The financial services industry is approaching a pivotal moment with the rise of tokenised funds, driven by evolving regulations, rapid advancements in tokenised finance, and growing adoption.

A new report co-developed by Boston Consulting Group (BCG), Aptos Labs and Invesco delves into this shift, providing an overview of the emerging market of fund tokenisation, exploring the technology’s benefits for investors and institutions, and sharing strategies for managers to seize the opportunities.

The report predicts that tokenised funds will reach an inflection point within the 12 to 18 months, spurred by the maturation of regulated on-chain money, including regulated stablecoins, tokenised deposits, and central bank digital currencies (CBDCs).

It notes that key international finance centers are accelerating this momentum. Hong Kong, for example, has initiated a number of regulatory initiatives, including the Stablecoin Issuer Sandbox, Project e-HKD+, and Project Ensemble.

Furthermore, with an estimated US$290 billion in demand from virtual asset owners, tokenised funds are poised to experience rapid growth, offering a significant opportunity for asset managers and financial institutions to tap into.

Drawing parallels to exchange-traded funds (ETFs), which captured 1% of total AUM within seven years of the launch of the first one in 1993, the report says that tokenised funds could reach that 1% of total fund AUM by 2030. This would translate to more than US$600 million in AUM.

That amount could be even be larger if clear and low-friction conversion pathways are established for converting existing mutual funds and ETFs into tokenized formats. This would accelerate the integration of tokenized assets into mainstream investment portfolios, and drive broader adoption, the report says.

Benefits for fund investors

Fund tokenisation refers to the use of blockchain-based digital tokens to represent fund ownership, functioning similarly to how transfer agents record fund shares today. Tokenised funds offer advantages to investors, including 24/7 transactions and fractionalization, a lower threshold for investing, and instant collateralization if regulatory guardrails are put in place.

The technology promises to usher in “the third revolution in asset management”. By addressing inefficiencies that have long plagued the asset management space, including slow settlement processes, high administrative costs, and the lack of transparency, fund tokenization promises to deliver significant improvements and create billions of dollars of value for both financial institutions and end investors.

These improvements could translate to an additional 17 basis points of annual return for mutual fund investors, representing about US$100 billion each year. Four key areas are to benefit the most.

First, instant settlement can unlock productivity for trapped capital, potentially adding about US$50 billion annually to investor portfolios.

Second, transaction fees would likely be closer to the average ETF fee of 0.09%, potentially creating annual investor savings of about US$33 billion.

Third, tokenised mutual funds would be easier to lend out than funds such as ETFs, generating about US$12 billion in interest income. Finally, tokenized mutual funds are traded intra-day, creating the possibility for sophisticated investors to capture intra-day fund net asset value (NAV) fluctuations and potentially creating US$80–400 billion of value annually.

Opportunities for wealth and asset managers

Wealth and asset managers also stand to benefit from tokenised funds. The first business opportunity involves addressing the existing on-chain investment demand.

In the global cryptocurrency market, valued at approximately US$2.5 trillion, the report estimates that there is about US$290 billion of investment demand for tokenized funds. This segment includes owners of stablecoins, tokenized real-world assets (RWAs), and decentralized finance (DeFi) protocols.

DeFi protocols currently have a market cap of about US$120 billion and a two-year growth rate of 56%, while the tokenized RWA market has a market cap of about US$12 billion and a 85% growth rate. Stablecoins, meanwhile, have a market cap of US$160 billion.

The second opportunity involves the potential of tokenized mutual funds to revolutionize fund distribution. Tokenized funds allow investors to transfer their fund shares instantly, anytime, and even in small fractions. Some companies, like BlackRock and Franklin Templeton, already support limited secondary transfers.

If a robust secondary market for tokenized mutual funds develops, similar to ETFs, the market could handle US$200 trillions in annual transactions, based on the ETF turnover-to-AUM ratio in North America of 340%, representing a major opportunity for asset managers.

Tokenised funds also introduce innovative fund distribution methods, leveraging fractionalization and instant 24/7 execution to reduce barriers to investment. Micro-investing, for example, is a segment in which fintech startups are growing fast, particularly among younger, tech-savvy investors.

Finally, tokenszed funds and smart contracts allow for hyper-personalized investment portfolio management, improving customer experience and client retention rates.

For instance, investors would be able to track their tokenized fund’s disclosed holdings in real time and leverage a re-balancing smart contract to take regular long or short positions to achieve their optimal exposure.

Growing interest in tokenisation

Distributed ledger technology (DLT) is attracting increasing levels of interest in wealth and asset management, driven by its potential to create value and deliver substantial cost savings.

BCG estimates that asset tokenszation and blockchain could unlock a US$16 trillion market for tokenised illiquid assets by 2030, and generate savings of US$20 billion annually in global clearing and settlement.

This month, UBS Asset Management launched its first tokenised investment fund, the UBS USD Money Market Investment Fund Token (uMINT). The product allows investors to access high-quality, risk-managed money market instruments through tokenized assets.

This surge in tokenisation solutions reflects growing demand from investors. A 2023 survey by EY-Parthenon, which polled 251 accredited/high-net-worth (HNW) investors and 78 institutional asset investors in the US, found that 17% of respondents were already investing in tokenized assets. 25% were planning to invest in them and 35% expressed a keen interest in learning more about this asset class.

In terms of asset allocation, institutional investors projected to allocate 5.6% of their portfolios to tokenised assets by 2026, while HNW investors anticipate an even higher allocation of 8.6%.

Featured image credit: edited from freepik