Proof-of-concept project explores settlement of fund tokens across blockchains
Firms examining tokenized assets for possible operations and liquidity benefits
Program is part of the Project Guardian initiative scoping potential for tokenization
November 17, 2023 (Preqin News) – JP Morgan and Apollo Global Management have joined a growing list of firms exploring the potential of tokenization for streamlining fund management operations and broadening investor access to private market assets.
JP Morgan’s Onyx Digital Assets team and Apollo this week announced the development of a system that allows fund managers to tokenize their funds on a blockchain of their choice. The proof-of-concept system is designed to enable the settlement of transactions across different blockchains, allowing wealth managers to purchase and rebalance positions in tokenized assets.
Interoperability software developer Axelar, fintech infrastructure provider Oasis Pro, and blockchain network provider Provenance Blockchain also participated in the collaboration.
Interest in the tokenization of assets – creating a token on a blockchain that represents an asset – has been growing in recent years. The potential benefits include greater efficiency in settlements and around-the-clock access for market participants. Proponents also say that it has the potential to allow fractionalization of large and illiquid assets, opening them up to smaller investors and improving liquidity. In March, analysts at Citi forecast that $4tn to $5tn of tokenized digital securities could be issued by 2030.
Achieving interoperability – enabling tokens to be moved across different blockchains – is a significant step for any future adoption of the technology, given that blockchains cannot ‘talk’ to one another and require an intermediary to arbitrate.
‘The interoperability achieved through Project Guardian is a step forward in showing how tokenized traditional and alternative investments can be automatically managed across multiple systems,’ said Tyrone Lobban, head of Onyx Digital Assets.
The JP Morgan/Apollo collaboration is part of the Project Guardian program, a joint venture initiated by the Monetary Authority of Singapore (MAS) that aims to bring policymakers and the financial industry together to explore potential avenues for decentralized finance and tokenization.
In addition to MAS, other policymakers taking part in the project include the UK’s Financial Conduct Authority, Swiss regulator FINMA, and Japan’s Financial Services Agency. Financial institutions participating in the collaboration include Apollo, BNY Mellon, Citi, HSBC, Onyx, Schroders, Standard Chartered, and SBI Digital Asset Holdings. The project aims to test and assess the viability of certain applications on-chain, conduct industry pilots, and use the findings to establish a regulatory framework.
Several private market funds have already been exploring tokenization for their offerings. In September, Hamilton Lane announced a partnership with Securitize, which aims to open private markets to more investors. By tokenizing their funds, Hamilton said it can offer access to equities, private credit, and secondaries to a far larger investor pool.
Securitize has also announced the launch of a fund that tokenizes exposure to KKR’s Health Care Strategic Growth Fund II. According to Wilfred Daye, Head of Securitize Capital, ‘The tokenized fund we have developed is a significant breakthrough in unlocking investor access to private equity investments.’
Despite the increased interest in tokenization, there remain several hurdles to negotiate to facilitate adoption, primarily the development of a broad regulatory framework and the development of a digitally native fiat currency.
In a recent survey of fund managers by funds network Calastone, institutional investors cited a lack of Central Bank Digital Currencies (CBDCs) and regulatory uncertainty as the most significant obstacles to wider digital asset adoption.
According to Calastone – which recently announced it was collaborating with Schroders on a tokenized fund investment vehicle – 80% of respondents identified the lack of a CBDC as an issue. Without a digital currency, the process of exchanging between digital currency and digital assets becomes more complicated.
Fewer than half of survey respondents said they believed interoperability between blockchains to be a long-term issue and was seen as something that could feasibly be addressed.
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