Last week (March 30), US private market firm Hamilton Lane launched a “tokenized” share class of its global private asset fund and the firm took this first step, far from the first tokenized fund.
Indeed, although some jurisdictions, such as the United States, have allowed this use of blockchain technology, the United Kingdom still does not have a regulatory environment for it. However, the UK may soon see them when the Chancellor nails the mast color by announcing his ambition to create a regulatory environment to open the nation to crypto business.
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The government’s response to this has focused on other forms of cryptocurrency, such as retail investment, while focusing on stablecoins. It said the consultation planned later this year would determine proposals for the innovation.
This information was given by the investment association Investment Week It was already in discussions with companies and regulators about tokenized funds.
John Allen, a fund operations expert at the Investment Association, explained that “it is vital that UK residents are able to keep up with this type of innovation”.
So what are tokenized funds and what do they mean?
A tokenized fund, also known as a digital fund or BTF (blockchain-traded fund), is one where the shares or units of the fund are digitally represented and can be traded and recorded in a distributed ledger.
According to a research paper by IA and law firm CMS, the difference between investing in a fund and owning tokens that represent shares or units in the fund is not significant. However, there are advantages associated with maintaining investor registration and the costs associated with secondary market trading.
“Tokenized funds have the potential to bring benefits to consumers for faster settlement and to make back-office processes more efficient,” Allan explained.
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In addition to fast, and potentially cost-effective benefits, tokenization can improve the transparency of transactions and help provide liquidity for traditionally liquid assets.
In fact, Serge Wayland, CEO of Edmund de Rothschild Asset Management (Luxembourg), noted at the ALFI European Asset Management Conference in Luxembourg earlier this month that tokenization of personal assets could be “a huge opportunity” for this technology.
First hand experience
At the conference, Marco Cora, a board member at Azimut Investment Management Singapore, spoke about his firm’s experience in being one of the first firms to “tokenize a traditional financial asset” and what he expects for the future.
In March last year, Azimut partnered with Signum Bank to tokenize the first portfolio of € 5m loans for Italian small and medium businesses.
Cora explains that one challenge Azimut is interested in solving is that despite having a lot of money in the financial system, it has not found its way into the “real economy” like small and medium-sized companies.
He said part of the problem is that regulators, understandably, have a high minimum investment for liquid resources. He said that over time, using blockchain technology, they hope to work with regulators to reduce the minimum investment.
He noted that there is an additional challenge with some areas of the market, such as asset-backed securities, and the cost of transacting in the secondary market. However, he said that these could be dramatically reduced by using blockchain.
Cora went on to highlight that she never expected these investments to be “liquid like Apple’s stock” and that there could be significant improvements.
The main challenge with Azimut’s fundraising was control, not technology. Cora said there were difficulties with “finding out the consequences of what they were doing” and “whether it was consistent with the regulatory framework.”
“Once the regulatory situation is cleared, the industry will improve, I have no doubt,” he added.