Although regulators around the world have responded to the rise of blockchain token financing that began in 2017, and international regulators have tried to reach a global consensus on how to regulate crypto assets, the laws and regulations governing tokenization still only apply to specific Jurisdiction, and is unclear and unclear. The scope of regulating crypto-assets ranges from the legislative level to regulate the roles, rights and obligations of crypto-asset issuers, investors and intermediaries (as in Liechtenstein), to regulating which crypto-assets and crypto-asset activities require regulatory authorization (as in the UK) . In the absence of clear legal definitions of crypto-assets and smart contracts, and subsequent jurisprudence, tokenization still faces legal and regulatory uncertainty.
Regulatory uncertainty is unsettling for fund managers. As regulated entities, they are unwilling to take action first and then seek approval from regulators. However, in the UK at least, guidance from the Financial Conduct Authority (FCA) has proven sufficient to enable the tokenization industry to develop on the basis that crypto-assets issued on private rather than public networks are subject to existing Securities and cash payment rules apply.
First, issuance of crypto-assets on private blockchains (as opposed to public blockchains) enables fund managers to meet their regulatory obligations and enable investors to pass KYC, AML, CTF and economic sanctions screening checks. It is a prerequisite for investment. Secondly, fund tokens are regulated by the FCA as securities. In particular, this gives investors confidence that risks will be controlled; information disclosure will maintain market integrity; market manipulation and insider trading will be curbed; and tokens will be safely kept.
Although the above fund tokens are classified as security tokens, fund tokens issued in the UK are regulated by the FCAs collective investment scheme information booklet (COLL) regulations in the same way as mutual fund shares today. In other words, fund token issuers must issue fund prospectuses and key investor information documents (KIIDs), comply with detailed COLL rules regarding investing, lending, risk management and valuation, and appoint depositaries to protect investors.
6. Conclusion
If you want to use the advantages of blockchain and distributed ledgers to achieve the final form of tokenized funds, making an analogy based on the current situation is like needing to replace the engine of an airplane flying at an altitude of 30,000 feet. Additionally, the new engine required complete rewiring while still being compatible with the older system. Of course change wont happen overnight.
In the fund industry, the change in strategic direction has been obvious, and fund companies are exploring tokenization and repositioning their businesses for the future of tokenization. Fund managers are acquiring wealth management businesses and investing in fund platforms. The fund platform is considering the capabilities of the transfer registration agency. Transfer agents and custodians are investing in order and execution management technology, as well as fund platforms and custody services.
These developments indicate that restructuring has begun on both the distribution and service sides of the funds industry. The touted advantages of tokenization – lower costs, larger markets, greater liquidity, reduced counterparty risk, automation of account opening/ongoing verification, expansion of investable asset classes, changes in customer service and funds Customization of investment is gradually being realized with difficulty.
There is reason to believe that tokenization can simplify the intermediate chain that separates fund managers from investors; accelerate the digitization of products and expand the scope of investable assets under their management; ultimately, the issuance and redemption of fund shares may This will give way to an active secondary market for fund tokens, allowing funds to escape the shackles of daily NAV and trade in a manner comparable to investment trusts and ETFs.
Many hurdles still need to be cleared before the value brought by tokenization can be realized. Such as common standards for KYC, AML, CTF and economic sanctions screening and verification, cross-chain channels and oracles between public chains and private permissioned chains, how to build secondary markets, etc. There is also regulatory uncertainty, and the lack of fiat currency on blockchain is a major constraint, but the biggest obstacle to progress is time.
The transformation of a global industry into the future cannot happen overnight. The danger is that as time goes on for reform, it will become a reason to do nothing now, which would be a mistake. For blockchain, what is valuable today will still be valuable tomorrow, just like Bitcoin.
Reference:
[ 1 ] SS&C, Tokenization of Funds - Mapping a Way Forward
[ 2 ] CMS, Tokenised funds series
[ 3 ] Open for Investing 24/7: An Introduction to Open-End Funds on Solv V3
[ 4 ] Franklin Templeton Announces the Franklin OnChain U.S. Government Money Fund Surpasses $ 270 Million in Assets Under Management
https://investors.franklinresources.com/news-center/press-releases/press-release-details/2023/Franklin-Templeton-Announces-the-Franklin-OnChain-U.S.-Government-Money-Fund-Surpasses-270-Million-in-Assets-Under-Management/default.aspx
[5] UBS Asset Management launches first blockchain-native tokenized VCC fund pilot in Singapore
[ 7 ] [ARFC] Aave Treasury RWA Allocation
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