Tokenisation: Reshaping the Asset Management Landscape

The asset management industry has always been at the forefront of financial innovation, and tokenisation represents one of its most transformative developments in recent years. By merging traditional assets with blockchain technology, tokenisation is creating new opportunities for asset managers to enhance liquidity, streamline operations, and broaden access to previously illiquid or exclusive assets. However, alongside these opportunities come important regulatory, legal, and strategic considerations.

In this post, we’ll explore what tokenisation is, how it’s reshaping the asset management landscape, and what firms need to be aware of as this trend continues to evolve.

What is Tokenisation?

Tokenisation is the process of converting rights to an asset into a digital token on a blockchain. These tokens can represent ownership in real estate, stocks, bonds, commodities, and even fine art, enabling fractional ownership and facilitating easier trading and transfer. Essentially, tokenisation unlocks liquidity for assets that were traditionally considered illiquid or difficult to trade, such as private equity, real estate, or fine art.

These digital tokens exist on blockchain technology, ensuring a transparent, secure, and immutable record of ownership and transactions. Asset managers, in particular, are beginning to realise the potential of tokenisation to improve efficiency and open up new revenue streams.

The Impact on the Asset Management Industry

Tokenisation is beginning to significantly impact how asset managers operate, with ripple effects across the entire industry.

1. Increased Liquidity: Traditionally illiquid assets, such as real estate or private equity, are now being tokenised, allowing fractional ownership and making it easier to buy, sell, or trade these assets. This could lead to shorter holding periods, as investors gain flexibility in managing their portfolios.
2. Reduced Operational Costs: Tokenisation can streamline processes like settlement, clearing, and record-keeping. By eliminating the need for intermediaries and centralised systems, asset managers can reduce costs associated with transactions, audits, and compliance.
3. Broader Access to Markets: Fractional ownership enables smaller investors to access high-value assets like commercial real estate or private equity. This democratisation of asset ownership allows asset managers to expand their client base and attract investors who were previously excluded from certain markets due to high capital requirements.
4. Automation via Smart Contracts: Smart contracts, self-executing contracts with the terms directly written into code, can automate compliance, distribution of dividends, or redemption processes. For asset managers, this means less time spent on administrative tasks and more efficient operations.

Use Cases for Tokenisation in Asset Management

Tokenisation is being applied across a wide range of asset classes:

• Real Estate: Traditionally a highly illiquid asset, real estate is increasingly being tokenised to allow for fractional ownership. This creates new liquidity for investors and provides a wider audience with access to real estate markets.
• Private Equity & Venture Capital: Tokenisation is also making it easier to trade private equity and venture capital stakes, enabling investors to enter and exit these positions more flexibly.
• Commodities: Tokenised commodities, such as gold or oil, allow investors to trade digital representations of these assets on blockchain platforms.
• Securities: The tokenisation of securities is already underway, with asset-backed tokens being used to represent shares or bonds, improving the efficiency of trading and settlement.

Legal and Regulatory Considerations

While the benefits of tokenisation are clear, the legal and regulatory framework surrounding it remains a work in progress.

1. Regulatory Oversight: In most jurisdictions, tokens that represent securities are subject to existing securities laws. Regulators, including the Central Bank of Ireland and the European Securities and Markets Authority (ESMA), are actively working on creating frameworks that address the unique challenges of digital assets.
2. AML & KYC Compliance: Anti-money laundering (AML) and Know Your Customer (KYC) regulations still apply to tokenised assets. Firms will need to ensure robust compliance with these standards, which can be automated to some extent using blockchain technology, but still requires oversight.
3. Data Privacy: Blockchains are transparent by nature, which can create conflicts with data privacy laws like GDPR. Asset managers need to consider how to balance transparency with privacy requirements when dealing with tokenised assets.
4. Custody: Custody of tokenised assets is another key concern. Traditional custodians are still developing the infrastructure needed to store and protect digital assets, and there are emerging questions about liability and security in this new environment.

Public vs. Private Blockchain

One of the key decisions asset managers face when dealing with tokenisation is whether to use a public or private blockchain.

• Public Blockchains: These are open, decentralised networks where anyone can participate. While they offer transparency and security, they can also be slower and less scalable. Bitcoin and Ethereum are examples of public blockchains.
• Private Blockchains: Private blockchains are permissioned networks controlled by a single entity or group. They offer greater control, faster processing times, and more privacy, but may not provide the same level of trust or decentralisation as public blockchains.

For asset managers, private blockchains may be more appealing in the short term due to the control they offer, particularly when handling sensitive financial information or complying with regulatory requirements.

International Developments in Tokenisation

Outside of Ireland, several countries are taking proactive steps to facilitate tokenisation:

• Switzerland: With its forward-thinking regulatory framework, Switzerland has positioned itself as a hub for blockchain and digital assets. The Swiss Financial Market Supervisory Authority (FINMA) has introduced legislation tailored to tokenisation, creating a clear pathway for companies looking to issue tokenised assets.
• Singapore: The Monetary Authority of Singapore (MAS) has also embraced tokenisation, developing regulatory guidelines to encourage innovation while ensuring investor protection.
• United States: The SEC has begun addressing tokenisation through its framework for digital assets and security tokens, though regulation remains complex and fragmented across states.

These jurisdictions are leading the way in developing the legal and regulatory infrastructure needed for tokenisation to thrive, setting examples that other nations, including Ireland, can learn from.

The Long-Term Future of Tokenisation

In the long term, tokenisation has the potential to completely redefine the asset management landscape. As technology continues to mature, and as regulatory frameworks become more robust, tokenisation could enable a world where virtually any asset can be traded in a fraction of the time and cost it currently takes.

However, for this future to materialise, several challenges need to be addressed, including:

• Interoperability: Different blockchains and platforms need to be able to communicate with one another seamlessly for tokenisation to reach its full potential.
• Regulation: Continued efforts by regulators to create clear, consistent frameworks will be crucial for widespread adoption.
• Education & Adoption: Both investors and asset managers will need to fully understand the technology and its benefits before tokenisation can become a mainstream solution.

Conclusion

Tokenisation is reshaping the asset management landscape in profound ways, offering greater liquidity, reduced operational costs, and access to new markets. However, the road ahead is not without its challenges. Legal and regulatory considerations, the choice between public and private blockchains, and the broader need for global alignment on standards will all play pivotal roles in determining how tokenisation evolves in the coming years.

For asset managers, the opportunity is clear: embrace tokenisation now to stay ahead of the curve, or risk being left behind as the digital transformation of financial services continues to accelerate.