Following Jersey Finance’s recent ‘Funds Focus’ event in London focusing on the impact of tokenisation on private fund distribution, Elliot Refson, Head of Funds at Jersey Finance, reflects on how investors are playing such a significant role in the evolution of tokenisation and why education and collaboration are key to realising the benefits it offers.

It’s an understatement to say that the growth of tokenised assets has been rapid over recent years.

In 2021, the sector stood at around US$1.9bn, growing to US$2.8bn in 2023 and US$3.45in 2024 so far. Aggregated, assets currently stand at around US$13bn with the expectation that the sector will rise into the trillions (USD) by 2030.

It’s an impressive rise, but there are mitigating circumstances for this – and the rise of tokenisation is actually a natural evolution within the investment space. We have seen shifts before – from greater access to stock markets and unit trusts to, more recently, exchange traded funds and passive investments. Each era has heralded new economic trends and investor behaviour.

Tracing the impact of investor behaviour is particularly important within the context of tokenisation, because that investor dynamic is a key force in driving forward evolution in this space.

In Jersey, for instance, over the past five years we’ve seen a marked increase in single and pooled funds, a sustained rise in the use of Jersey Private Funds (JPFs) for limited numbers of sophisticated investors and more limited partnerships registered in the first three quarters of 2024 than we did over the whole of 2023.

This points to a pertinent industry truth that investors want more control over their capital and investments. Control is also something that tokenisation plays incredibly well to, giving investors access to more diverse investment opportunities and managing them directly and easily.

This is a space where – as was noted at Funds Focus – evolution is being driven by a new generation of investor decision maker; a generation who are digital natives and who are not only comfortable with virtual systems, but are in fact demanding them. The concept of owning ‘content’ through streaming and music subscription services is now being applied to the investment world and the investment funds world needs to keep up.

A survey by EY-Parthenon in 2023, for instance, found that more than a third of institutional investors in the US and almost two-thirds of high-net-worth investors plan to invest in tokenised assets by the end of 2024.

Tokenisation is no longer a niche area – it is mainstream, with large financial houses now actively exploring and launching tokenised solutions to clients, alternative fund managers increasingly introducing tokenised offerings to their platforms and service providers and law firms establishing digital fund groups, virtual asset solutions and real-world asset committees.

Collaboration and Education

So, can we expect that pace of change to be sustained in the coming years?

The feeling, echoed at Funds Focus, was that after a period of considerable evolution, the pace of change may relax a little in the coming years. A number of challenges are expected to impact the sector in the short to medium term – but the longer-term potential remains huge.

Trust and confidence are one such challenge, as a number of crypto-related regulatory issues and a rise in market volatility have been witnessed in recent years. If the sector is to embrace a new paradigm, trust is crucial and the industry needs to work hard to establish that trust across all steps of the supply chain.

Education and creating forums for sensible constructive conversation is significantly important if we are to maintain momentum as an industry, because to make this work it requires full participation and deep understanding at all stages.

Which segues into a second key issue – infrastructure and cross-border certainty. Creating an ecosystem that works is vital, to ensure the smooth establishment, management, banking and ongoing servicing of tokenised solutions. IFCs that can provide regulatory clarity will be leaders in this space, but it will also require multilateral collaboration. There is little point in one IFC creating a fully functioning tokenisation environment if it does not integrate seamlessly with regulatory regimes in other locations.

This dovetails with the third issue – how to distribute tokenised products. Jersey, for instance, has the ecosystem to create a highly workable tokenisation vehicle. But distributing and marketing that product effectively to an international investor audience is a little tricker and will be an area of focus for the industry in the upcoming months.

Again, it will take a certain amount of multi-stakeholder cooperation involving regulators and other market participants to make that work.

For its part, Jersey is committed to helping to resolve these challenges around trust and regulatory certainty. New guidance published this year by the Jersey Financial Services Commission, for instance, made it clear that digital assets will be treated in Jersey as a securitisation vehicle, not as a fund. That’s significant because it means a tokenisation solution can be marketed into Europe, out of scope of the AIFMD. In addition, it means a tokenised product can receive proactive confirmation of its validity from the JFSC – a degree of certainty that is not available elsewhere, where there is a reliance on legal opinion.

Steps like this can help address the challenges and answer the call of market trends – but it will take a wider and collaborative effort.

Looking Forward

Despite these challenges, the expectation shared by speakers at Funds Focus remains that tokenisation will continue to become more mainstream, driven by the relentless driving force of investors, both institutional and private, demanding increasingly greater levels of control.

In the years ahead we are likely to see a coming together of the worlds of tokenisation and traditional finance. As a result, we will continue to see asset managers looking to bring traditional investment products ‘on chain’ in order to offer investors exposure to new opportunities.

That said, if the industry as a whole can collaborate and focus on educating stakeholders effectively, we will also see growth in ‘native’ products and greater participation across the alternative fund space, including private equity and real estate.

That’s where the real cost efficiencies, accessibility and transformational associated benefits of tokenisation will be seen.