The Future of Asset Management: Exploring the Power of Tokenized Funds

Introduction: The Current State of RWA

When discussing Real World Assets (RWA), people typically focus on underlying assets such as U.S. Treasuries, fixed-income products, and securities. Besides stablecoins, the largest RWA projects by asset size come from money market funds. These projects play a crucial role in bridging the gap between Traditional Finance (TradFi) and Decentralized Finance (DeFi). The top three projects by asset size are:

• Ondo Finance: $623.17M (government bonds)
• Securitize: $519.46M
• Franklin Templeton: $440.36M (government bonds)

Among them, Franklin Templeton is a fully tokenized fund, Ondo Finance has two tokenized funds, and Centrifuge has set up a tokenized fund in collaboration with Aave. Funds, as a form of asset, are ideal carriers for RWA assets due to their regulatory compliance and the relative standardization of digital representation.

Inefficiencies in the Fund Market

The global asset management industry faces many challenges. While the market's growth has led to the expansion of asset management scale, fund management fees have been compressed due to competition and the shift to passive investment strategies. At the same time, the demand for digitization has increased, and investors expect funds to offer more efficient online distribution, asset reporting, regulatory compliance, and personalized services.

Currently, multiple layers of intermediaries separate funds and investors, including financial advisors at the distribution end, fund platforms, and order-routing networks, as well as paying agents, custodian banks, and fund accountants on the service end. Transfer agents coordinate these intermediaries, handling KYC (Know Your Customer), AML (Anti-Money Laundering), CFT (Combating the Financing of Terrorism), and other verifications, as well as subscription and redemption settlements and investor registrations.

Traditional fund operations are extremely inefficient, with issues including:

1. Fund shares are issued for subscriptions and canceled for redemptions.
2. Fund pricing is based on net asset value (NAV) set by fund accountants, rather than market buy-sell prices.
3. Transfer agents must integrate orders and pricing based on NAV and settle them in the registry.
4. During the settlement process, funds and investors face market volatility and counterparty risk within three days.
5. Fund managers need to retain some funds to cover the cost of rebalancing the NAV.

These problems lead to cumbersome processes, inefficiencies, and increased operational costs for fund managers.

Advantages of Tokenized Funds

Tokenized funds represent assets in the form of tokens on the blockchain, significantly improving fund operational efficiency:

1. Real-time pricing and settlement: Tokenized funds enable 24/7 real-time settlement on the blockchain, eliminating market volatility risk and improving transaction efficiency.
2. Elimination of intermediaries: Tokenized funds no longer require transfer agents, fund accountants, or other intermediaries, reducing transaction friction and costs.
3. Atomic settlement: Tokenized transactions adopt atomic settlement, where cash and fund shares are exchanged simultaneously, eliminating counterparty risk.
4. Lowering investment thresholds: Tokenized private equity funds drastically lower investment thresholds, allowing smaller institutions and family offices to participate more easily.
5. Global investor participation: Tokenized funds can attract global investors, particularly in underserved regions like Africa, Asia, and Latin America, enabling participation through crypto assets.

Not only do tokenized funds simplify fund operations, but they also drive the digital transformation of the global asset management industry. UBS Asset Management is a prime example. On October 2, 2023, UBS launched a tokenized fund pilot project as part of the Monetary Authority of Singapore’s Project Guardian initiative, which aims to tokenize real-world assets. UBS’s internal tokenization service, UBS Tokenize, runs these tokenized funds on Ethereum, representing money market fund equity. This initiative improves fund issuance, distribution, subscription, and redemption processes, marking a significant milestone in the understanding of tokenized funds. The project lead commented: “Through this exploratory initiative, we will collaborate with traditional financial institutions and fintech providers to enhance market liquidity and improve clients' market access.”

Personal Insights

As a Web3 developer and consultant, I believe that RWA and tokenized funds hold immense potential for growth. In traditional financial markets, inefficiencies and lack of transparency have long been challenges for investors, and blockchain technology provides a viable solution. Tokenization not only enhances liquidity but also lowers investment barriers, allowing more small-scale investors to participate.

The global asset management industry faces numerous challenges. Although the industry’s overall asset management scale has grown with the market’s rise, fund management fees have been compressed due to competition and the industry's shift towards passive investment strategies. In addition to investment pressure, the market has higher demands for the digital capabilities of funds to meet investors’ growing needs for online distribution, asset reporting, regulatory compliance, and personalization. The growth of fund management costs is outpacing revenue, squeezing profit margins.

For private equity funds, liquidity is limited, and high investment thresholds mean that investors have long been restricted to a few institutional investors. The private equity market urgently needs to lower investment thresholds and introduce alternative products that meet the investment needs of smaller institutions, family offices, and even high-net-worth individuals through proper product design.

Tokenized funds offer a new and expanding market opportunity. The success of BlackRock’s tokenized fund, which exceeded $500 million in market value, has brought more participants into this space.

This kind of innovation and disruption also applies to funds. A tokenized fund refers to fund shares recorded digitally on a blockchain-based distributed ledger, which can be traded in secondary markets. This is different from crypto funds that invest in cryptocurrency markets. Tokenized funds can directly digitize real-world assets, increasing transparency and efficiency across the market.

Of course, the successful implementation of tokenization still faces regulatory challenges and market acceptance of blockchain technology. However, with more projects and companies entering this field, I believe that RWA will see widespread adoption globally in the future and will play a significant role in reshaping financial markets.

Looking ahead, the digital transformation of the global asset management industry is an inevitable trend. Tokenized funds, as a key component of this transformation, are likely to unlock even greater market value. As technology matures and regulatory frameworks become clearer, tokenized funds could become an indispensable force in the global asset management industry.

Reference:

[1] SS&C, Tokenization of Funds – Mapping a Way Forward

https://www.ssctech.com/resources/form/tokenization-funds-mapping-way-forward

[2] CMS, Tokenised funds series

https://cms.law/en/gbr/publication/tokenised-funds-series

[3]?Open for Investing 24/7: An Introduction to Open-End Funds on Solv V3

https://medium.com/solv-blog/open-for-investing-24-7-an-introduction-to-open-end-funds-on-solv-v3-84abc4704e68

[4] Franklin Templeton Announces the Franklin OnChain U.S. Government Money Fund Surpasses $270 Million in Assets Under Management

https://investors.franklinresources.com/news-center/press-releases/press-release-details/2023/Franklin-Templeton-Announces-the-Franklin-OnChain-U.S.-Government-Money-Fund-Surpasses-270-Million-in-Assets-Under-Management/default.aspx

[5]?UBS Asset Management launches first blockchain-native tokenized VCC fund pilot in Singapore

https://www.ubs.com/global/en/media/display-page-ndp/en-20230927-first-blockchain-native.html?caasID=CAAS-ActivityStream&hss_meta=eyJvcmdhbml6YXRpb25faWQiOiAxNDc3LCAiZ3JvdXBfaWQiOiAxMTA5MDA0LCAiYXNzZXRfaWQiOiAyMjUwMDA3LCAiZ3JvdXBfY29udGVudF9pZCI6IDEyMTM4NjcwOSwgImdyb3VwX25ldHdvcmtfY29udGVudF9pZCI6IDE4ODYyNTM2M30%3D

[6]?Hamilton Lane and Securitize to Tokenize Funds, Expanding Access to Private Markets for a Broader Set of Investors

https://www.hamiltonlane.com/en-us/news/hamilton-lane-securitize-tokenize-funds