One of the challenges to tokenizing real-world assets is establishing a marketplace. It’s one thing to put an asset onchain, but something else to develop the market makers, brokers and investors that bring liquidity to those tokens.
But what if the tokenization bit comes as part of an existing distribution process and network? Tokenize the connections between manufacturers (the asset managers) and their distribution channels (banks, private banks, financial advisors). Nothing much happens to the underlying funds, but they are now abstracted so they can move, clear and settle via a blockchain.
That’s what UK-based fund administration vendor Calastone wants to do. Its bread and butter is providing a network through which distributors of investment funds can automate the messaging around their customers’ buying and selling units of the funds they offer.
This network involves not just wealth managers but the fund administrators, transfer agents (keepers of registries) and custodians that handle, account, and safekeep funds and their underlying assets. It’s a complex and messy industry where many orders are still filled by fax message or email.
Vendor in the middle
Calastone, as with competitors such as Allfunds, provides a single language, as it were, to communicate purchases and redemptions among all the relevant players.
Calastone says it processes 15 million such messages every month, primarily among funds domiciled in the UK, as well as in Luxembourg and Ireland (as UCITs funds, which can be easily distributed across the European Union and which are also popular in East Asia).
The vendor has built this infrastructure to serve mutual funds, which worldwide is a $59 trillion industry. It also supports exchange-traded funds (globally, $13 trillion), which are popular in the US and becoming more so in Asia and Europe.
The new frontier for collective investment schemes are digital assets, and Calastone intends to use its tokenization platform to serve both traditional products as well as be able to serve blockchain-native assets, says Justin Christopher, the vendor’s managing director for Asia, based in Singapore.
Digital asset dare
Today, the real-world asset space is around $4 billion, of which $221 billion is stablecoins. A mere $3 billion goes to tokenized US money-market funds or Treasury bills. The rest is mostly illiquid private credit (usually MMFs or T-bills with a lot of financial engineering to juice yields).
Almost nothing, in other words, that fits the definition of a retail-accessible collective investment scheme. And nothing that represents a traditional asset manager creating a crypto-native product: right now they are still just creating synthetic versions of existing, traditional products that can trade on blockchain.
But that’s today, and Calastone is betting that traditional asset managers will gradually launch more tokenized versions of mutual funds and ETFs, or create crypto-native products.
This bet is based on the shift of worldwide household wealth to young generations. Tom Asprey, Singapore-based commercial officer at Calastone, notes the Baby Boomers will gradually bequeath $68 trillion of assets to younger generations, a growing number of whom will be comfortable with crypto.
He asserts that crypto rails can cut the costs of fund transfer and settlement. Tokenized funds can also be used as collateral within the crypto world, for example, across DeFi networks.
New network
The way the vendor’s new service works is that an asset manager uploads its funds to the Calastone Tokenized Distribution network, using Calastone’s smart contracts, which allow the funds to connect to distributors also on the network. Users can select which blockchain to use (eg, Ethereum, or layer-2s like Polygon and the bank consortium project, Canton).
Users also authorize which counterparties can access fund tokens, and view transactions and who owns what in the fund. The service comes with an order-management system so asset managers can track how their products transact onchain.
This connectivity amounts to writing distribution agreements on chain, for specified accounts (hashes). Calastone confirms and validates a distributor’s accepting a given fund, at which point it enables orders to flow across the network.
Although it is using decentralized ledger technology, Calastone still acts as a central recordkeeper for these tokenized funds, including who is using them for collateral purposes – analogous to a real-time securities-lending program, but one administrated by Calastone rather than by any custodian bank.
Christopher also hopes the use of smart contracts will streamline processes and enable real-time confirmations and settlement, where today funds distribution remains operationally messy, particularly in Asia, where there is more regulatory variety. Overcoming these traditional hurdles should draw more liquidity into the tokenized funds world.
He also expects this to yield a trove of new analytics, giving Calastone better visibility of fund themes and trends, that it can share (or sell to) its clients.
Yes, but
Are distributors and fund administrators ready for such a solution? Is it relevant?
Today administrators and transfer agents struggle with integrating digital experiences with their legacy tech platforms. In Asia, they are still busy trying to streamline distribution and settlement of ETFs.
Digital assets is not a current reality, although these will likely come. The challenge is that all of these products – mutual funds, ETFs, hedge funds or other alternative assets, and now tokenized synthetics of funds all require their own tech treatment and operational procedures. Adding crypto-native tokens will probably just add yet another layer.
So it’s not clear that a Calastone tokenization service will address this.
Another challenge is making tokenized products attractive to end investors. Banks now experimenting with their own tokenization platforms recognize the operational benefits and cost savings of doing things onchain. That’s not the same thing as attracting a lot of liquidity from investors who might be more interested in returns. (Indeed, DigFin has written a lot on this mismatch of expectations.)
Moreover, Calastone can address technical issues but there remain legal realities. For example, a crypto-native asset can easily combine distribution settlement with title transfer, merging the sales with the transfer-agency function. But the legal requirements can be distinct, and what works in Luxembourg may not in Taipei.
Time and cost to integrate to the vendor’s new platform is another consideration. Calastone is trying to make it sound seamless, with no need for new teams or systems. If that claim holds true, then this removes a major barrier to industry adoption, but if there are devils in the details, then banks and other players will struggle to justify the cost.
Calastone can also only move as fast as the overall market. For example, trading assets on blockchain will become easier once banks are comfortable with exchanging fiat currency for crypto. Regulation of stablecoins may advance this. Until it happens, though, the lack of a digital cash leg will be another barrier.
The good news is that many of these challenges look to be in flux. Moreover, as new services become available, it is likely to drive new waves of product innovation that will grow the pie for everyone. What’s most interesting about Calastone’s new product is that it helps industry players move beyond the thorny issue of creating liquidity and secondary markets. Those things are still important, but once the processing bit of distribution goes online, so too may other necessary parts of a liquid market for tokenized assets.
