LONDON (Reuters) – 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% in the space of just a few minutes on one day last week, following a 15% 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 markets investment firms Hamilton Lane and Partners Group have tokenized funds in the past year and said they were considering further products.
Mainstream asset manager abrdn hopes to launch a tokenized 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 to 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 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 things.
“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 tokenization and cryptocurrencies “slowly improving”.
Crypto woes caused a U.S. private markets manager client to hold off on launching a tokenized 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 tokenized 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 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 tokenized funds.
Euronext owns a stake in Luxembourg tokenization platform Tokeny, and Singapore Exchange has a stake in ADDX, where Partners Group and Hamilton Lane launched their tokenized offerings.
London Stock Exchange is working with fund technology firm FundAdminChain on a pilot for several tokenized funds.
Hurdles remain. Arun Srivastava, a partner at law firm Paul Hastings, said regulators may continue to remain unwilling to allow retail investors to invest in illiquid assets, whether tokenized 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?”
(Reporting by Carolyn Cohn; Editing by Emelia Sithole-Matarise)