Today Libre unveiled plans to launch its web3 fund tokenization protocol this quarter with Brevan Howard and Hamilton Lane as the first asset manager partners. Libre is a joint venture between Alan Howard-backed WebN and Nomura’s digital asset subsidiary Laser Digital.
The institutional protocol will launch on a permissioned Polygon sidechain. Over time, as institutions become more comfortable with public blockchains, assets can be bridged onto the Polygon main net and other Ethereum-compatible permissionless blockchains.
Looking five to ten years into the future, founding CEO Avtar Sehra, who also founded Nivaura, believes in a multi-chain future where most activity will happen on public blockchains. However, there will still be permissioned infrastructure for certain functionality.
Tokenized alternative investments
Meanwhile, alternative investments are an attractive sector for fund tokenization because currently investors are mainly institutional or ultra high net worth individuals. Fractionalization doesn’t suddenly enable consumers to invest in alternatives but lowers the minimum investment amount. The efficiencies delivered through tokenization and automated smart contracts open access to a larger pool of wealthy accredited investors. Bain & Co and Onyx by JP Morgan recently predicted that tokenized alternatives will be a $400 billion annual revenue opportunity.
In an article published today by Laser Digital’s Olivier Dang, he outlines the broader tokenization opportunity, estimating revenues of $1 trillion by 2030.
A fund tokenization protocol, not a platform
Libre CEO Sehra positions Libre as a protocol rather than one of the many tokenization platforms. Like those tokenization solutions, Libre automates the workflows involved in issuing tokens. As a B2B protocol, it additionally enables the tokens to flow to wealth managers and their clients by automating the legal, regulatory and policy aspects. Hence, it will also support the distribution of tokens not originally issued on Libre.
Later this year Libre will add more functionality, including collateralized lending and automated rebalancing of separately managed accounts (SMAs).
“At Hamilton Lane, we believe that tokenisation has the potential to revolutionise the way investments are managed and traded, and are focused on strategically partnering with other leading firms to improve compliance and streamline access to the private markets through initiatives like Libre,” said Victor Jung, Head of Digital Assets at Hamilton Lane in a statement.
Libre’s go-to-market strategy
Compliance in the funds sectors is non trivial. Hence, it’s not viable for a compliant protocol to launch with the entire globe at its target. Rules for each jurisdiction have to be encoded.
Talking to Ledger Insights, CEO Avta Sehra described how the protocol works. “It’s not just about KYC and AML. It’s about saying, if I’ve got a fund based in Luxembourg for example, what can that fund do? What jurisdictions can that be distributed to? And what kind of investors can you distribute to? So all of these kinds of flags are recorded, essentially encoded into the asset.”
He continued, “And then on the other side, the distributors can onboard their investors and they can ask what kind of investor is this? And what kind of assets could they hold, etcetera? What jurisdictions could they (the assets) come from? And then ultimately what the protocol does, it connects the two sides from a compliance perspective.”
However, it’s not purely about compliance. The protocol also enables the flow of tokens – fund units or shares – from the issuer to the distributor and onwards to the investor.
On the issuance side, the first tokens will launch in Singapore (as shares in a Variable Capital Company), followed by Abu Dhabi and Luxembourg later in the year.
Ideally Libre wants to focus on the protocol. However, feeder funds will be launched in each jurisdiction in association with locally regulated entities to kickstart the process. While that might add cost, the regulated entities are taking on more of an oversight role because most of the operations are encoded in smart contracts.
Regarding the jurisdictions of investors, these will include the UK, Switzerland, Singapore, Belgium and the UAE. At launch, Libre will unveil two global wealth managers who will use the protocol to distribute tokenized funds to their clients.
When it comes to settlement, stablecoins may not always fit the bill for institutions. Initially, Libre will use a settlement token solution, which triggers an off chain payment. However, it plans to use deposit tokens, potentially Fnality’s recently launched solution and stablecoins.
A key takeaway from Sehra is that tokenizing assets is insufficient to bring liquidity. Reducing the cost of issuance is only one side of the equation. The other side is reducing the friction in distribution. That’s why Libre developed the protocol in conjunction with top asset managers and distributors, asking them how they can cut costs.
“These three things, the legal, the regulatory and the policy side, are where the costs are. And that’s got nothing to do with tokenization. And ultimately that’s what Libre is solving in the protocol.”