As an advisor to both traditional finance (TradFi) and cryptocurrency-focused firms, I see immense possibilities in blockchain and tokenization, especially for helping asset managers connect with the upcoming generation of investors.
These institutions often navigate complexities with innovative approaches, managing trillions in areas like private equity, credit, venture capital, and tangible assets. Despite their advanced portfolio strategies, many still depend on outdated systems reminiscent of the fax machine era.
Investor records are often maintained in spreadsheets, capital requests are communicated via email, and complex financial calculations are handled manually, leading to outdated practices across operations. The underlying technology assisting these firms is often fragile, obscure, and due for a substantial overhaul.
Transforming Fund Infrastructure
The typical investment firm continues to depend on a mix of administrators, custodians, and transfer agents, with each operating on distinct systems and manually reconciling records at every stage of a fund’s lifecycle: initiation, fundraising, management, trading, and finalization. Common issues include mistakes, delays, and minimal transparency, all while compliance and administration costs continue to escalate.
Blockchain and tokenization effectively tackle these challenges by standardizing processes across participants. With a shared, permissioned ledger for stakeholders like general partners (GPs), limited partners (LPs), fund administrators, and auditors, there would be a unified record of investor accounts and transaction histories, enhancing accuracy and transparency.
Smart contracts can automate complex financial procedures such as capital calls and distributions, ensuring accurate payments to counterparts with transparency. Tokenization enables rapid, automated settlements, eliminating the delays caused by tradition paperwork and human error.
These operational improvements offer significant benefits: digital shares, instant redemption processing via stablecoins, and real-time yield tracking enhance capital management, thereby reducing operational bottlenecks.
Innovating Investment Products
Beyond merely modernizing fund infrastructure, blockchain has the potential to foster the creation of entirely new investment products.
For example, tokenized private credit funds, such as Apollo’s offering which has processed over $100 million on-chain, provide seamless interoperability with multiple blockchain systems. Similarly, Franklin Templeton’s Benji platform enables peer-to-peer transactions of tokenized money market funds across various blockchains.
The pioneering firms are setting their ambitions even higher: developing innovative on-chain products like yield vaults that execute investment strategies autonomously.
For instance, Veda Labs is creating smart contracts that can stake tokenized assets or engage in decentralized finance (DeFi) transactions, allowing institutions to offer comprehensive, transparent investment strategies without outdated procedures.
In summary, adopting blockchain technology is a crucial step for asset managers to enhance operational efficiency, lower risks, and provide advanced products to clients.
