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 Mungall, and Aaron Sammut, our digital assets funds experts.
In this interview, we explore the fund industry's transition to tokenization, focusing on collaboration among stakeholders to integrate blockchain technology. Our digital assets experts, Dan, Aaron, and David, share insights on enhancing investor experiences and addressing regulatory challenges in a tokenized environment.
In the second part, they will examine how tokenization transforms the investor experience by enhancing accessibility, transparency, and liquidity. Additionally, we will explore the advantages that tokenized funds offer to sponsors, including improved operational efficiency and streamlined processes. Stay tuned for part 2!
Considering the transformation to on-chain fund accounting and investor relations, what fundamental changes or challenges have you encountered, and how has your team leveraged its expertise to navigate them?
Dan: Tokenization in 2024 feels very much to me like crypto/digital asset hedge funds felt in 2017 when Trident first entered that space. There were not many crypto funds in existence and there were even fewer fund service providers attempting to figure out how to provide services to those funds.
Our approach at Trident was to take what we knew about administering traditional hedge and venture capital funds and then leverage industry relationships to fill in the crypto specific gaps to come up with solutions that worked for these funds trading and investing in what for the private funds industry was a new asset class. Through our accumulated experience with digital asset funds and the work we do on the assets they trade and invest in, we are well positioned to use many of the same processes to work with this new wave of tokenized data, including investor registers and tokenized real assets.
Having said that, we will continue to collaborate with industry leaders in the tokenization space to work through all the unique issues that will undoubtedly arise as private funds increasingly adopt that technology.
David: As Dan has noted, the need for agility, thoughtfulness and collaboration continues to be our key to success in this new industry evolution. Tokenisation of the fund itself pushes this further than ever before with theoretical questions arising which have never had to be considered previously – particularly around timing. Activities on the blockchain run in real time – with the ability to calculate valuation at any second of any day. Traditional financial systems, fund accounting and investor servicing doesn’t run on these instant timeframes and the fundamental replumbing of processes are necessary to align to the new reality. It is exciting to work through these new challenges and apply our expertise in both fund administration and the digital asset sector to imagine and deliver new solutions with our partners.
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?
Dan: Previously we were focused on the connections to the blockchain data that we need to put into our fund administration systems in order to do the accounting and investor-related work we do for our clients. We are now focused on automating that data flow by working closely with the technology firms that developed the tokenization platforms and technology our client funds are using.
Aaron: We have seen the biggest results in automations for high-frequency trading funds. Such funds may have up to a million trades a month. If you do not automate your processes, you will face substantial challenges in your procedures and systems due to the large volumes of data. And, as Dan mentioned, this is an “evolution”, it is constantly changing and developing, and as service providers, we need to follow this evolution at the same pace.
What are the current limitations or hurdles you face in transitioning fund accounting and investor relations to an on-chain basis, and how do you mitigate these challenges while the technology matures?
Dan: The end users of the work we do as fund administrators are fund sponsors and fund investors. Whether fund data they are interested in sits in tokenized form on a blockchain or inside more traditional fund administration systems, those end users still want to have that data presented to them in ways they can access and make use of it. That consumption of information still takes place primarily by way of all the commonly used methods of the past 10 years: apps on phones, web portals, and by email.
Fund sponsors and investors continue to want to see user friendly presentations of information, whether that is capital statements for investors or performance reporting for fund managers. As fund administrators, we need to be able to take tokenized data sitting on a blockchain and convert it into views and documents that our clients and their investors can consume.
Additionally, we along with the other service providers in the private fund space are all still working together to figure out how we will continue to do what we’ve always done together for our fund clients but with source data now sitting on a blockchain.
David: On the fund accounting side, there has been a centralisation of technology solutions in the last twenty years, with a general pattern of consolidation through acquisition resulting in a handful of solutions. We have entered a new era of innovation with technologies and platforms now attacking this dominance from various angles, which could lead to a more decentralized delivery of accounting and break some of the market dominance currently visible. The new entrants are not likely to overtake the status quo in the next couple of years (given the decades of investment which have gone into the latter to build very comprehensive solutions) but given the level of knowledge, money and (perhaps most importantly) passion which is present with the new market entrants, there is early signs of disruption.
From an investor services perspective, the last few years have brought to market some incredible solutions in investor onboarding and dashboard experiences. In the US market, the tokenization and streamlining of investor registers has been largely considered, whilst innovation continues to work through how to fully satisfy the AML / KYC considerations of many offshore financial jurisdictions which have more detailed requirements.
How do you balance maintaining traditional practices with adopting new technologies like blockchain for fund accounting and investor relations? What strategies have proven effective in this transition?
Dan: The work we have to do and the deliverables we have as fund administrators do not change just because the data has moved from our server to a blockchain. We will modify our practices to work with the data wherever it lies.
Aaron: I fully agree with Dan. Perhaps, the bigger changes however will be on the transfer agency. Considering that the investor’s experience will be totally on the blockchain – both primary and secondary market, we have to adapt our controls to align to the new reality. But I believe that the strategy we have adopted in the past, i.e. a continuous sharing of knowledge and information between us, the auditors, technology providers, and the fund managers, will also be a success with tokenisation.
David: We are very fortunate to have professionals physically based in almost every key financial jurisdiction globally, with considerable careers in the financial services industry, and a company size which permits collaboration. Our digital asset working group provides a focal point for direction, whilst our client account managers globally continue to constructively challenge and add value to our clients. We remain guided by key accounting, legal and regulatory practices, and knowledgeable to industry and technology trends, to be able to complement our clients with an independent perspective.
In summary, the transformation to on-chain fund accounting and investor relations presents both significant opportunities and challenges for the funds industry. As our experts have highlighted, leveraging expertise from traditional fund administration, fostering industry collaboration, and embracing continuous innovation are key strategies for navigating this evolving landscape. By addressing current limitations and adapting to new technological advancements, Trident is well-positioned to lead in the adoption of tokenization, ensuring that both fund sponsors and investors benefit from enhanced efficiency, transparency, and accessibility.
Watch out for our second part of the interview to follow soon...