Investors in cryptocurrencies have seen frantic moves over the past few months, but that hasn’t upset wealth managers ready to use the blockchain technology behind cryptocurrencies to break up their money into bite-sized units or tokens to be distributed to small depositors for sale.
Following a one-day drop of 15% in June, Bitcoin fell 7.7% in just minutes as sharp interest rate hikes by major central banks and hyper-inflation prompted investors to sell risky independent assets.
The industry has faced other problems, with Celsius this week suing a former investment manager for losing or stealing tens of millions of dollars in assets before the cryptocurrency lender went bankrupt last month.
However, private market investment firm Hamilton Lane and Partners Group have tokenized the fund over the past year and said they are considering more products.
Mainstream wealth management firm abrdn hopes to launch a token fund later this year, according to people familiar with the matter, and rival Schroders is also investing in the industry.
In such funds, tokens are issued through securities offerings, giving investors participation rights.
Proponents say blockchain allows for the safe management of tokens or portions of funds and can help retail investors buy illiquid assets such as private equity, which tend to offer higher returns but are difficult to get in and out of quickly.
“Any wealth manager aspiring to offer private markets to clients and become a leader in the field will focus on blockchain technology,” said Magnus Burkl, principal at Oliver Wyman.
However, some potential investors are skeptical of the close connection between the technology and cryptocurrencies. Fred Shaw, head of global operations at Hamilton Lane, said the firm helps investors understand that cryptocurrencies and blockchain are not the same thing.
“Blockchain is the underlying technology, but (encryption) is just one application of it.”
A spokesperson for Partners Group said the firm sees a “slowly improving” understanding of the difference between tokenization and cryptocurrencies.
Carlos Domingo, chief executive of Securitize, an investment platform that tracks token funds, said crypto concerns caused U.S. private market manager clients to delay launching token funds earlier this year due to reputational risk, but now plans to launch soon. index late last year.
Due to the risks associated with illiquid assets, many funds that invest in such assets are only open to professional investors and require a minimum investment of $10 million.
Using blockchain technology, fund managers can offer a portion of these assets for a fraction of the original investment.
Industry experts say the tokens will allow secondary markets to develop and provide more liquidity, although the Financial Stability Board has warned that it still exposes retail investors to potentially illiquid assets that are difficult to exit quickly when prices fall.
Experts say the technology could also reduce costs for asset managers and investors.
Fund managers and exchanges are working to improve market infrastructure to facilitate the issuance of tokenized funds.
Euronext holds a stake in Luxembourg-based tokenization platform Tokeny, and Singapore Exchange holds a stake in ADDX, where Partners Group and Hamilton Lane launched their tokenized products.
The London Stock Exchange is partnering with fund technology firm FundAdminChain to pilot a multi-token fund.
Obstacles remain. Regulators may still be reluctant to allow retail investors to invest in illiquid assets, tokenized or not, said Arun Srivastava, a partner at law firm Paul Hastings.
“It sounds good to say ‘we have this blockchain product’ and it sounds like you are keeping up with the crypto world, but how is it different or better?”