Driven by both investor demand for enhanced digital and data capabilities, and ongoing fee pressures, asset managers are increasingly taking an interest in tokenized funds. By utilizing blockchain networks to issue shares, fund managers hope to reduce the costs of operation and distribution while increasing assets under management and transforming the experience of their customers.
One way that tokenization potentially reduces costs is by decreasing some types of risk exposure. For instance, when trades are settled instantaneously, the liquidity risk for that fund is greatly reduced. Tokens permit secondary market trading too, potentially maintaining assets under management while reducing the cost of maintaining liquidity in the fund or borrowing to meet redemptions.
Tokenization can also cut the costs of fund distribution by eliminating the need for order routing networks and complex, highly intermediated settlement processes. On-boarding could be cheaper. Current financial crime compliance methods tend to be paper-based and manual, while tokenized funds can tie holdings and transactions to verified digital identities.
Smart contracts, which are written into the code of the fund tokens themselves, can also ensure that a tokenized fund is distributed only where permitted (for example, as required by Blue Sky Laws) and that a fund is suitable for the investor that buys it. By building these checks directly into the token, the risks and costs of manual checks are significantly reduced or even eliminated.
In the future, tokenized funds will enable asset managers to tailor investment portfolios to the specific needs of individual investors, by accessing asset classes currently unavailable to them and purchasing small (or “fractionalized”) lots. Lastly, tokenization will enable asset managers to improve customer service to existing clients (notably through real-time reporting)andreach tech-savvy Millennials.