Fund tokenization in fund accounting and investor relations has the potential for transformative impact on the funds industry and is set to continue to change the funds landscape in the coming years. Today, we have the privilege of discussing key industry trends and challenges in navigating the evolving landscape of blockchain technology and financial markets with Dan Smith, David van Duynhoven, and Aaron Sammut, our digital assets funds experts.
Previously, we explored the fund industry's transition to tokenization, focusing on collaboration among stakeholders to integrate blockchain technology. Our digital assets experts shared insights on enhancing investor experiences and addressing regulatory challenges in a tokenized environment. If you missed it, you can read it here.
As we continue our conversation, in this follow up, we shift our focus to the practical implications of tokenization on investor experiences, regulatory landscapes, and the necessary collaboration with various stakeholders to advance these initiatives. Our experts will provide deeper insights into how tokenization enhances transparency, accessibility, and liquidity for investors, and how they navigate the evolving regulatory frameworks to ensure compliance and trust.
How does a tokenized fund change the investor experience? Can you elaborate on the specific enhancements to the investor experience brought about by tokenization of funds? What advantages does this new model offer in terms of accessibility, transparency, and liquidity for investors?
Dan: The “tokenization” of information and data really just means that the data and actions related to that data are being stored and manipulated on a network of computers commonly referred to as a blockchain.
Information and activity on blockchains are visible to investors and others who have been granted access to them, so with that access, an investor would have full sight of their information on that blockchain. Many fund sponsors are looking to these tokenized investor registers to increase and improve the liquidity of their funds by allowing transfers of investor interests to other pre-approved investors that have access to the same blockchains.
So, tokenization takes data that historically would have sat solely in a fund sponsor’s or fund administrator’s legacy accounting and CRM systems and makes it available on a blockchain to those who have been granted access to it.
How will regulators get comfortable with investor activity, for example related to AML/KYC, on blockchains?
Dan: Trident ventured into the digital asset space in 2017. Eight years later, there is still active dialogue among U.S. regulatory bodies as they work to clarify the appropriate oversight for Bitcoin and other digital assets.
Aaron: What is important is to ascertain that AML/KYC requirements are still satisfied, and at this initial stage we believe that technology solutions are flexible enough to accommodate requirements and controls that we, as service providers, may put forward in this respect. This will enable regulators to get the necessary comfort that AML/KYC obligations are still being met, regardless of whether it is a tokenised fund or not.
How do you address concerns within the industry about the changes to traditional fund administration roles in light of increasing automation and blockchain-based processes?
Dan: The data still sits in digital form. The only difference is where it sits and how it’s accessed. The need for fund administrators will not change just because the data has changed location.
Aaron: Agreed, the role of the administrator will still be there to facilitate the fund’s operations. This will leave the fund managers to continue focusing on their area of expertise.
Can you explain the role of collaboration with external partners or stakeholders in advancing your initiatives related to tokenization and blockchain technology?
Dan: Collaboration with the lawyers, CPA audit/tax firms, bankers, regulators, and the blockchain technology firms is critical to moving the tokenization effort forward. The tech firms are the first movers, as is always the case, but all the other players need to work closely together to keep things moving forward.
What steps are we taking to ensure alignment with the opportunities presented by tokenization while addressing the inherent challenges of this transformative process?
Aaron: Research, training, and investment. As mentioned above, tokenisation is still in its early days, and we are doing a lot of research on the trends coming through as presented to us by prospective clients and through information we gather when we attend seminars and conferences on the subject. We are regularly training our teams on tokenisation and on how this might be changing the traditional ways of fund accounting. At the same time, we are looking to invest in technology which will assist us in aligning ourselves to the opportunities available and at the same time ensuring that our internal control objectives are met.
In your view, how could tokenization impact investor trust and transparency in financial markets, and what steps are you taking to maintain or enhance these elements in an on-chain environment?
Dan: For most investors, tokenization and the blockchain are new concepts and therefore will be met with doubt if they think too hard about the technology itself. Most, though, will continue to trust in the firms that they know and that have provided them with the information they need, including fund administrators.
Aaron: Indeed, investors will have some doubts on what a tokenised fund means for them. However, investors must be reassured that transparency and security is intrinsic within the blockchain technology that is the basis for tokenised funds. Once an investor transaction request (subscription or redemption) is recorded on the blockchain, it is publicly available, is immutable and cannot be revoked. This should give investors more comfort on their dealings with a tokenised fund.
How has tokenization impacted the regulatory landscape, particularly in regions like the British Virgin Islands and the Cayman Islands, and what steps are being taken to address these challenges and opportunities?
David: Tokenization has reshaped regulations, notably in the British Virgin Islands (BVI), where favourable Virtual Asset Service Providers (VASP) regulations have made it a hub for token issuance. The Cayman Islands are adapting their regulations to remain competitive. Collaboration with external partners is crucial for compliance, especially regarding AML/KYC procedures. Despite regulatory challenges, the long-term outlook for tokenization is positive, driven by technological advancements and evolving regulatory frameworks.
How has blockchain investment catalysed the evolution of technology in enhancing client and investor experiences within your organization? Can you share any notable advancements or projects in this realm?
David: What is apparent from recent industry networking conferences is that investment continues to flow into digital asset technologies, particularly at the Web3.0 layer. Investors continue to look for the new wave of companies to leverage the latest technologies to achieve investment returns, with digital assets (and AI) continuing to attract capital and talent. Our exposure to the venture capital side of the crypto sector, servicing many of the world’s largest managers, provides foresight through broader exposure into where innovation continues. The continuing global investment has spurred a new wave of solutions which are impacting many sectors, including fund administration services.
Our key during this period is remaining agile and informed for our clients. From a solutions perspective, we provide value by being able to identify and deliver relevant technologies by remaining solution agnostic in many areas. This enables us to leverage the latest innovations in the industry, rather than be locked to legacy technologies, some of which will struggle to evolve in a timely manner.
As we look to the future, it is clear that tokenization holds the potential to significantly enhance investor trust and transparency in financial markets. By addressing regulatory challenges, investing in research and training, and fostering collaboration with key stakeholders, Trident is committed to navigating the complexities of this transformative process. Our experts believe that with the right strategies and continued innovation, the adoption of blockchain technology will not only reshape the funds industry but also provide a robust foundation for future growth and investor confidence.