A US Perspective: Continued Trends and Transformations

Trends that emerged at the start of the year continue to transform the international finance industry, evolving into a dynamic landscape of significant opportunities and challenges. These include increased interest in direct ownership and funds of one, the trend of digitised real assets, and the successful legal challenge to the US Securities and Exchange Commission’s (SEC) private fund adviser rules. It remains crucial amid these changes for jurisdictions to address current challenges and anticipate future issues to remain stable and adaptable. To do so, one needs to understand the developing trends of today and their implications for tomorrow.

This year has seen a notable increase in appetite for funds of one, driven by institutional investors, pension funds, and sovereign wealth funds. A fund of one is a custom investment structure created by a manager for a single investor, as opposed to investment in a commingled fund. This structure allows for increased customisation and is designed to meet the investor’s specific needs. As covered by Ropes and Gray earlier this year, challenging economic conditions have precipitated a preference for separately managed vehicles that provided more control than passive participation in less transparent pooled funds¹.

This shift is part of a larger trend we noted earlier this year, where sophisticated investors are moving away from pooled investment vehicles towards direct ownership and special purpose vehicles (SPVs). The preference for more precise allocations that mirror the flexibility of pooled vehicles but with greater control is the draw. While this trend is not yet universal, it highlights a growing desire for more direct control. As this need evolves, jurisdictions must adapt to support this demand.

A second trend gaining traction is digitalisation, with a significant number of US managers currently planning to offer tokenised products. According to a Calastone survey, 67% of US managers expect to have tokenised offerings within the next 12 months². Additionally, confidence in the sector is growing, being partly driven by reputable traditional financial firms entering the space such as BlackRock launching its first tokenised fund, BUIDL.

As additional products emerge, it will be interesting to observe who participates in these offerings. A white paper by IFI Global, published in partnership with Jersey Finance, indicates that family offices and high-net-worth investors are most likely to be interested in tokenised options, especially in illiquid alternative asset classes. Such access to institutional-grade products could have a democratising effect on the space.

Despite gaining interest, some remain cautious about entering the tokenised asset space due to uncertainty in the regulatory environment. To remain at the forefront, jurisdictions must adapt and offer the necessary infrastructure to support this digital transformation effectively, balancing innovation with investor protection. This forward-thinking approach to regulatory change allows jurisdictions to provide a stable environment that anticipates future needs and ensures predictability and stability for clients.

As a testament to Jersey’s commitment to offering innovative solutions, it has collaborated with the Jersey Financial Services Commission (JFSC) to develop guidance around real-world asset/virtual asset applications. The guidance, split into two parts—‘Tokenisation of Real-World Assets (RWA)’ and ‘Initial Coin/Token Offering (IC/TO)’—recognises the benefits of tokenisation, clarifies the JFSC’s principal approach to its application, and establishes a framework that addresses the distinct nature and use of these assets.

This regulatory framework underscores Jersey’s expertise in tokenisation and its maturity as a virtual asset jurisdiction. As one of the early movers in this space, Jersey quickly recognised the potential benefits and growing demand. Now, Jersey is enhancing its competitiveness as an international financial centre and supporting the industry by providing clear regulatory expectations around this technology. From a legal and regulatory standpoint, tokenisation is effectively considered a form of securitisation in Jersey. Decades of experience in securitisation, along with a specialised regulatory approach to such vehicles, informed this decision. The frameworks that have historically provided stability for securities are now available to issuers and investors involved in tokenisation. Uniquely in Jersey, approval from the JFSC is required and explicitly granted before the issuance of tokens, ensuring compliance with regulatory standards.

Finally, SEC’s new rules that promised significant ramifications for the private funds space at the start of the year has been overturned. When 2024 began, there were many questions about the long-term outcome of the SEC’s private fund advisor rules, first implemented in August 2023, which mandated, among other things, detailed quarterly performance, expense reports and limited preferential terms for investors. Since then, the litigants (six trade associations) successfully challenged the rules in the Fifth Circuit Court of Appeals. The court ruled that the SEC overstepped its authority and did not establish a rational connection between the rules and their intended purpose. Ironically, the discussions surrounding the rules prompted advisers to examine and improve their operations and investor communications to align more closely with evolving SEC and investor expectations, while avoiding the additional (and not insignificant) compliance burden. Regardless, this decision highlights the often-unpredictable nature of regulation and more broadly underscores the need for jurisdictions that can avoid this type of expensive volatility by bringing government, the regulator and industry together to solve these issues in a forward looking and predictable fashion.

The second half of the year promises to be as eventful as the first. While investors and managers may have to contend with some uncertainty and volatility in markets, the same should not be said about the jurisdictions with which they partner. Ever more apparent is the need for jurisdictions to be proactive rather than reactive, staying ahead of potential complexities by playing an active role in the evolving trends affecting the financial industry today.

¹ ‘Fund of One: Recent Trends in Separately Managed Accounts’, Insights: Ropes & Gray LLP (March 2024)

² ‘Getting to Grips with Tokenisation’, Calastone (accessed July 2024).