In the rapidly evolving landscape of finance and technology, there is one concept that has been making significant waves in recent times: tokenisation. Undoubtedly set to significantly impact the future of finance, the concept of tokenisation is likely to revolutionise the global investment funds space in particular and inform the structuring of real assets, not least of all in the private equity and real estate sectors.
As a process, tokenisation involves converting ownership rights to a particular asset into a digital token on a blockchain, with this digitisation of assets having the potential to reshape traditional financial systems, bringing about increased accessibility, efficiency, and liquidity.
Put simply, these tokens allow partial or fractional ownership, making it easier for investors to participate in markets, from properties and art works to company shares and commodities, that historically have been less accessible due to high costs and regulatory barriers.
But, while tokenisation presents significant opportunities, there are also a number of considerations for jurisdictions wishing to stay on the front foot. That is why Jersey Finance recently worked with IFI Global to explore the impact of tokenisation now and with an eye to a future that will almost certainly see tokenisation become central to the cross-border fund industry.
Challenges
Among the challenges identified in the ‘Tokenisation of Real Assets’ white paper were: industry disruption prompted by the emergence of new categories to define investors and asset classes; greater exposure to fraud; complexity around the recapitalisation of real asset funds; and domiciliation questions provoked by tokenised real asset funds which, by essence, are global in nature and unrestrained by borders.
In many ways it is this borderless quality that, while offering a truly global product, also prompts important questions around regulation and governance. How jurisdictions respond to such challenges is likely to be what separates the wheat from the chaff.
In this respect, however, Jersey is on firm footing; the Island’s joined-up approach between regulator, government and industry has already positioned it not only at the forefront of standard setting but also as an active participant in the evolution of the market.
Such an approach means there are already digitalised funds operating within Jersey’s regulatory regime which, going forward, should provide a solid basis from which to formulate a model that can also incorporate real assets.
When looking from a governance perspective, greater access to assets previously reserved only for professional investors is likely to raise vital questions in relation to rights and responsibilities.
It is this level of complexity that has meant tokenised real asset funds launched to date have required a nuanced approach with several law and administration firms forming specialist digitalised teams that understand the trajectory of the market.
Technology
Tokenisation utilises blockchain and related technologies. However, these are technologies in continual rapid development and industry can expect to see their tech spend increase accordingly.
Consequently, having a good understanding of how blockchain, and distributed ledger technology more broadly, works will become vital with fund directors and senior executives needing to expand their expertise.
There is also still a lot of work to be done in building blockchain scalability and developing global frameworks. Implementing all the necessary infrastructure is going to present the industry with some technological challenges that will likely require deep pockets to meet.
Future funds
Global consulting firm BCG and the digital exchange ADDX last year forecast that asset tokenisation will grow into a $16.1tn business by 2030 and, while there are a number of crucial questions needing to be answered, the direction of travel is clear.
Jurisdictions that do not evolve to answer these questions but also drive the industry forward will undoubtedly be left behind. And, while tokenisation may turn out to be the biggest disruptor the funds industry has seen, it may also offer the greatest opportunities – democratising real assets for investors and opening new opportunities for asset managers.
This article originally featured in Business Brief Magazine.
