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Article07 Jun 2024

Bringing Traditional Assets to Digital Networks: Exploring the Tokenization of Private Markets

Across financial services, there is a growing recognition that the use of distributed ledger technology (“DLT”) presents a significant opportunity to re-architect capital markets. Against an increasingly complex and competitive environment with persistent margin pressures, backed by a history of technological innovation spurring developments like ETFs or direct indexing, financial institutions are now exploring opportunities provided by DLT. The potential benefits range from solving infrastructural issues in traditional operating models to the possibility of new investment product and servicing capabilities enabled by DLT features, such as programmability and composability. This could represent a step-change in how private assets are held and transacted.

The vision is an end-state of digitally native investment products that are created, traded, and administered entirely on DLT infrastructure. Digitally native products have the potential to enable better distribution, unlock new product capabilities, and deliver operational efficiencies. The transactions are also fully traceable and auditable with the potential to exist on a shared infrastructure resulting in reduced reconciliation overhead.

In partnership with key investment and wealth management clients, we conducted a proof-of-concept (“PoC”) to better understand key technological, operational, and legal considerations that are required to kickstart the transition from analog to digital. The PoC consisted of the issuance and transfer of a dummy “test token” with no value and which did not represent any legal rights, permitting us and our clients to focus on technological and operational issues.

This PoC demonstrates some of the benefits of tokenization in private markets. Through traditional  partnerships (issuer, distributor, servicer) and leveraging DLT (moving value over the internet, digital identity, fractionalization, smart contract-based compliance checks), we propose a framework aimed at putting private assets into the hands of investors in newer digital-formats with upgraded capabilities, not possible under the traditional market structure.

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