A true "storming of the Bastille" for the fund management industry

The beginning of the decade saw the emergence of financial actors performing exploratory work and isolated experiments around tokenization. They envisioned a fundamental disruption in infrastructure and financial assets, without truly kicking off the Darwinian process.

Among the most significant reports on the subject, The Investment Association's Investing for the future: Three potential paths for a tech-powered UK fund industry presents a coherent scenario for the future of financial management.⁴ It discusses the massification of investment in a context of operational efficiency, improved transparency, reliance on advice, broadening the base of accessible assets, and the dissemination of financial knowledge. This is to mitigate the devastating effects of the Retail Distribution Review (RDR) on advised savings.

Another piece of evidence to consider is the joint BCG and ADDX report Relevance of on-chain asset tokenization in ‘crypto winter’, which aims to demonstrate the proven advantage of using decentralized finance (DeFi) for illiquid assets.⁵ It estimates that by 2030, the value of already tokenized assets could increase fiftyfold and represent up to 10% of global GDP.

If the BlackRock-Securitize collaboration confirms asset tokenization’s shift from experiment to industrialization, this initiative is far from isolated. In recent weeks, several significant projects have emerged, including those from:

• "Pure players" like Tokeny, a Luxembourg-based tokenization pioneer, collaborating with Kakao, the Korean IT giant with a compatible public blockchain platform.
• Cryptocurrency players, such as Coinbase’s Diamant project.
• Traditional institutions like HSBC partnering with Metaco, a Swiss specialist in cryptocurrency custody, to launch a digital securities custody business.
• Issuers like Société Générale (via Forge, the institution's crypto branch) completing the first tokenized green bond issuance of EUR10 million.⁶

Digital assets offer unique advantages to portfolio managers and investors
  

Figure 1: Principles of tokenization (source: Securitize)

Tokenization involves converting the ownership of an asset, such as artwork, a commodity, company stocks, or debt securities, into a digital token stored on the blockchain. The token represents the asset and is used to track and transfer ownership of that asset (Figure 1). Tokens can be issued alongside traditional shares in funds, with the only difference for the investor being the potential cost savings of the on-chain model.

The primary benefits of this model for illiquid assets include:

• Compliance with the issuance of securities and throughout their lifecycle, such as universal application of know your customer (KYC) and anti-money laundering rules;
• Control of liabilities by the issuer at measured costs;
• Access for the same issuer to an amplified primary market of distributors and investors; and
• The establishment of a secondary market capable of addressing liquidity issues.

Tokenization significantly boosts operational efficiency, particularly for wealth advisors and private bankers, who are increasingly tasked with managing a growing proportion of their clients' portfolio allocations.

Digitalization generates unprecedented horizons for innovative distribution methods
 

The range of possibilities offered by fractionalization allows more savers to access cutting-edge, ultra-tailored strategies through replicable model portfolios, which are based on a range of factors like horizons, risk levels, and opinion communities.

For example, investors’ ideal portfolios (in the form of non-fungible tokens) could be created through mini-basket stocks grouped by investors or their advisors. Advisors (or their platforms) could also assume an "influencer" role for less affluent savers at controlled costs.

While many obstacles exist, a substantial market is ready to respond to the new investment forms of the post-COVID generations of savers. This will help open access to managed advice for many European savers—nearly 40% of French savers rely solely on themselves to manage their wealth and prepare for retirement.

It will also be a breath of fresh air for emerging savings solution providers, who are seeing distribution barriers topple.
 

A facilitating or constraining regulatory environment?
 

France's Pacte Law established a framework for digital asset service providers in 2019. This legislation, focusing on infrastructure, heavily influenced the EU’s Markets in Crypto Assets (MiCA) Regulation. Coming into force at the end of 2024, MiCA introduces two new categories of crypto-assets:

1. Electronic money tokens, such as stablecoins, which refer to one asset or currency; and
2. Asset-referenced tokens (ART), which refer to multiple assets or currencies.

The EU also initiated a distributed ledger technology (DLT) pilot regime in 2023, aiming to encourage the digitization of financial securities and allow the listing, trading, and settlement of digitized financial instruments, known as security tokens.

However, while European regulation has tackled infrastructure and issuers, it has yet to fully consider the impacts of tokenization on investor protection. The EU continues to debate distribution and price control business models rather than breaking the isolation of savers orphaned of advice.

The EU must fully embrace emerging technologies, providing savers with the necessary tools for better understanding, informed comparison, efficient management, and the dissemination of advice suited to the new generation of retail investors.

Conclusion
 

BlackRock’s significant investment is the latest sign that the fund industry is on the cusp of an asset digitalization revolution. Alongside increasing operational efficiencies, tokenization and fractionalization enable greater customization and widen market access to a larger range of savers and investors. However, the EU’s regulatory framework must do more to support the opening up of the European fund market.

¹Insight AM is a consulting firm specializing in thematic analysis and positioning based on quantitative and qualitative surveys for financial actors.

² Patrimeta is the very first virtual and permanent showroom of savings solutions for wealth management advisors.

³ The Investment Association, Investing for the future: Three potential paths for a tech-powered UK fund industry, July 2022.

⁴ Sumit Kumar, Rajaram Suresh, Darius Liu, Bernhard Kronfellner and Aaditya Kaul, Relevance of on-chain asset tokenization in ‘crypto winter’, BCG and ADDX, September 2022.

⁵ Reuters, "SocGen issues 10-mln-euro digital green bond on a public blockchain," 4 December 2023.