Marita McGinley, head of digital asset strategy at Schroders, explained that tokenisation, based on blockchain technology, could represent a "paradigm shift" for financial services.
A blockchain is a digital ledger, recording transactions between a peer-to-peer network on a decentralised database.
Through tokenisation, both underlying assets and their vehicle or wrapper could be 'tokenised', allowing them to be traded on-chain without the need for a centralised system.
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"These tokens represent ownership rights or value and can be transferred, traded, or utilized in various ways within the blockchain ecosystem," said Valérie Noël, head of trading at Syz Group.
Noël explained that through tokenisation of illiquid assets such as real estate or private equity, banks could enable fractional ownership and "the creation of secondary markets where these assets could be traded more easily".
Even with publicly traded stocks, investors could forgo buying whole shares, instead allowing investors to buy a fraction of a stock or bond, "making it more accessible to a broader range of investors", she argued.
McGinley also pointed to the potential high level of "automation and efficiency" that can be achieved, due to all parties operating "a common chain with shared, synchronised data".
Through self-executed smart contracts embedded in the tokens, the need for reconciliation can be removed, while dependencies on data providers or service agents would be reduced.
Noël agreed, citing the potential to streamline banking operations and reduce costs through automating processes related to asset transfer, settlement and record-keeping, which would eliminate the need for intermediaries and simplify complex transactions.
Adam Belding, chief technology officer at Calastone, said the firm regarded tokenisation as "a new way to think about investment management".
He explained that while some argued decentralised finance (or DeFi) could spell an end to traditional asset management, he believed investment management services will still be required.
"Most investors do not want to manage their own investments, either because they do not have the time, the expertise, or both," he explained.
Therefore, Belding viewed tokenisation not as "an existential threat, but rather an opportunity to rethink how collective investment is undertaken".
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"As asset managers sit in the middle of the investment value chain, curating underlying assets and constructing investment vehicles, they are uniquely placed to help drive, adopt and harness the benefits which tokenisation can deliver," added McGinley.
Belding said that currently fund managers can either be the ones creating new tokenised assets or using tokenised assets within their funds and strategies.
If tokenised assets were being included in a fund, then traditional rules will apply, for now, he said, and regulation was unlikely to change "if regulators do not see an erosion of safeguards"
"In terms of the creation of tokenised investment vehicles that fund managers can sell to their existing client base, there is an opportunity now, within existing regulation, to make this happen, and to begin exploring new opportunities and concepts," Belding concluded.
Challenges
However, Noël warned of the potential challenges for asset managers that come from tokenisation, chief among them being regulatory compliance.
"Banks need to ensure that tokenised assets and transactions adhere to existing financial regulations, including anti-money laundering and know-your-customer requirements," she said.
"Collaboration with regulators and proactive engagement in shaping regulatory frameworks are essential for banks to operate within the legal boundaries."
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McGinley also stressed the importance of regulation, arguing it is "critical" there is a convergence of international standards for ‘legacy assets' and tokenised assets, with an emphasis on flexibility "to future proof against continued technological innovation".
"Asset managers need to actively engage with regulators to help harmonise this convergence and maximise the potential benefits which can be unlocked through tokenisation," she said.
Belding emphasised the importance of managers focusing on how tokenisation can aid in improving investor outcomes within the current regulatory frameworks, "rather than thinking that a wholesale rewrite of regulation is required".
While he suggested all assets may one day be tokenised, he warned that there "many conceptual and actual barriers for this to happen".
"There are however immediate gains that can be achieved, which could also define a path to a radically different future," he added.
Technological risks also come with tokenisation, with cybersecurity threats, smart contract vulnerabilities and potential breaches in the blockchain infrastructure
"Banks must invest in robust security measures, conduct thorough due diligence on blockchain platforms, and implement comprehensive risk management frameworks to mitigate these risks effectively," Noël concluded.