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Beyond Funds: Transformation Led by DLT Tokenization

The investment fund industry stands on the brink of a transformative era, heralded by the integration of Distributed Ledger Technology (DLT) and tokenisation. The collaborative efforts of Calastone and Schroders and their engagement with the Monetary Authority of Singapore (MAS) demonstrate that this revolution is not a distant reality but a rapidly developing reality.

Embracing a New Paradigm: Tokenized Investment Vehicles

The concept of tokenisation in investment funds is ground-breaking. It replaces the conventional idea of unitised holdings with a model in which tokens on a distributed ledger represent investor holdings. This change is more than a technical advancement; it's a paradigm shift offering opportunities for extensive innovation in how the asset management industry operates and serves its customers.

Calastone's Digital Investments platform, running on its Distributed Market Infrastructure (DMI), exemplifies this shift. It underscores a movement towards manufacturing and distributing new investment vehicles that are fundamentally different—tokenised and digital.

Operational Transformation and Cost Efficiency

The application of DLT and tokenisation in fund administration marks a profound transformation. It promises not only operational efficiencies but also cost reductions and the creation of more flexible investment products. This shift aligns well with consumers' evolving digital experiences in other areas.

Scale and Efficiency: The New Frontier

Tokenisation and DLT are set to redefine the scale and efficiency of investment management. The resources currently tied up in legacy administration can be redirected towards innovation, expanding the range of asset offerings and broadening investor participation.

UBS and the Dawn of Tokenized Funds

A significant milestone in this journey was the introduction of tokenised funds, specifically the pilot of a tokenised Variable Capital Company (VCC) fund by UBS Asset Management. This ground-breaking action is part of Project Guardian, which MAS is leading and represents a significant advancement in developing investment funds.

The tokenised VCC fund by UBS is a legal entity format adaptable for all investment funds in Singapore. This initiative is instrumental in driving operational efficiencies, faster settlement, and more effective cross-border distribution for capital market instruments on digital asset networks.

The UBS Tokenize Platform: A Case Study in Innovation

UBS Asset Management’s first pilot transactions included fund subscriptions and redemptions of the tokenised fund, represented as a smart contract. These transactions were notably conducted on UBS’s UBS Tokenize platform, illustrating the bank's commitment to and capability in this new digital landscape.

Thomas Kaegi, Head of UBS Asset Management in Singapore and Southeast Asia, remarked on the significance of this development. He emphasised UBS's intent to work alongside traditional financial institutions and fintech providers to explore ways to enhance market liquidity and client access.

Expanding Horizons: UBS’s Future Plans

Looking ahead, UBS plans to extend its partnership network for this project. The bank is also poised to explore other investment strategies in future live pilots, signalling a broader commitment to the digital transformation of investment funds.

Unveiling Project Guardian

Project Guardian, launched by MAS in May 2022, is a testament to the regulatory foresight and ambition to harness the benefits of asset tokenisation and decentralised finance (DeFi) while managing associated risks. This initiative aims to establish best practices, technical standards, and a robust governance model for the burgeoning digital asset ecosystem. It has gained international attention, with the Japan Financial Services Authority (FSA) joining the project.

A Series of Pioneering Pilots

Project Guardian has already seen a series of successful pilots. These include the technical pilot by HSBC, Marketnode, and UOB on digitally native structured products, demonstrating the potential for lower costs and faster settlements. Another notable pilot involved DBS Bank, JPMorgan, and SBI Digital Asset Holdings, focusing on foreign exchange and government bond transactions against liquidity pools of tokenised assets.

The Future: Efficiency and Flexibility

One of the ongoing pilots within Project Guardian is a repurchasing agreement (repo) involving natively issued digital bonds. This project, led by DBS Bank, SBI Digital Asset Holdings, and UBS AG, underscores the commitment to enhancing flexibility, operational efficiency, and the efficiency of cross-border distribution and settlement on digital asset networks.

Schroders: A Pioneering Partnership

With its forward-looking approach towards DLT and digital assets, Schroders exemplifies an asset manager embracing this transformation. Their participation in the issuance of the GBP Digital Bond and collaboration with Calastone position them at the forefront of digital asset solution development.

MAS's Role: Fostering a Digital Asset Ecosystem

The MAS's Project Guardian plays a critical role in this transformation. It aims to build a responsible and innovative digital asset ecosystem, emphasising the development of international standards for secure and efficient financial market infrastructure. The scope of this initiative, including various pilots from tokenized bonds to yield-generating tokens, signals a large-scale transformation in the financial markets.

The Convergence of AI and Tokenization

The fusion of Artificial Intelligence (AI) and tokenisation is another significant development. This combination supercharges the capabilities of both technologies, offering new opportunities in the financial sector. AI can improve the coding and execution of smart contracts, enhance blockchain security, and optimise decision-making processes.

The Road Ahead: Challenges and Opportunities

While the path to a fully tokenised and DLT-powered investment fund industry is clear, it's challenging. Integration, interoperability, and adopting new technologies will need to be navigated. However, the potential benefits in terms of operational efficiency, cost reduction, and product innovation make this journey necessary and immensely promising for the future of investment funds.

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