Tokenisation has the potential to powerfully disrupt asset management. It could ‘transform existing asset lifecycles, accelerate product innovation and create customised, hyper-personalised options for investors’, according to a recent report by Northern Trust and HSBC.1 But existing providers must be ready to embrace the new technologies as highly competitive innovators enter the industry.
The potential of tokenisation to revolutionise asset management
The power of tokenisation to disintermediate and democratise
Tokenisation is the process whereby an underlying asset, either tangible or intangible, is converted into a digital ‘token’ that acts as its proxy. Almost every type of asset can be tokenised, from traditional assets such as bonds, commodities, investment funds and real-estate properties to more exotic assets such as sports teams, artwork and even celebrities.
Tokenisation promises to transform asset management, enabling the industry ‘to become more disintermediated and democratised’, according to Northern Trust and HSBC. These institutions argue that tokenisation is ‘increasing transparency, building cost efficiencies, and impacting everything from trading, pricing and the liquidity of securities, and potentially creating more efficient clearing and settlement’.2
Northern Trust warns, however, that ‘firms cannot any longer expect to keep performing the same roles without evolving to new client needs, new entrants and disruptors will innovate and compete’.3
The advantages to the industry lie in the cost savings generated by tokenisation and the potential to attract more customers by offering a greater range of assets. Tokenisation digitalises laborious manual processes like pricing and fund accountancy, creating a streamlined intermediary chain, according to Calastone. The global funds network adds that tokenisation brings greater visibility and instant settlement, as well as improvements in data and analytics, ‘saving many basis points on the management of funds’.4
According to a report by Cashlink Technologies and Finoa, tokenisation can achieve cost savings of 35% to 65% along the entire value chain.5 The report used, as an example, the tokenisation of a bond with an issuance volume of €50 million, a maturity of seven years, and 3000 investors. In this particular case, the cost savings amounted to more than €750,000 – or 59% – compared with traditional processes.
Figure 1: An example of the cost savings tokenisation can bring
Moreover, according to Calastone, tokenisation allows asset managers to expand their universe of products without any increase in cost. It argues that while adding a huge new range of products would normally involve a significant overhaul to an investment management system, traditional mutual funds and digital assets can be handled within the same infrastructure.
This is important, says Calastone, because institutional investors expect to mix both traditional and digital assets in their portfolio, with nearly three-quarters of those surveyed having a strong preference for a fully integrated provider for all their digital asset needs.
The potential cost savings explain why so many institutions are eager to embrace tokenisation: A survey commissioned by BNY Mellon and conducted in 2022 found that 91% of institutional investors were interested in investing in tokenised products. Moreover, 97% agreed that ‘tokenization will revolutionize asset management’ and be ‘good for the industry’.6
Boosting customers and liquidity
The tokenisation of private markets provides an example of how asset managers can expand their customer base. The process converts private equity funds – normally the preserve of relatively wealthy investors – into tradeable digital securities. For example, a $5 million portfolio could be divided into 100 tokens worth $50,000 each, then fractionalised and sold in even smaller units.
Meanwhile, investors benefit because blockchain, the technology that underpins the process, ensures that once a token is purchased, no single authority can erase or change its ownership. In addition, as BNY Mellon explains, ‘the process of tokenization facilitates the creation of a multitude of new financial products, allowing every person and organization in the world to diversify their portfolio of investments on a global scale, regardless of income or size’.
BNY Mellon explains the potentially revolutionary impact with an example:
‘A middle-class woman named Ms. Ganbold in Ulaanbaatar, Mongolia, makes the average income in the city, which is approximately $400 US per month, and she would like to invest in Manhattan real estate, where prices nearly doubled in the 2010s. With traditional financial products, this would be extremely challenging considering the usual initial capital investment, if not a near impossibility. However, with tokenization, fractionalization—the division of an asset class into portions that are smaller than the whole—opens the door of opportunity for Ms. Ganbold.’7
Moreover, expanding the investor base should boost liquidity – and hence reduce volatility and risk. Other benefits include instant access to assets and, if the asset managers pass on some or all of the cost savings, lower transaction costs, as well as the benefits of greater transparency.
To sum up, tokenisation appears to provide a win-win for both institutions and their clients. However, as the CEO of BlackRock, Larry Fink, pointed out in his annual letter to investors in March 2023, while the digital-asset industry is maturing, ‘there are clearly elevated risks and a need for regulation in this market’.8 If the obstacles can be overcome, the potential prize is immense. Northern Trust and HSBC forecast that, by 2030, approximately 5% to 10% of all assets will be digital. They add that ‘considering that global assets are expected to rise to $145.4 trillion by 20259 this is a substantial number, and it will only continue to increase as technological innovation drives change’.
1 https://www.northerntrust.com/content/dam/northerntrust/pws/nt/documents/asset-servicing/beyond-asset-tokenisation.pdf
2 https://www.northerntrust.com/content/dam/northerntrust/pws/nt/documents/asset-servicing/beyond-asset-tokenisation.pdf
3 https://www.northerntrust.com/united-states/insights-research/2023/cis/beyond-asset-tokenisation
4 https://www.calastone.com/insights/tokenisation-reducing-costs-and-building-alpha-for-tomorrow/
5 https://cashlink.de/en/cost-disruption/
6 https://www.bnymellon.com/content/dam/bnymellon/documents/pdf/insights/migration-digital-assets-survey.pdf
7 https://www.bnymellon.com/us/en/insights/all-insights/the-rise-of-tokenization.html
8 https://www.blackrock.com/corporate/investor-relations/larry-fink-annual-chairmans-letter
9 https://www.pwc.com/ng/en/press-room/global-assets-under-management-set-to-rise.html
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