What is the appeal of crypto assets for asset management?


What are the key benefits blockchain could bring through tokenized securities?

Let’s first clarify that, when talking about Crypto Assets, we will not consider so-called currency tokens or utility tokens but rather focus on “investment” or “security tokens”, i.e. instruments that should be understood as being comparable and subject to the same regulatory framework as securities (loans/debt, equity, funds, etc.) in the traditional world, and we will look at the appeal of issuing such instruments on a blockchain infrastructure for asset managers.

Issuing securities on a blockchain infrastructure can bring a number of benefits to asset managers and their investors. This could potentially be true for issuers of any type of financial instruments, but more specifically for those involved in the issuance and management of private equity funds, venture capital funds or real estate funds for instance, i.e. instruments that are currently generally not issued on large existing market infrastructures like CSDs or ICSDs, which generally require some flexibility in terms of the technical features they offer, which generally still suffer from many manual interventions in their handling process and which, most of the time, are not or are barely transferable between investors after their initial issuance (no transferability, and hence no liquidity post-issuance).

The key benefits blockchain could then bring through tokenised securities would mainly be the following:

Global Reach: blockchain is a global infrastructure, technically reachable from anywhere in the world, which means that by issuing securities on the blockchain, issuers can potentially make them available to any investor, and these could have their positions registered on one single, global, market infrastructure. This is very different from the traditional way of holding cross-border securities, which would typically involve a chain of local and global custodians in addition to issuer and investor CSDs (or investment funds, a main register and one or more local registers). Of course, this “technical” global reach, which brings a number of operational and cost benefits, does not mean “regulatory” global reach, and the issuer still needs to make sure the instrument he or she issues complies with the regulations of the country of issuance and the countries targeted for distribution;

Resilience: by definition of its distributed ledger nature, the blockchain is more resilient than most existing market infrastructures, most of them constituting single points of failure, and it is achieving this at a much lower cost in comparison. The blockchain is also operating on a 24/7 basis, which is not the case of traditional markets;

Speed: by its nature, blockchain allows the time between trading and settlement to be dramatically reduced, if not eliminated, as the trade is the settlement instruction, it also reduces the risks of mishandling and errors in transactions;

Transparency: as, on a blockchain infrastructure, all positions can be held on one single global ledger, it potentially allows for full transparency for the Issuer, its agent(s), the regulators, etc. For some types of instruments characterised today by multiple layers of custody/distribution, it will clearly allow Issuers/Asset managers to reconnect with their investors;

Operational Efficiency: as all positions are held on one single global ledger, Blockchain very much reduces or even virtually eliminates the need for successive layers of reconciliations (as well as investigations and possibly remediation of breaches) frequently seen in traditional custody chains. This direct access of issuers to their investors also offers positive prospects in terms of making voting and proxy voting processes more efficient.

Many of those benefits are obviously directly derived from the global nature of the blockchain and linked to the fact that positions can be maintained on such infrastructure at a (as much as possible) granular level. The technology offers the possibility of operating in such a way, but all stakeholders will need to “play the game” and leverage on such capability rather than replicating the traditional custody (or distribution) chain using multiple layers of omnibus accounts.

Obviously, in order to reap all the benefits that blockchain technology can offer, regulations, which are in general still very “local”, will have to evolve in order to cater for a global infrastructure that could not even be imagined when most of them were set up. Things have started to move in a number of countries in that respect, but most projects have been fostered at local level whereas supranational initiatives remain marginal.

In both cases (industry stakeholders adoption and regulation) asset managers – securities issuers in general – have a role to play, first by educating themselves and their counterparts as to what the blockchain is and what it could bring to them and their investors, and then advocating for its adoption with their regulatory and business counterparts.