Today the UK’s Investment Association (IA) called for the British government and regulator, the FCA, to create a framework for tokenized funds to operate in the UK. And it requests the creation of a decentralized finance (DeFi) task force to explore the policy implications for the sector. The trade body’s members manage £9.4 trillion of assets. Today it published a report exploring a broad role for blockchain and DeFi within the asset management sector.
“With the ever-quickening pace of technological change, the investment management industry, regulator and policy makers must work together to drive forward innovation without delay,” said Chris Cummings, CEO of the Investment Association.
A spectrum of potential innovations for Funds 3.0 is considered. At its most basic, it is business as usual with blockchain and tokenization creating efficiencies and some opportunities. A more advanced level of innovation broadens the potential asset classes to include private companies, infrastructure and native digital assets such as cryptocurrencies.
The IA also outlines a third ‘transformative change’. This involves extreme fund customization based on the individual’s risk appetite and would include native digital assets.
Almost 18 months ago, Calastone – the Carlyle-backed fund distribution firm – outlined a similar vision to Ledger Insights. For years personal investment site eToro has enabled users to ‘follow’ amateur fund managers. While the IA’s report doesn’t mention eToro, it highlights trends such as Meme stock investors, identity investing based on fandom with Tesla as a good example, alternative investing in cryptocurrencies, and more.
So what are the benefits of distributed ledger technology (DLT) for the funds sector? A key one is creating a shared record of transactions and fund ownership. This removes the costly reconciliations between asset managers, fund accountants, transfer agents, custodians, intermediaries and more. If desired, DLT can enable instant settlement, reducing counterparty risk. Don’t forget the automation potentially enabled through smart contracts.
Tokenization enables fractional ownership and potentially opens up markets that were previously only available to institutions or accredited investors if regulations allow. In theory, tokens enable greater liquidity because of the availability of secondary markets.
And then there’s the opportunity to have hyper-personalized funds. And potentially even use fund investments as DeFi collateral – something not mentioned by the IA.
Blockchain activity in the funds sector
There’s already a significant amount of blockchain activity in the funds space. In the UK alone, there’s Calastone, arguably the first mover. UK startup FundAdminChain was recently acquired by major global fund administrator Apex. It plans to launch a regulated marketplace for digital funds.
Another UK trade body, TISA, created a fund data solution, TURN, which initially used blockchain to share fund cost data with investors.
Beyond the UK, in Europe there’s Allfunds Blockchain and FundsDLT. In the U.S., iCapital has signed up Blackrock, BNY Mellon and State Street for its alternative investments blockchain consortium. And LaSalle Investment Management has partnered with RealBlocks.
In other news, the UK is already planning a DLT Sandbox for Financial Market Infrastructures. But that’s more for exchanges and trading venues than the funds sector.