Investors in crypto have endured wild moves in recent months, but this has not fazed asset managers who are preparing to use the blockchain technology behind cryptocurrencies to break funds into bite-sized units, or tokens, to sell to small savers.
Bitcoin fell 7.7 percent in the space of just a few minutes on one day last week, following a 15 percent drop on one day in June as aggressive rate hikes by major central banks and ultra-high inflation prompted investors to ditch high-risk assets.
The sector is also facing other issues, with Celsius this week suing a former investment manager for losing or stealing tens of millions of dollars in assets before the crypto lender went bankrupt last month.
However, private market investment firms Hamilton Lane and Partners Group have tokenised funds in the past year and said they were considering further products.
Mainstream asset manager abrdn hopes to launch a tokenised fund this year, according to a source familiar with the matter, and rival Schroders is also investing in the sector.
In such funds, tokens are issued through a security offering, which gives the investor the right to participate.
Blockchain allows the tokens, or fund fractions, to be securely managed, proponents say, and can help small investors buy illiquid assets like private equity, which tend to offer higher returns but can be hard to trade in and out of quickly.
“Every asset manager who has the ambition to offer private markets to their clients and be a leader in that space will look into blockchain technology,” said Magnus Burkl, principal at consultants Oliver Wyman.
Some potential investors are, however, wary of the close link between the technology and cryptocurrencies. Fred Shaw, Hamilton Lane’s global head of operations, said the firm has been helping investors to understand that crypto and blockchain are not the same thing.
“Blockchain is the underlying technology, but (crypto) is only one use of it.”
A Partners Group spokesperson said the firm was seeing the understanding of the difference between tokenisation and cryptocurrencies “slowly improving”.
A U.S. private markets manager client to hold off on launching a tokenised fund earlier this year because of the reputational risk, but it now plans to go ahead soon, said Carlos Domingo, CEO of investment platform Securitize, which launched tokenised funds tracking two S&P indices late last year.
Because of the risks associated with illiquid assets, many funds investing in such assets are only open to professional investors, requiring minimum investments of $10 million.
By using the blockchain technology, fund managers can offer fractions of these assets, for a fraction of the initial outlay.
The tokens will enable secondary markets to develop, providing more liquidity, industry specialists say, though the Financial Stability Board has warned that this still leaves retail investors exposed to the underlying illiquid assets, which are difficult to exit quickly if prices fall.
The technology can also cut costs for both asset managers and investors, the specialists say.
Fund administrators and stock exchanges are trying to improve the market infrastructure to make it easier to offer tokenised funds.
Euronext owns a stake in Luxembourg tokenisation platform Tokeny, and Singapore Exchange has a stake in ADDX, where Partners Group and Hamilton Lane launched their tokenised offerings.
London Stock Exchange is working with fund technology firm FundAdminChain on a pilot for several tokenised funds.
Hurdles remain. Arun Srivastava, partner at law firm Paul Hastings, said regulators may continue to remain unwilling to allow retail investors to invest in illiquid assets, whether tokenised or not.
“To say ‘we’ve got this blockchain product’ sounds good and sounds like you’re keeping up with the crypto world, but how is it any different or any better?”