JP Morgan and Apollo Global partnered on a blockchain proof of concept (PoC), as part of the Monetary Authority of Singapore’s (MAS) Project Guardian tokenization trials. By tokenizing funds, including alternatives, its possible to automate and personalize the discretionary portfolios of wealthy clients, a $5.5 trillion space.
Additionally, the PoC tested interoperability, linking JP Morgan’s Onyx Digital Asset platform in a private environment to permissioned layers of public blockchains. These included the Cosmos based Provenance Blockchain and an Ethereum compatible subnet on the Avalanche blockchain.
To date much of the emphasis in fund tokenization has been on the ability to expand the client base, improving liquidity. This PoC covers that because tokenization enables alternative assets to be included in portfolios more easily alongside publicly traded assets. JP Morgan and Apollo estimate this could be a $400 billion revenue opportunity for alternative fund managers (such as Apollo) as well as distributors.
Today wealth managers typically offer a limited list of approved alternative funds on an advisory basis. However, the client has to complete the paperwork and make payment themselves. Hence, tokenization can enable better distribution of alternative funds via wealth managers.
But there’s another equally, if not more important, potential for blockchain. Asset managers can use blockchain to automate and transform asset management, by tokenizing the assets in a portfolio. This will not only enables efficiencies but also the potential for personalization. Until now, it’s mainly fund distributor Calastone, owned by Carlyle, that has been pushing this vision for years. Another Project Guardian initiative with Schroders and Calastone also explores this.
Key tokenization findings
For a wealth manager with 100,000 portfolios, monthly rebalancing typically involves 3,000 steps. With the JP Morgan Crescendo prototype, that becomes a few clicks.
One of the more surprising findings was the benefit of real time settlement. JP Morgan estimates that typically 3% of portfolios are held in cash, losing a potential 8% return over cash. That percentage could be reduced to zero with real time settlement, yielding a benefit of 24 basis points. However, zero cash assumes all assets are perfectly liquid. Anyway, the 0.24% represents 20% of costs.
And there’s the $400 billion revenue opportunity if alternative funds are distributed more efficiently.
How the fund tokenization PoC worked
For the PoC, Onyx developed a portfolio management prototype, Crescendo, to automate a significant amount of the portfolio management. Wealth managers generally have model portfolios for wealthy clients. Some clients might be more interested in capital appreciation versus income. Others want a greater emphasis on ESG. One might think of a model portfolio as a template.
To start with, there’s a portfolio manager with some discretionary portfolios. Each portfolio is linked to a model portfolio. And these sit on the Onyx Digital Assets ledger alongside the client’s tokenized cash balance.
Alternative asset managers JP Morgan Private Bank, Apollo and WisdomTree tokenized their funds on three blockchains: Onyx Digital Assets (private, Ethereum-based), Provenance blockchain (public, permissioned zone, Cosmos-based) and a permissioned Avalanche subnet (Ethereum-compatible).
Axelar was used for interoperability between the Provenance blockchain and Onyx. And LayerZero was used to connect Avalanche with the Onyx ledger. As an aside, Biconomy’s account abstraction was used on Avalanche so that an asset manager doesn’t need to use crypto to pay for gas fees.
Next up was to make changes in a model, replacing one fund asset with another. The smart contracts automatically redeemed fund assets and subscribed to others, despite the funds living on separate blockchains. Likewise the discretionary portfolios were automatically updated when a client added more capital.
A couple of existing relationships underpinned this PoC. Christine Moy was formerly with Onyx by JP Morgan and is now Strategy partner at Apollo responsible for Digital Asset. And Apollo has a relationship with Figure Technologies to explore fund tokenization. Figure is the founder of the Provenance blockchain. Apollo and JP Morgan published a report on that PoC.