IDR and Carey Olsen recently hosted a webinar on tokenisation’s potential to unlock retail capital for private markets. The panel was moderated by Tim Andrews, CEO of IDR and featured guests Matt Brehaut, Partner at Carey Olsen, Tom Carey, Partner at Carey Olsen and Jason Green, CTO at IDR. They covered what tokenisation is, its potential to support the democratisation of private funds, how it’s in use today and why it’s likely to achieve unstoppable momentum during the next 5 years.
Here we cover the highlights of the discussion. You can also watch the full recording here.
Behind the buzzwords – tokenisation and blockchain
The discussion commenced with demystifying tokenisation, defining it as the representation of real-world assets (RWAs) through code on the blockchain. Matt clarified that it’s a shift in how ownership is recorded, not the creation of new assets. Tokenisation enables the inclusion of real-world features via smart contracts, automating operational tasks associated with financial securities.
Jason went on to shed light on what blockchain technology is and how it works, describing it as a secure and transparent digital ledger that records transactions or activities across a network of computers, also referred to as ‘nodes’. Once entered onto the blockchain, records or transactions can’t be changed meaning that all participants can trust the information is accurate. All of which means that when RWAs are brought on the chain as tokens, the purchase, sale and exchange of these assets becomes significantly quicker.
Tokenisation of funds: not a distant future but a present reality…
Tim pointed out that whilst this might sound esoteric, it’s being actively used today, as highlighted by a recent report on fund tokenisation by the UK’s Asset Management Taskforce Technology Working Group which states that tokenisation is “not a distant future, but a present reality”.
Tom cited real-world examples of tokenised funds launched by prominent fund managers including Blackrock Hamilton Lane and Partners Group. Carey Olsen is involved in a project to tokenise real assets on a PCC platform and is aware that there is a Guernsey business which will be tokenising gold. The discussion highlighted the potential for tokenisation to disintermediate private banks, enabling individuals to step into assets they wouldn’t otherwise have access to, like private markets funds. Tim noted how this could open a wider range of investment opportunities to “ordinary people” enabling them to generate higher returns from their pensions.
How tokenisation solves problems associated with private markets access
Acknowledging the cottage industry nature of private markets, the panel discussed how tokenisation could align private and public markets investment experiences.
The ability to fractionalise assets will make smaller and smaller investment sizes more feasible as the costs associated with transacting falls. Increasing liquidity and reducing minimum entry sizes to the asset class can then pave the way for a more public markets-like experience with bulletin boards and exchanges.
The panel also touched on how, through tokenising AML credentials (as IDR already does), the overheads and friction associated with traditionally time-consuming and repetitive fund subscription and KYC processes are significantly reduced. Tying these together with tokenised funds will help to create a seamless end-to-end investment process.
The tokenised investor experience
Jason picked up on tokenisation’s potential to deliver easier access for investors to the class via an online marketplace similar to the likes of Robin Hood or Amazon. Investors could come to an exchange that offers private markets tokens, from there they would create an account completing the onboarding process, and once complete they would be able to select those funds they were eligible to purchase and simply hit a “buy button”.
Towards common standards
Tom said that we’re likely to see more commoditisation in retail sphere, noting that what’s bespoke often becomes commoditised over a number of years. Matt concurred saying that as more retail investors come in, they will have lower negotiating powers, leading to more standardisation across the asset class, and this increased standardisation in turn will drive wider access.
Perception and regulation
Having discussed the opportunity, the panel turned to challenges to adoption, with reputation and the technology’s association with crypto being front of mind in light of recent scandals in the digital assets space including the collapse of FTX and Binance’s significant AML Failures. Tom explained that these examples demonstrate why assets and markets require regulation but went on to point out that where tokens represent Real World Assets, they follow established regulations that are already in place. He highlighted Guernsey as an example of a jurisdiction where everything exists from a regulatory perspective to support tokenisation and digital assets, for instance the jurisdiction’s Electronic Transactions Law recognises the legal validity of smart contracts, whilst its Companies Law allows for electronic keeping of registers.
The Path Ahead: Transforming Private Markets
Looking ahead, the panel envisioned private markets evolving to mirror public markets, driven by the evolution of common standards and consolidation around centralised marketplaces. Tim emphasised the inevitability of this transformation, given the size of the prize associated with unlocking retail capital, foreseeing tokenisation and blockchain as pivotal tools. Matt echoed this sentiment, predicting that we’re likely to see exponential growth and unstoppable momentum within five years. With regulators’ support and increased collaboration between traditional finance and decentralised finance, tokenised feeder vehicles, bulletin boards, and trading venues are expected to emerge, with funds conceivably existing entirely on-chain in 5-10 years.
