Over time, the way investors fund, trade, and manage assets has dramatically changed. The concept of investing has been around for a millennia, but the transaction networks and record keeping have continued to innovate with technological advances.

The shift from paper to digital transactions enabled new methods like securitisation, transforming illiquid assets into tradable securities. Today, blockchain technology aims to further advance how we invest, trade, and manage investments in assets through tokenisation.

By 2030, tokenisation could reach a $16 trillion global market for tokenised illiquid assets, which accounts for less than 2% of the total value of public and private assets [BCG].

Large institutional investors, such as Blackrock, JP Morgan, Golman Sachs, Nomura, and Citi are already heavily invested in the tokenisation space.

This article aims to equip smaller funds with the insights and strategies necessary to embrace and capitalise on tokenisation investment methods, maintaining a competitive edge in the evolving financial landscape.

What is tokenisation?

To understand the benefits, we first need to grasp what tokenisation actually is. At its core, a token can symbolise a specific asset or utility. In the blockchain space, tokenisation refers to the conversion of an asset into a digital token suitable for blockchain applications.

Such tokenised assets can be divided into two categories: tangible assets, such as real estate, fine art and precious metals, and intangible ones, such as voting rights, intellectual property and or any ownership claims. Essentially, any item that has value, can be owned, and fits into a broader asset market can be tokenised.

Asset tokenisation is set to transform a broad spectrum of asset classes. Its reach extends from private equity, venture funds, real estate, and debt in the private capital markets to exchange-traded funds, money market funds, and even intellectual property and fixed income. The potential market for tokenisation is vast, making it a significant prospect for the future of investment.

Tokenisation offers many benefits, such as:

• Increased liquidity: Tokenisation is revolutionising the way we handle illiquid assets, allowing for their fractionalisation, broadening investor access, and creating a liquid secondary market.

• Programmability: Smart contracts on the blockchain allow us to code certain rules and requirements into tokens that have to be met, allowing for increased security and compliance.

• Efficiency: By cutting out intermediaries and leveraging blockchain technology, tokenisation reduces transaction fees and speeds up settlements. Automation and shared infrastructure further reduce costs and time, optimising market exchanges.

• Transparency: Blockchain’s open source nature ensures all token transactions are recorded and verifiable, providing clear asset histories and ownership chains. While full openness isn’t always ideal, privacy technologies and private chains can be used to protect sensitive data when necessary.

• Defi investment products: As tokenised assets move seamlessly within a global decentralised network, it offers opportunities for lending, trading, and capital optimisation against existing assets on an unprecedented scale.

Tokenised products most relevant to funds

Tokenised Funds

In the 20th century, we witnessed the evolution to exchange traded funds (ETFs), and tokenisation is advancing this innovation to digital or blockchain-traded funds (BTFs), in which shares or units are digitally represented on a distributed ledger and can be traded with enhanced efficiency and transparency.

Due to the nature of tokenisation being programmable, funds wishing to maintain limited access to LPs are able to hardcode certain rules to comply with, such as fixed KYC/AML procedures for any buyers, minimum holding periods, governance, redistribution, and more.

Tokenising a fund offers increased incentives for LPs to invest such as increased efficiency, solving alignment issues, increased liquidity, global investment access, increased transparency, preferred return hurdles, access to further Defi instruments, and more.

An example of a tokenised fund is SPiCE VC, a blockchain-focused seed fund. SPiCE recently raised their second fund with $250M AUM, parts of this fundraise was tokenised for LPs.

Private Assets

Private assets, such as equity and bonds issued by private companies as well as tangible assets such as real estate, stand to benefit greatly from tokenisation. These assets are hindered by issues like illiquidity, outdated asset pricing, and a reliance on intermediaries for price discovery.

With private assets experiencing a growth rate more than double that of public assets in the last decade and only ~0.01% of private assets being currently tokenised [Bain], the opportunity for tokenisation is substantial.

A tokenised equity example includes Vidby, an AI startup specialising in video dubbing, successfully secured $10 million in seed funding by tokenising their shares on the Ethereum blockchain.

A tokenised debt example includes Sygnum Bank, which in collaboration with Float and Fasanara Capital, launched a private debt asset token, offering investors a lucrative 14% annual interest rate over 18 months on a portfolio of European SME loans. This tokenisation venture, fully compliant under Swiss law, democratises access to private debt.

Although public assets will also see advantages from tokenisation, it promises to be most transformative for private assets, due to their illiquid nature.

However, some publicly listed companies that have issued tokenised bonds include Siemens (€64 million), and Santander ($20 million).

Institutional Defi

Defi, or Decentralised Finance utilises decentralised applications (DApps) to provide financial services. These services include payments, lending, trading, investments, insurance, and asset management, all facilitated by automated code known as Defi protocols. Defi has seen rapid growth, with total value locked peaking at $160 billion in 2021.

DeFi innovations like liquidity pools and automated market makers (AMMs) are central to its growth, offering passive yield to investors. Liquidity pools in platforms like Aave and Compound connect participants for trading and lending, enhancing market liquidity. AMMs, used by Uniswap and Curve, automate trading and pricing without traditional market makers, streamlining crypto transactions.

In order for regulated funds to interact with Defi, a new field of institutional Defi must evolve, which integrates necessary AML/KYC protocols, privacy features, and regulatory guidelines to enable regulated fund participation.

Institutional DeFi will enable funds to access advanced financial services, maximising capital efficiency and returns. Ultimately, the most secure and compliant protocols will be positioned to win in this arena, although they are likely to be centralised solutions.

With the progression of institutional Defi, funds will gain the capability to borrow against and stake their tokenised assets, thereby enhancing their capital utilisation.

What does this mean for investors?

With 91% of institutional investors already interested or interested in tokenised assets [Celent survey, 2022], tokenisation will revolutionise the investment space for funds.

Funds must first develop a comprehensive internal perspective — often referred to as a “house view” — on how blockchain and Defi will reshape the investment landscape. This involves continuous market monitoring and scenario planning to predict various futures of tokenisation and its impact on operations and investment strategies.

Once a thesis has been developed, it allows for more informed organisational decision making, to then build an effective participation strategy.

Additionally, due to tokenisation still being early, funds must seek clarity in the legal, tax, and regulatory framework of tokenisation, engaging with policymakers to understand compliance requirements and mitigate risks. Jurisdictions such as Luxemburg, Singapore, Switzerland, the Cayman Islands, UK (the UK just launched a blueprint for fund tokenisation) and others are providing clearer and more friendly tokenisation environments.

Investors, especially funds, need to actively explore integrating tokenised assets into their portfolios to capitalise on opportunities like global market access, cost reductions, institutional Defi tools, and enhanced liquidity.

Failure to do so could mean losing significant advantages in a competitive landscape.

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