In our"The Rewards of Tokenization: Increased Speed and Reduced Costs"blog post, we discussed how tokenization of funds can help fund managers launch and distribute funds more quickly and reduce operational costs. However, there are other benefits. Here, we explore how tokenization can drive digital adoption by simplifying interactions between fund managers and investors.
Transfer agents support fund managers by facilitating interactions with financial advisors, fund platforms, order-routing networks, custodians, depository banks and other intermediaries. Tokenization could simplify those interactions because subscriptions and redemptions can settle directly by the delivery of fund tokens against payment tokens into investors’ accounts.
In theory, that makes it easier for fund managers to deal directly with retail investors, but the effects on intermediaries will vary. Retail investors will continue to rely on advisors to access tokens via electronic wallets, and those wallets must be reconciled by custodian banks and fund platforms. Those custodians and fund platforms must also continue to perform KYC, AML, CFT and sanctions screening checks in addition to any security checks performed by smart contracts embedded in tokens.
Order-routing networks will likely be more significantly impacted by tokenization, as services such as point-to-point messaging and data-sharing services will become redundant. Paying agents will also be impacted. Though still required to convert payment tokens into currency, they will play less of a role in collecting and paying money to bank accounts off the blockchain network.
Not every impact of tokenization will be negative. Opportunities will arise for intermediaries willing to reposition their businesses for a tokenized future. Fund managers are already investing in fund platforms; fund platforms are adding transfer agency capabilities, and transfer agents and custodians are investing in order and execution management technologies.