Key Points:
- Legal & General (L&G) considers tokenizing liquidity funds using blockchain technology.
- The UK government has authorized tokenization for recognized funds under specific regulations.
- Tokenized assets could offer increased efficiency, liquidity, and tailored investment portfolios.
- Other major asset managers, such as BlackRock, are already seeing success with tokenized funds, like the BUIDL fund on Ethereum.
- Franklin Templeton has also entered the on-chain fund space but has recently been outpaced by BlackRock’s BUIDL.
A New Frontier in Fund Management
The concept of tokenizing traditional financial assets is rapidly gaining traction among leading investment firms, with one of the most prominent examples being the London-based pension and investment management company Legal & General (L&G). L&G, through its investment arm, Legal & General Investment Management (LGIM), is now exploring the possibility of tokenizing liquidity funds by utilizing blockchain technology. This move signifies a broader trend in the financial sector toward digitalization and the incorporation of innovative technologies like blockchain to enhance operational efficiency and expand investment options.
LGIM’s Move Toward Tokenization
LGIM is one of the world’s largest investment managers, overseeing approximately £1.14 trillion ($1.4 trillion) in assets. Ed Wicks, Global Trading Head at LGIM, has confirmed that the firm is actively investigating methods to offer its liquidity funds in a tokenized format. Tokenization would allow the creation of digital shares or units of these funds, making them more accessible, tradeable, and potentially more liquid.
The primary advantage of tokenizing liquidity funds lies in the increased efficiency and potential cost reductions. It would enable broader access to investment solutions for a wider range of investors, from retail to institutional. Liquidity funds, designed for short-term and ultra-short-term cash management, could benefit from blockchain’s ability to facilitate instant and transparent transactions. This would allow investors to quickly convert their assets into cash while maintaining low-risk exposure.
The UK’s Regulatory Approval for Tokenization
The push towards tokenization is supported by recent regulatory advancements in the UK. In November 2023, the UK government granted approval for recognized funds to develop tokenized investment products. These products, regulated by the Financial Conduct Authority (FCA), are permitted to use tokenization for trading and redemption activities under certain conditions. Importantly, the portfolio composition must only include traditional assets such as equities and bonds, while excluding cryptocurrencies. Additionally, the tokenized assets must adhere to existing valuation and settlement processes, ensuring that they meet regulatory standards for investor protection.
This regulatory move has opened the door for investment firms like L&G to experiment with tokenized products while maintaining compliance with established financial regulations. It represents a cautious yet progressive step toward integrating blockchain technology into mainstream finance.
Tokenization’s Potential to Revolutionize Fund Management
The potential benefits of tokenizing assets are vast. According to Michelle Scrimgeour, chair of the UK government’s working group on fund tokenization, this innovation could revolutionize the asset management industry by enhancing liquidity, improving risk management, and enabling the creation of bespoke investment portfolios. For example, tokenization allows for fractional ownership, enabling investors to buy smaller portions of assets, which could democratize access to high-value investments traditionally reserved for wealthy individuals or institutions.
Additionally, the blockchain infrastructure supporting tokenized funds ensures greater transparency and traceability. Every transaction is recorded on the blockchain, allowing for a clear audit trail and reducing the chances of fraud or mismanagement. The elimination of intermediaries, such as brokers or clearinghouses, further streamlines the process and reduces operational costs.
The Rise of Tokenized Funds: BlackRock’s Success
While L&G is just beginning its exploration of tokenization, other major asset managers are already seeing substantial success in this area. One notable example is BlackRock’s USD Institutional Digital Liquidity Fund (BUIDL), launched on the Ethereum blockchain. Each BUIDL token represents $1 and allows its holders to earn interest. The fund invests 100% of its assets in cash, U.S. Treasuries, and repurchase agreements.
Since its launch in March, BUIDL has attracted over $550 million (¥80 billion) in assets in just four months, showcasing the growing demand for on-chain liquidity funds. The ability to earn interest through tokenized assets, combined with the security and transparency provided by blockchain, has made BUIDL a popular choice among institutional investors seeking low-risk exposure to U.S. government bonds in a digital format.
Competition in the On-Chain Liquidity Fund Market
BlackRock is not the only player in the tokenized liquidity fund market. Franklin Templeton, another asset management giant, has been offering its Franklin OnChain U.S. Government Money Fund (FOBXX) since 2021. Like BUIDL, this fund also invests in U.S. government securities and leverages blockchain technology to provide liquidity and transparency.
However, despite being an early entrant into the space, Franklin Templeton has recently been overtaken by BlackRock’s BUIDL in terms of market share. The rapid success of BUIDL highlights the increasing competition in the on-chain liquidity fund market and suggests that investors are becoming more comfortable with blockchain-based financial products.
A Step Toward a Digital Future
The decision by Legal & General to explore the tokenization of its liquidity funds reflects a broader trend in the financial industry toward embracing blockchain technology. Tokenization has the potential to unlock new efficiencies, reduce costs, and democratize access to investment products. As more regulatory frameworks, like the one in the UK, emerge to support this technology, we can expect to see even more traditional financial institutions experimenting with tokenized assets.
While L&G is still in the early stages of its tokenization journey, the success of BlackRock’s BUIDL and Franklin Templeton’s FOBXX demonstrates that the demand for tokenized financial products is real and growing. As blockchain technology continues to evolve, it will be interesting to see how traditional financial products, such as liquidity funds, adapt to this new digital landscape.
