Tokenization can improve transparency but brings its own challenges
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Tokenization can improve transparency but brings its own challenges

Asset managers and industry regulators face operational challenges around the tokenization of private assets.

Illustration: iStock

In February, Citi announced the completion of a proof of concept on tokenization of a private equity fund in conjunction with Wellington Management and WisdomTree.

“When applied through the value chain from base asset to end investor’s holdings, tokenization and blockchain could enable better ‘look through’ of relevant metrics to end investors – assuming data metrics are brought on-chain and are machine readable,” explains Nisha Surendran, emerging solutions lead for Citi digital assets.

A survey of asset managers conducted by funds network Calastone in the third quarter of 2023 found that 67% of US-based managers and 61% of Asian managers expected to bring tokenized offerings to market within 12 months, with firms engaged in private assets most advanced in their implementation efforts.

Issuers could start to rely on smart underlying assets that encapsulate their core representations with off-chain data feeds to automate allocation strategies. Smart contracts could help automate reporting and distribution, while atomic transactions (where all legs of a multi-step transaction either succeed or fail together) could reduce counterparty risk.

DLT and related technology has the potential to blur boundaries between traditionally defined roles, so regulators need to define protocols and criteria
Nisha Surendran, Citi

“In private markets, tokenization on blockchain can allow for greater transparency on the ownership of an investment and its transaction history, reducing ambiguity and risk around who is managing an investment and how,” says Paul Wong, director of product at open source blockchain Stellar.

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