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How asset tokenization changes the investment fund industry

Como a tokenização de ativos muda a indústria de fundos de investimento

How asset tokenization changes the investment fund industry

A major structural change in third-party asset management is approaching.

For those who follow the innovations that are occurring in the traditional financial market and its most recent trends, one that constantly appears, and one could even say there is a hype about it, is the tokenization of assets.

Numerous statements by the president of the Central Bank, Roberto Campos Neto, several projects within the sandboxes of the Central Bank and the Securities and Exchange Commission (CVM), as well as the numerous initiatives in the local and international market demonstrate this unequivocally.

For those who want to better understand what this is all about, I would suggest following what the Brazilian fintechs LIQI, BlockBR, Ntokens, Netspaces, and the international Solidblock are doing in this regard. On my youtube channel there is a playlist where you can find out more about these and many other fintechs.

Well, taking asset tokenization as a trend that has huge traction and is already happening, what does it change about third-party money management? I worked for more than 20 years as a fund manager in Brazil and have been investing, working and interacting with this blockchain/crypto environment for at least eight years and all I can say is that the changes ahead are huge.

The investment fund industry, ETFs included, is where a huge percentage of the world’s investments are and it is a very consolidated industry in terms of rules, regulation and format.

In every jurisdiction I know, the activity of third-party asset management is regulated and requires registration and consequent approval by the regulator. Some jurisdictions allow exceptions, limiting the number of clients and assets managed, but this is becoming increasingly rare. The rule is: if you manage third-party money, you have to be regulated.

And for this it is mandatory to have a third party KYC/AML responsible, to guarantee that the money coming in is suitable, an administrator, who will do the quota calculation and manage the fund’s liabilities (separate client investments, monthly statements, etc…), a custodian, who guarantees that the assets are safe and segregated from other entities, and an auditor. This is to name a more standard background. If we go to more complex funds like FIDC and real estate funds other agents are needed.

All this framework, and the external and internal costs that result from it, means that the minimum equity to have an operational fund is no less than US$10 million, an amount that goes against the movement of starting small and then growing with success.

Well, but what is the big change that tokenization brings us?

To explain further I will put here the case of a crypto initiative in the field of asset management, ENZYME. Through it you can create a Vault (which we can simplify as being a “fund”) with the features you want, including, but not limited to, management and performance fees, exit fee, exit term, open to the public or limited to known investors, and assets allowed for investment and redemption.

This Vault issues a token (“fund shares”) that has its market value tied to all the assets it contains. The investor in the “fund” receives this token that is his “share” and can custody it in his portfolio, just as he does with Bitcoin (BTC) or Ether (ETH). To do all this the platform charges 0.25% on the amount managed and nothing else.

In terms of management, this fund can buy various assets (tokens) within the Ethereum network by trading through DEX (decentralized exchanges) and has all its assets, calculations and even the token of the “fund shares” on-chain, which means there is full transparency about its assets and prices. The value of the share token can be seen by anyone at any second, i.e., I can know online how much my investment is worth, without having to wait for the next day to see what the fund’s share value is in the Brazilian case, or the next month as is usual with many American funds.

Another interesting point is that the secondary market trading of the token referring to the “fund shares” is native to the public blockchain, which makes this token born with attributes of ETFs, that is, it can be traded in the secondary market as soon as it is created. While this is native, there is an AML/KYC factor here that would need to be looked at, but could be addressed via regulation and limiting trading on some platforms only and not totally free, among other suggestions.

This is all spectacular, but it’s not over yet! Creating this “background” on the enzyme platform takes no longer than the time it takes for you to set the parameters you want. In the case of the one I created, and I will leave its data at the end of this article for you to see, this process took 15 minutes.

I ended up not mentioning the time needed to create a fund in the traditional financial market, which can go from a few weeks if you already have the structure of the manager defined and the country where this fund will be, to a few months if you are going to start everything from scratch. From my own experience I can say that it is almost impossible to get everything operational in less than 6 months. Here I did everything in 15 minutes!

Well, to sum up, through this platform I can already (highlight the Already!) create an “investment fund” (or would it be better to define it as ETF?) in 15 minutes with quota calculation every second, with total transparency about the assets (which makes it automatically auditable) through which I can manage a portfolio of tokens, with practically zero cost. Incredible, isn’t it?

As I started looking into this path of on-chain asset management (tokens), which I believe is the future of asset management, given that everything will be tokenized, I came across numerous initiatives that are already testing the most diverse models.

Syndicate, for example, already even assists in the legal structure needed to stay above the token of the fund “share”. Nested is another one that is acting in this segment. In Brazil we have PODS, PICNIC, and AMFI, the latter within the NEXT program of the BCB, which I have the pleasure of being one of the mentors, are examples that touch, in one way or another, on what I described above.

Now imagine this when we have everything tokenized? Government bonds, stocks, real estate, cash. What will all these intermediaries that exist today look like? One of the great promises of blockchain is to eliminate intermediaries and this case of asset management is emblematic and I have no doubt that the use of this technology will change this industry profoundly.

As always, the more I search for information the more doubts I have, and here I share some of them with you. Full transparency in asset management may not be the best thing for managers, especially large ones, as it could generate a lot of front running. Are there ways to solve this while keeping everything on-chain?

All platforms I have tested limit the assets that can be bought, either because of the cost of on-chain calculations or the sources of asset prices (price oracles). How to make it unlimited? Limitation by blockchain is also an issue. How to issue a “quota” token with assets on multiple blockchains? When will we have a regulator that will accept such a token being more transparent and secure, even having zero intermediaries? How to provide transparency for funds that have both on-chain and off-chain assets without jeopardizing transparency, pricing, and auditing?

Finally, just as we are at the beginning of asset tokenization, we are also at the beginning of tokenized asset management with a blue ocean formed in front of us. From my experience and current knowledge, it seems to me that this wave is already well formed and is inevitable. So if you are at all active in the mutual fund industry or in third-party asset management more broadly, it is past time to understand what asset tokenization is and its impacts.

Source: Infomoney

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