Tokenising every managed fund in the world could unlock about US$100 billion in annual returns for investors and US$400 billion of trading opportunities for managers, a new Boston Consulting Group (BCG) paper suggests.
“Once up and running, tokenized funds offer advantages to investors including 24/7 secondary transfers and fractionalization, a lower threshold for investing, and instant collateralization if regulatory guardrails are put in place,” the BCG paper says. “If all the mutual funds globally were tokenized, we estimate that mutual fund investors could realize additional annual investment returns of about US$100 billion, while sophisticated investors could potentially generate US$400 billion by taking positions on intra-day value changes.”
The report identifies an immediate demand for tokenised funds – that essentially replaces many back-office functions to a blockchain – of US$290 billion with “potentially trillions of dollars more driven by the rise of on-chain money adoption among traditional financial institutions”.
Some of the efficiencies may come as various intermediaries in the current fund admin process, such as registrars, disappear in the blockchain-based world envisioned by the global consulting firm.
But fund managers face a few challenges on the path to token nirvana, the BCG paper says, including the need for industry-wide cooperation and regulatory consent.
“To fully realize fund tokenization’s potential, the industry must first establish robust foundations, including clarity on regulation, global operating standards, and technical interoperability,” the report says.
“From there, financial institutions will benefit from six foundational capabilities: a strategic tokenized fund vision, a use case road map, on-chain compliance, blockchain technology and operational setup, the ability to manage cross-chain interoperability, and a center of excellence to orchestrate their endeavors.”
Authored by BCG consultants David Chan, Yue Hong Zhang, Teddy Hung and Allison Xu along with input from tech firm, Aptos Labs, and fund manager, Invesco, the paper places fund tokenisation just 12 to 18 months away from an ‘inflection point’.
The report points to several token projects on the boil in Hong Kong, the UK and Singapore as well as a handful of live funds built ‘on-chain’ offered by institutions such as BlackRock and Franklin Templeton.
According to the report, tokenisation looms as the “third revolution” in the industry following the recent exchange-traded fund (ETF) upheaval and the original investment disruption in 1940 that saw the creation of the unitised mutual fund in the US.
And those first to the barricades stand to reap most of the rewards, the BCG paper says.
“Among asset managers, first-movers are likely to attract significant market share and occupy preferred white spaces, with simple products helping them build brand recognition and economies of scale. Fast followers, by contrast, may need to innovate within niche areas.”