The tokenisation dialogue

00:00:03: I'm your host, Natalie Gerritstein.

00:00:04: And I am excited today to be joined by our two speakers Sven Bissecker of PwC Luxembourg welcome!

00:00:10: Hello!

00:00:11: Hi.

00:00:11: and Samuel Boerlevy of Arndt & Mennonack Welcome.

00:00:15: So just a kick off today's episode.

00:00:17: could you each provide?

00:00:18: Just a brief description of your day-to-day work and i'll start with you Sven.

00:00:21: Yeah so I'm Sven Beiseker and I'm a senior associate at strategy end which is the Strategy Consulting Arm of PWC here in Luxemburg.

00:00:30: originally I come more from a research background, did the PhD in data and digital marketing.

00:00:36: And then started my career as a data scientist but along that way i also always had a strong passion for new technologies more in general.

00:00:45: That's what am focusing on right now at strategy end using my current role to advise on strategic projects around blockchain digital assets and tokenization.

00:00:57: Okay thanks and you Sam?

00:00:59: Hi, so I'm Samuel.

00:01:00: I am working at Arrethé-Mandanao and an investment funds lawyer advising fund managers on the structuring side of their projects for instance in use seats and regulated aves private market and liquid strategies And i also part digital and fintech committee.

00:01:23: Okay, thank you.

00:01:24: So tokenization has become one of the industry's most talked about topics and in one sentence What does tokenisation mean to you Sven?

00:01:32: So tokenisation for me is an innovation which fundamentally changes how ownership in an asset that could be a fund share Could be a bond could be real estate is represented.

00:01:42: So if you think about going back in time, maybe you used to demonstrate your ownership via a piece of paper.

00:01:48: A physical certificate that is now really replaced by digital tokens on a shared ledger known as blockchain and all the activities on their block chain can be automated via code which are known as smart contracts.

00:02:03: As result of this lot new advantages come out.

00:02:06: Okay, thank you.

00:02:07: So we've been talking about tokenization for several years but it seems to be gaining some real momentum now.

00:02:12: What's changed?

00:02:13: Is that regulation technology investor demand market maturity or maybe a contribution of these?

00:02:20: Well I would say We are now.

00:02:22: at the moment were actually all the pieces of the puzzle coming together.

00:02:26: so That is first of all corporate and investor demand.

00:02:29: The other week i did a marketing exercise in the EU.

00:02:35: That's a thirty trillion Euro fund tokenization opportunity.

00:02:39: Asset managers are actively moving, there is strong appetite.

00:02:43: global players like BlackRock, Fidelity and others already live with tokenized funds And they're lot of new player in the market as well such as Spyco.

00:02:52: so There's alot competition.

00:02:56: The technology now has also really proven that it mature.

00:02:59: So if we think of Ethereum or other black chains, they've really been operating at a hundred percent uptime for years now.

00:03:07: We can trust them and the ecosystem in this space is also evolving.

00:03:11: so Now we will have players around tokenization platforms those providing KYC Or even know your transaction services custodians transfer and control agents.

00:03:23: all of that isn't place And regulation is also playing its role, but I think we can talk about that in more detail later.

00:03:29: Okay,

00:03:29: Samuel do you want to add to it?

00:03:31: Yes sure what?

00:03:31: i would add?

00:03:33: really a common saying basically innovation starts always with the same path.

00:03:39: We have first caution curiosity experimentation and then adoption.

00:03:44: In my view thats where are right now.

00:03:48: The conversation has moved from Is It Safe To How Do We Make It work properly, at scale and within a regulated framework.

00:03:59: And Luxembourg is great example of why timing matters.

00:04:04: it's not simply reacting to the trend.

00:04:07: its been building legal basis for DLT securities for several years now.

00:04:15: so the so called blockchain laws since two thousand nineteen helped clarify how security can be issued and can circulate using blockchain.

00:04:28: That groundwork gives the market a level of legal certainty that's extremely valuable, something that differs a lot from different jurisdictions even within the EU And also I would add the CSSF has been great part in this evolution.

00:04:49: We recall in January, the white paper on DLT and blockchain issued by the CSF which was quite forward-looking already at that time.

00:05:01: It showed early awareness of where the industry could be heading while still keeping focus on risk management and investor protection as is the CSSF duty.

00:05:14: That segues quite nicely into our next question, which is sort of looking ahead.

00:05:17: What are the biggest risks or unintended consequences?

00:05:20: The industry needs to be mindful.

00:05:21: office tokenization becomes more widespread and maybe we'll start with you against them.

00:05:25: So I'm seeing in particular a few different types of risks.

00:05:30: So the first ones are rather technical, for example there could be bugs in smart contracts.

00:05:36: some of their oracles which have feeding information such as enough inputs could fail.

00:05:44: There's cyber security risk.

00:05:45: of course, there is a risk for hacking.

00:05:47: If we look ahead maybe as quantum computers are becoming more commonplace even the blockchain might not be safe from hacking anymore.

00:05:57: and of course you have always key management risks.

00:06:02: so if you lose your keys then it isn't your token anymore.

00:06:07: There are also a couple of aspects which can come into play.

00:06:10: For example, on the blockchain there can be consensus issues that network could be congested or transaction fees at times could be rather high.

00:06:20: and Of course we've all heard as well about more environmental concerns around energy consumption Which I will say already addressed by moving away from proof-of work towards proof of stake.

00:06:34: But if i had to really name the biggest risk then I would say the biggest risk is not doing.

00:06:41: If asset managers are not moving, they will lose out on a big opportunity of capturing new asset pools and likewise as its service providers we'll be left behind and disintermediated in my opinion.

00:06:53: Okay, good point.

00:06:54: And Samuel what do you think?

00:06:55: Yeah What I can add to that is really about the legal of course perspective and it will be The operational comfort i already mentioned on the previous question.

00:07:08: But in Luxembourg we have a lot of legal certainty That help reduces the risk.

00:07:15: but for cross-border products managers still need to consider how Other jurisdictions, service providers and distributors will treat tokenized units.

00:07:27: And that's a very important point.

00:07:31: I'll also add about IMLCFT and Investor Duality Regents of course which remain essential in the more automated and potentially disintermediated distribution chain.

00:07:44: And the final point would be the governance and accountability because in a blockchain it's very specific framework.

00:07:56: Who is responsible when something goes wrong?

00:08:00: In more automated process chain, its' bit tricky.

00:08:04: Thank you well put.

00:08:05: Where do see biggest opportunities for tokenization of investment fund industry?

00:08:10: are there any use cases that you find particularly promising?

00:08:12: Yes, absolutely.

00:08:13: And I think we'll come to that a bit later too.

00:08:16: but the first one which crosses my mind is really private markets Private equity, private debt and real assets where tokenization can help reduce operational friction and overtime support more flexible access to historically illiquid and high minimum ticket structures.

00:08:40: The second one I would mention is really more on the legal and regulatory side, but it's the collateral and secondary liquidity features.

00:08:51: Tokenized units could be used more efficiently as collateral or transferred in secondary transactions than traditional fund shares.

00:09:00: In particular we see more and more tokenized money market funds which are becoming one of the most concrete early use case because they connect familiar regulated liquidity products with on-chain settlement.

00:09:15: A very good and well known Luxembourg example will be the Franklin Templeton tokenized usets.

00:09:22: in two thousand twenty twenty four, They received CSSF approval And it was presented as the Luxemburg's first fully tokenised on chain usets.

00:09:34: The appeal is fairly intuitive.

00:09:37: institutional investors want cash-like exposure and money market yield, but with faster transferability use as collateral an easier integration into the digital assets workflow.

00:09:50: Okay your perspectives fun

00:09:52: Yes.

00:09:52: So I absolutely agree also on the more illiquid assets.

00:09:56: But in my view really the near term And i think here Sam we completely agree are for example tokenized money market funds is a first step.

00:10:05: so In The EU I believe that this is about a seven point three trillion euro opportunity.

00:10:12: Why?

00:10:12: Because it's an option for corporates and also financial institutions to put their idle cash into work.

00:10:21: So if you think of the alternatives right now, You can either park your cash on bank deposits That earns maybe around zero point five percent net interest With tokenized money market fund its rather two percent Or you can park it for some time in a term deposit, then you might get a similar yield.

00:10:39: But at the same time your money is blocked for sometime and you cannot use otherwise.

00:10:45: to your point of instant accessibility's not given And as result that we see really as not just retail investor play but something institutions would actually already to organize money market funds, even aside from the ones in Luxembourg for example.

00:11:06: In France we have as well a SPICO which has really competed with major players on the market where majority is also B-to-B business proving that this something for corporates

00:11:21: too.

00:11:22: Looking at investors particularly retail investors how could tokenization change their way?

00:11:26: people are investing?

00:11:28: So from my perspective, when it comes to retail investors the benefits that we need to focus on are more those around fractionalization so democratizing access To previously less accessible investments.

00:11:43: They're just lower barriers to entry and if we combine that with general digitalisation trends I think being able to invest twenty four seven at near instant access, maybe from your phone where you have an app or wallet.

00:12:00: That's really the way that future is headed.

00:12:03: and To make this work Really?

00:12:05: I believe the companies should not even lead with a technology They might not need to talk about.

00:12:11: This is enabled by blockchain.

00:12:13: they just showed.

00:12:14: show the benefits.

00:12:15: retail investors are going to see that And our going to respond in a favorable way.

00:12:21: my opinion

00:12:22: Yeah, and to just to complement that.

00:12:24: so to respond to the question In my opinion it will change completely.

00:12:29: The way investors would invest.

00:12:33: And as when you mentioned fraction ability I would also mentioned what I said before, meaning the tokenization can basically lower minimum investment amounts via fractionalisation for instance and speed up settlement processes.

00:12:52: And make portfolio more transparent to investors.

00:12:57: On the centralisation side it could change completely how investors hold their shares, imagine a retail investor holding the diversified range of tokenized fund shares within a centralized digital wallet.

00:13:16: It will be much more easier for investors to know where they invested and manage their portfolio.

00:13:24: basically

00:13:24: Okay, thank you both.

00:13:26: One of the promises tokenization is broader access to private markets as we sort have talked about already.

00:13:30: but do you think tokenized private market funds could do for private markets what ETFs or exchange traded funds did for public markets?

00:13:37: Yeah and that's a very good question.

00:13:39: it's a bit the follow-up question of what we just mentioned But that's really the ambition.

00:13:44: I think the comparison works in spirit

00:13:47: even

00:13:48: if the mechanics are very different.

00:13:51: ETF succeeded because they combine wrapper, liquidity and lower costs.

00:13:57: Tokenized private market funds will not replicate that model exactly.

00:14:02: Private assets are by nature less liquid but tokenization can help lower minimum tickets as mentioned streamline dealing cycles and create more efficient secondary market mechanisms.

00:14:15: so the direction of travel is comparable.

00:14:18: broader access to an asset class reserved to professional and institutional investors.

00:14:25: So getting there responsibly with appropriate investor protection is the real work ahead, And that's where Luxembourg actually heading.

00:14:35: Speaking of Luxemburg sort what strengths does Luxembourg bring?

00:14:37: You touched on some already but What do you think also still needs happen for wider adoption by fund managers.

00:14:43: So yeah, in terms of strengths Luxembourg has like obvious ones and we also mentioned that already but the blockchain laws.

00:14:50: it's an important groundwork In terms of legal certainty for market players.

00:14:56: But we also have different texts.

00:14:58: Different white papers And different guidelines from The European Union For instance.

00:15:06: I think what we Have other jurisdictions don't is really An open regulator.

00:15:13: The CSSF has shown willingness to engage with DLT and crypto asset projects.

00:15:19: And its guidance continues to evolve at the market develops.

00:15:24: Absolutely, Sven your thoughts?

00:15:25: Yes, Sam I absolutely agree on the role of the CSSF.

00:15:30: maybe just add onto that yes we do have blockchain laws But we even have another regime as well, which is a very old, nineteen-fifteen company law.

00:15:39: Which actually also applicable here because it doesn't specify the technology.

00:15:45: so... We really have lot of freedom on that side As well worth mentioning.

00:15:50: I believe its not only about tokenizing fundwrapper but we've also seen steps toward tokenizing the cash lag actually.

00:15:59: So just recently in February this year, the CSSF in one of its AQs announced that now you can for subscription and redemption use e-money tokens.

00:16:08: so there's certain regulated stable coins which then really leads to something much closer to T plus zero in practice I believe other than the regulation we just also here in Luxembourg have a very strong will to win and tokenization.

00:16:25: And, um...I think the regulator everyone else on market doesn't want that happen again on tokenisation.

00:16:33: Then of course as Sam already mentioned We already had existing tokenised funds.

00:16:37: I think Franklin Templeton was mentiond who has Amundi & BNP doing the same And we have all the Luxembourg players in the ecosystem, which actually support that.

00:16:49: So just thinking of a couple tokeny I mean recently acquired by Apex funds DLT investry like CSD and so many others.

00:16:58: i think The next step is now really to take that momentum and move from pilots To large-scale deployment?

00:17:07: In order for that to be successful We have two things strategically on what we really want to achieve.

00:17:12: first

00:17:13: Thank you both.

00:17:14: What recommendations would you give a fund manager today looking into tokenization?

00:17:19: Let's start with you, Sam.

00:17:20: Yeah

00:17:21: my pleasure.

00:17:21: so first message will be don't assume the answer will be no.

00:17:27: I think Today A lot of managers still approach tokenization projects bracing for regulatory brick wall and that completely out-of-date thinking at least here in Luxembourg And we demonstrated by our response earlier.

00:17:44: look at the pace of The last years and the two thousand twenty-two white paper already mentioned a blockchain loss.

00:17:51: The crypto assets FAQ recently refreshed.

00:17:54: That's not a regulator dragging its feet it really Regulator that keeps showing up ahead off the market, and keep saying yes And here's how in Newark some board?

00:18:05: The framework has moved on a lot.

00:18:07: the real question is no more can this be done but rather How do we structure it properly?

00:18:14: So I would tell a manager to have a clear map of their digital asset project, but also involve legal advisors and consultants early.

00:18:25: And where appropriate engage with the CSSF before the structure is already fully locked down.

00:18:31: That's precisely when firm like Arendt comes in not talk clients out ambitious ideas but really to translate that ambition into a structure, which works and is actually bankable with the CSSF.

00:18:48: Great

00:18:49: point!

00:18:49: Thank you.

00:18:51: So for me the recommendation in one sentence would be don't wait or wash but think strategically.

00:18:58: so from our observations The easy part really is creating a token.

00:19:04: we've done it at our office.

00:19:05: It takes about ten minutes.

00:19:07: The hard part is everything else.

00:19:08: And the heart part, in particular to answer questions like what does success look like and what needs to be done for that to happen?

00:19:17: So if I think about some of those questions it's very important to start with first off all this strategic framework.

00:19:25: where do i want to play?

00:19:26: What are the pain points?

00:19:27: am really solving...I don't want you to tokenization For the sake of tokenization but we need one to solve a client problem.

00:19:35: You also have to think, of course, about the regulatory framework as discussed.

00:19:39: All product features and token specifications – do you just want to tokenize the Wepper?

00:19:45: Do you want to talkonize the Asset side or the CashLeg perhaps as well?

00:19:50: Define quite clearly the target operating model which provides us a choice and then ultimately the last step is really implemented.

00:19:59: but we shouldn't wash our head and implement something that later realize it doesn't align at all with your corporate strategy.

00:20:06: Thank you, so imagine we're having this conversation five years from now.

00:20:11: What role do you think tokenization will play in the fund industry?

00:20:14: what Do you hope will have changed maybe by then for fund managers and investors?

00:20:19: So from my perspective if I think five years form Now Tokenization Will be far less visible because it would just simply Be part of infrastructure already.

00:20:29: Investors are not going to choose a fund Because that is tokenized.

00:20:33: They'll just choose it because its easier to access.

00:20:36: for example, or in the case of tokenized money market funds.

00:20:40: For example they can get a higher yield at near instant access.

00:20:44: and as we don't think anymore about how internet exactly works when you use online banking We may also stop thinking about tokenization itself And actually some of the players in the market have already embraced that.

00:20:58: They really lead with claims such as putting your idle cash to work, That's a very clear benefit for the client.

00:21:06: they don't talk about technology because The ultimate clients need not necessarily know their technicals and my hope is that the rest of industry will follow these examples.

00:21:17: Yeah... In my view it was a tricky question Because five years from now its a bit early still, we are in the experimentation phase.

00:21:28: We don't see a lot of live projects being set up at Luxembourg yet but it will come and I agree with Sven.

00:21:37: for me that most important idea would be to stop talking about tokenised funds only refer to funds because the tokenisation The structural part of the fund, electronic settlement became a decade ago for payments.

00:21:53: I would be very happy to see if looking back a few years ago people say that Luxembourg was well prepared and its role within the global funds industry CSSF's engagement, its evolving guidance and the laws that we are discussing at Luxembourg level gave market participants confidence to build credible tokenization projects.

00:22:22: And of course I hope firms like Arendt & Price will have played their part well helping turn legal and operational readiness into real structures for clients!

00:22:35: That's

00:22:37: a nice way to wrap up todays episode.

00:22:39: Thank you both very much for your time and to our listeners as well, it was pleasure to hear more of perspectives from two different areas sort.