The Future of Asset Management in an Ocean of Tokenized Assets
As the digital asset ecosystem grows, many experts are asking how traditional asset managers will respond to the paradigm shift underway in how we store and transact securities. Hedge funds, family offices, mutual funds, pension schemes and other financial professionals seem poised for the perfect moment to enter the digital asset space – but how will tokenized assets, still in their nascency, help asset managers deliver better services?
With the tokenized future approaching seemingly unabated, industry experts need to consider how new asset classes which have arisen from tokenization, or existing assets which have been tokenized, might fit in to the wider financial services industry.
Firstly, it’s worth exploring what tokenization means for asset management and fund operators, and whether financial professionals truly have an appetite for tokenized assets.
What does tokenization mean for asset management?
Essentially, any security can be ‘tokenized’, which as we’ve previously explored, is a term applied to the issuance of a blockchain token to represent a given asset; for example, equity, corporate debt, non-fungible assets, or a portion of a managed fund. Tokenized assets represent a huge shift in the way assets are transacted and traded, how they are stored, and their accessibility.
The shift into a tokenized economy offers greater potential for a more transparent, open and fairer financial services industry. This is especially applicable to asset managers, who could leverage the power of blockchain technology to reach a far broader audience of investors than would have been possible using traditional asset issuance.
However, to make the most of tokenization technology, change needs to come not solely from investors, but likewise from asset managers and financial professionals; who ultimately will lead the adoption of tokenized assets and proliferate token-based funds.
An appetite for tokenized change?
For those who operate in the digital asset industry on a daily basis, it’s easy to imagine what digital asset adoption would look like. However, the real question we may ask, is what appetite is there for tokenized financial products from the traditional fund management community?
To date, a number of digital asset index funds have arisen, although these have exclusively focused on the cryptocurrency markets, rather than the emerging tokenized asset markets. Instead, there has been a more recent trend of traditional, regulated and professional asset managers who are either looking to tokenize their existing funds or launch new funds as digital asset managers.
Big Four professional services company, Deloitte, recently stated that financial service providers who were unprepared for mass tokenization of assets risked being left behind, as an increasing number of assets are represented digitally via blockchain technology. Therefore, going forward, it may be imperative for fund managers to diversify into tokenized assets, following both pressure from clients and the widespread adoption of digital assets. As such, it’s likely that a new generation of digital asset managers will emerge to meet this need.
How will tokenizing assets benefit fund managers and investors?
For widespread adoption of tokenized assets, these newly formed digital analogues of traditional securities must first prove their worth as financial instruments to asset managers. There are a multitude of benefits associated with tokenization of assets, but some of the most significant are increased transparency, easier entry and higher liquidity.
By extension of the public blockchain’s immutable nature, whereby all past transactions and transfers are recorded, audibility and accountability will for the first time be fully provable on-chain. For professional fund managers, this not only provides a greater level of transparency to clients, but likewise makes it easier for independent auditors to confirm the legitimacy of the fund’s operations. This benefit works both ways – investors will now have greater assurances that they are participating in a fund whose actions and portfolio are open and transparent, whilst allowing top asset managers to grow their funds through best practice management techniques.
Index funds, hedge funds or other fund managers who issue a digital representation of their fund’s net asset value (NAV) through a tokenized asset will likely reach a wider group of investors, due to the highly accessible nature of a blockchain based token.
For investors, the benefits of tokenization are clear. Two of the more interesting aspects of tokenized assets are their increased liquidity, due in part to the fact that they enjoy round-the-clock trading worldwide, dependent on local regulation. This is a novel feature of tokenized assets, resulting from their ability to be traded peer-to-peer irrespective of borders, by virtue of their blockchain based nature. Second, the possibility of further diversifying one's portfolio as investors have access to more asset classes.
The future of asset management
Having explored the key benefits associated with tokenized assets, what is the likelihood that the professional asset management industry will begin a move towards fully tokenized portfolios, and what timescale will the shift to digital assets occur on?
At present, the largest obstacles for the adoption of tokenized assets are regulatory compliance and secure digital asset custody. Regulation doesn’t have to be the elephant in the room for asset managers or fund operators looking to move into tokenized and digital assets, as there are clear routes for fully compliant offerings. However, the relative scarcity of safe and insured custody options, compared to those for traditional assets, is likely to be a significant barrier for professional investors in the short term.
This is changing with the emergence of institutional-grade trusted custody options, such as that provided by Sygnum. Such services provide, among other features, multi-layer protection for digital assets, offering greater assurances for professional clients. Sygnum also provides a professional brokerage service, which offers seamless and regulated trading of digital assets.
It is likely that the most significant adoption of tokenized assets will come in areas where financial service providers and regulators seek to align their interests, offering tokenized financial products which keep investor safety and financial best practice in mind. Likewise, as tokenized assets most closely represent traditional securities, as opposed to cryptocurrencies, they are more likely to be approached favorably by regulators, asset managers and investors alike.