Clearstream Banking SA

03/26/2024 | Press release | Distributed by Public on 03/26/2024 04:00

Charting the Future: How DLT and Tokenization are Reshaping Investment Fund Distribution

Charting the Future: How DLT and Tokenization are Reshaping Investment Fund Distribution

26.03.2024

Investment fund distribution is on the cusp of a fundamental transformation. Real-world applications of new technology that address long-standing challenges and issues are growing. Olivier Portenseigne, CEO of FundsDLT believes DLT and tokenisation are well on the way to becoming the foundations of a new, modernised distribution chain.

Digital transformation, DLT and tokenisation simplify complex processes, reduce costs, enhance technical cooperation between actors, and open investment opportunities to a broader audience. This is especially relevant for the investment fund industry and its fund distribution activities.

In this context, the integration of FundsDLT, with its focus on future-proofing investment fund distribution via its platform and the setup of a new generation of services, into Clearstream Fund Services will result in a more-rounded offer for fund distribution actors. FundsDLT is a decentralised platform based on blockchain that enables the reengineering of the investment fund distribution value chain. It provides solutions for all player in the distribution chain to enable deeper collaboration between them and its stated aim is to make fund distribution easier, cheaper, and more transparent, with particular emphasis on access to funds for all.

Oliver Portenseigne, FundsDLT CEO, highlights this aspect saying, "At the heart of FundsDLT's mission is the understanding that we're not just building technology; we're crafting the future of investment fund distribution, where access is democratised and efficiency is paramount. Digital transformation and DLT are the keys to unlocking a world where funds are a simple option for all investors."

Fund Distribution Today

While other financial sectors have developed and modernised over the years, the fund industry in general has been slow to change. Although individual companies can be innovative, what has been missing is an overarching vision that cuts across the entire value chain. The industry is heavily intermediated with many redundancies and it was in this context that FundsDLT was created in order to make fund distribution cheaper, faster, and more transparent.

The existing distribution chain is complex, involving many actors, and here we focus on three: asset managers, distributors in the broadest sense including financial advisors, and investors. These have distinct yet interconnected needs, all of which can be effectively addressed by emerging technologies.

Distributors seek efficient, cost-effective means to expand their reach, while investors demand simplicity, transparency, and control over their investments, challenging the status quo of the traditional fund distribution processes. On the other hand, asset managers strive to attract these investors and manage their investments amidst regulatory challenges and shifting expectations, often hindered by a lack of direct visibility into the investor's real needs. In this respect, fund distribution is almost unique in that the product initiator has no real view of the product buyer.

These needs cannot be fully addressed by single actors because added to them is the fact that the fund distribution chain has in-built redundancies. A glaring example are the multiple separate ledgers throughout the chain, coupled with the redundancy of investors being required to provide the same documents to the various actors in the chain.

Clearly, if the fund distribution sector can address these needs and challenges, it can unlock significant benefits. As Olivier Portenseigne points out, "This really is a strategic imperative for the fund industry. It represents a paradigm shift towards achieving operational excellence and superior investor experiences."

He adds that, "The journey of digital transformation is not a short one. It's about reimagining possibilities and delivering real value to all stakeholders in the entire fund distribution chain." A solution will therefore involve a comprehensive re-engineering of the chain. The technological infrastructure supporting this transformation must be robust, secure, and scalable, necessitating the development of new platforms capable of handling high transaction volumes, ensuring data integrity, and providing necessary security.

Successful re-engineering in a complex chain like fund distribution requires collaboration across the ecosystem, involving technology providers, regulatory bodies, asset managers, distributors, and others. Shared standards and platforms play a pivotal role in facilitating interoperability and adoption.

Fund Distribution Tomorrow

Over the past few years, several initiatives have emerged, championed by diverse entities ranging from startups to established financial institutions. Now, the fund industry is at a tipping point, transitioning from the experimental phase and initial adoption of digital transformation and DLT to widespread implementation. What does this practical implementation look like? How does the use of DLT (and tokenisation) impact real-world fund distribution?

"Digital transformation as we see it is about offering the opportunity to create value at every link in the chain and every step in a process, turning challenges into opportunities for growth and innovation," says Oliver Portenseigne.

At the most basic level, that of a ledger, DLT significantly streamlines operations by automating processes such as subscriptions, redemptions, and transfers of fund shares. Smart contracts, self-executing contracts with the terms of the agreement directly written into code, can automate these processes, reducing the need for manual intervention and thereby lowering operational costs and the potential for errors.

It boosts transparency and trust by ensuring transactions are immutable and visible to all involved parties, aiding real-time tracking and analytics. Additionally, DLT enhances regulatory compliance with transparent, unchangeable transaction records and smart contracts that ensure adherence to regulations.

For some actors, a notable advantage of DLT is its ability to facilitate tokenisation of fund shares and units. Among many other benefits, tokenisation on DLT platforms can significantly reduce the time required for settlement of trades. Traditional transactions can take days to settle, but tokenised assets can be transferred near instantaneously.

DLT in the Real World

These are concrete benefits that can be seen in the real-world uses of DLT and tokenisation that are now in production. Let us look at some of these in more detail, and specifically threemodels that FundsDLT operates with: direct to consumer fund distribution, digital transfer agency and services under a B2B2C model (such as an intra-group shared infrastructure).

D2C: Direct-to Consumer fund distribution

Historically, selling shares of investment funds in Europe was, and often is, the domain of banks, insurance companies and financial advisor networks, although recent years have seen the rise of dedicated fund platforms. Additionally, one important link in the distribution chain, the transfer agent, is not really set up for D2C sales.

D2C fund distribution means direct fund distribution by asset managers. This foundational use of DLT streamlines operations, offering operational efficiency and significantly reducing acquisition costs for asset managers. It especially responds to the needs for automation and scalability, which are essential in order to manage thousands of accounts and to provide a good digital investor experience.

Asset managers can thus adopt a cost-effective, client-centric approach leveraging their brand values, ensuring rapid digital onboarding and seamless transaction processing. This enables them to target new segments, fostering asset growth, and gain valuable information and data insights. Consequently, asset managers can efficiently monitor, manage, and advance Direct-to-Consumer fund distribution.

An example of this is the Beewise investment app, developed by FundsDLT for the Italian asset manager Azimut. This is a D2C fund distribution solution that includes a fully digital investor account opening experience, reducing the barriers typically associated with starting an investment journey. Importantly, it also provides direct access to the fund registrar through order processing, cash settlement and register maintenance, thanks to the FundsDLT platform.

The Digital Transfer Agent

Traditionally, transfer agents serve as intermediaries, acting as gateways to distributors and investors while forming the primary point of contact for client interactions. However, transfer agent processes are manual and labour-intensive. Recognising the evolving landscape, asset managers want to offer better services, above all for a new generation of intermediaries - both financial entities like neo-banks and non-financial institutions engaged in embedded finance-geared towards delivering digital services.

The introduction of a fully digital transfer agent addresses these issues. This use of a digital transfer agent extends the D2C model above, but it can be used on its own in other contexts as it enables greater automation and workflow management. Importantly, it permits the asset manager to preserve flows with existing distributors that are using legacy systems while allowing the managers to open up opportunities with new digital distributors via APIs.

On the data side, transparency can be enhanced. It removes the need for aggregation of investor orders at transfer agent level, giving asset managers immediate transparency. Overall, this model brings much needed rationalisation and cost reduction.

An example of this developed by FundsDLT is its digital transfer agent partnership with Standard Chartered, which addresses the challenges tied to the expanding retail fund distribution landscape. By using FundsDLT's platform delivered as a Software as a Service (SaaS), Standard Chartered can offer asset managers a more efficient, digital-first approach to serving their clients via a streamlined and efficient front-to-back solution.

B2B2C models

The third use of DLT is that of multi-part network and B2B2C, where many companies need to interact.

This is perhaps the most interesting case for DLT in fund distribution and one that can have the most benefits. It orchestrates an entire ecosystem of companies, fostering efficiency gains and cost reductions across the entire network. It can also accommodate participants within the network employing legacy technologies.

Moreover, the introduction of shared decentralisation eliminates the complex steps associated with the retrieval, aggregation, and processing of data. This paves the way for capturing more and higher-quality data in real-time, unlocking possibilities for real-time data analytics. A decentralised infrastructure enables the seamless access of information beyond internal boundaries, presenting solutions to contemporary challenges.

It provides better interoperability between the broadest possible range of actors, including with existing banking systems. In this manner, the boundaries between internal and external business environments can be eliminated.

Examples of the B2B2C model developed by FundsDLT include the delivery of this solution to a new generation of market infrastructure in Asia, as well as the creation of a node-to-node connection for fund transactions between a Swiss bank and Swiss asset manager.

Road to Adoption

The fund distribution sector is at a pivotal moment, exploring DLT, tokenisation and digital transformation's vast potentials. Tokenisation, in particular, is poised to revolutionise investment fund distribution.

Adopting a DLT-based system requires a phased approach, acknowledging the coexistence of legacy and new systems. Next-generation technology (Cloud, APIs, blockchain) service providers like FundsDLT play a vital role in guiding financial institutions through this digital shift, focusing on integrating robust use cases with existing infrastructures. These efforts aim at addressing market-specific needs, enhancing fund distribution management and refining the interaction between various stakeholders.

"The transformation of fund distribution is built on innovation and collaboration," mentions Olivier Portenseigne, "and the synergy between new actors and the traditional ecosystem represents a new horizon for fund distribution. Collaboration across the ecosystem is key to unlocking the full potential. By working together, we can pave the way for a more transparent, efficient and inclusive financial future."

A holistic approach towards DLT adoption aims to create a dynamic fund distribution ecosystem, transitioning towards a more efficient, integrated model that bridges traditional limitations. By leveraging DLT and tokenisation as well as other next generation technology, the industry is not only adapting to the digital era but also paving the way for substantial operational improvements and market growth.