Schroders, the $965 billion global asset manager, which has been looking into how to use blockchain for unit trusts, has joined a Singaporean initiative on blockchain interoperability.
Project Guardian is a project led by Monetary Authority of Singapore and Bank of International Settlements to ensure advances in the use of blockchain-based finance develop standards for the industry, and avoid fragmenting capital markets and liquidity.
Schroders and Calastone, a UK-based vendor for fund distribution and administration, have been working for about a year on ‘tokenized investment vehicles’, or TIVs, to extend tokenization to collective investment schemes.
“We’ve joined Project Guardian in order to help build out the digital-asset ecosystem at an industry level,” said Singapore-based Marita McGinley, the asset manager’s head of digital assets strategy.
Calastone’s chief technology officer, Adam Belding, said, “We focus the technology where it improves the industry within the same business rules and same regulations.”
Conceptually, TIVs are collective investment schemes – unit trusts, mutual funds – on blockchain. TIVs have two advantages versus traditional schemes, the partners say.
First, distributed-ledger technology gets rid of a lot of reconciliation and ensures all parties involved – wealth managers selling funds, the asset manager, brokers, custodians, transfer agents or other administrators – sync data. This would compress time, reduce errors, and ultimately enable fund managers to pass cost savings to investors.
Second, looking ahead, Schroders wants its fund vehicles to be flexible, to accommodate future investor preferences. “Services are becoming digital and personalized, and that includes investments,” McGinley said.
Today, large institutional clients can dictate the asset allocations and portfolios they want. Retail investors cannot: they have the power to choose investment products from the market but fund houses don’t customize products for them. TIVs in theory can enable this.
What’s a TIV?
But Schroders and Calastone were not ready to discuss specific structures, as they are still working out how to ensure these adhere to regulatory, tax and other considerations.
For example, DigFin asked what a ‘personalized’ TIV would look like. Would the individual assets (say stocks or bonds) be represented as non-fungible tokens, and then package together as a security represented by a ‘Schroders fund token’? Or is it a single fungible token that can be packaged into a larger ‘token of tokens’? (McGinley says a fungible token is a likely starting point.)
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Then there are questions of integrating TIVs into the existing business. How do these get sold, marketed, accounted? Is there a custodian cutting a daily NAV, or does a smart contract do that?
“We’re making sure this is backwards-compatible,” McGinley said, so tokenization activities integrate with the firm’s internal systems as well as those of institutions that sell or service funds, including banks, insurers and financial advisors.
Integrating it into the firm’s own systems is probably the easier part. “Forward integration is still evolving,” she said, referring to building out the broader ecosystem for tokenized securities.
Who wants TIVs?
What is likely, however, is that the first TIVs would be built on permissioned, private blockchains. This is where Calastone comes in: the vendor is already serving thousands of distributors such as banks plus asset managers, enabling them to automate the admin around retail buying and selling. It has been working on how to upload this work to DLT and smart contracts for several years.
Calastone would have enough reach to make for a viable market, if it can convince enough players along the value chain to participate. Getting a large manufacturer such as Schroders to endorse the project is part of that process. This also allows Schroders to position itself as building TIVs for the industry, rather than making this a proprietary platform that other asset managers would be reluctant to join.
Progress from here will be incremental, however. Given the lack of regulatory signoffs, the parties agree that TIVs should resemble collective investment pools, but they won’t state that a token would be the equivalent of units in a fund.
“Interpretations of ‘token’ and ‘unit’ are still being worked out,” McGinley said.
And they are a long way from the notion of a secondary market to trade TIVs. This is a tantalizing prospect, of course. Bonds were once illiquid and in the 1980s became tradable instruments (an innovation led by Pimco’s Bill Gross). Today mutual funds aren’t securitized instruments, but tokenized versions could be, hinting at a whole new level of market activity. But at present, this is a step too far.
No Big Bang
“The TIV is a master book and record, a list of the assets and who owns them,” Belding said. “We can use these to integrate different asset classes. Maybe one day these can be tokenized, but we’re not leaping to the end state until we build out the infrastructure.”
McGinley added, “There’s not going to be a Big Bang.”
The gradualism is not about the technology. The partners say the tech can handle all of the big ideas. But it’s getting counterparties, regulators, tax collectors and investors on board in ways that are market-wide and inclusive. It’s about assuring service providers that they still have a role to play, even if the traditional work around maintaining ledgers is automated away.
And it’s about having tokenized assets in the marketplace that can be collected into a TIV. There’s no sense in rushing a TIV to market when there’s nothing to put in it. Given that most tokenization experiments underway are limited to fixed-income and private markets, how are TIVs meant to include equities? Is a TIV viable without tokenized equities, or will it have to include equity-like crypto to compete?
These are thorny questions, some of which are out of the hands of asset managers. At some point, however, speed is going to matter.
Anything blockchain is justifiably criticized for being a technological solution in search of a problem. McGinley and Belding say TIV hits on real-world problems for the active-management industry, which is desperate to slash costs and stay relevant to investors.
Meanwhile wealthtech companies are finding other ways to agglomerate mutual funds into low-cost solutions for investors. This is eating away at distributors more than manufacturers, but as artificial intelligence improves and personalization becomes of greater importance, it’s possible that other fintech models could deliver a more compelling proposition.
Whether it’s blockchain finance or robo-advisors, there is no clear path for asset managers. Technology is going to underpin whatever strategies the industry embraces to salvage margins and relevance in the face of low-fee passive funds and fee compression. But tech isn’t a silver bullet: Schroders took a minority stake in Singapore robo-advisor WeInvest, but it sold that position in May.