BlogMainA Blueprint for an Ecosystem with New Capabilities As financial institutions navigate a rapidly transforming landscape, particularly within the wealth and asset management sectors, they face a crucial decision point: adapt to the emerging era of tokenized funds or risk obsolescence. Blockchain technology has made considerable headway, with over a thousand individual chains developed to date, and this number is swiftly growing. However, for tokenization to reach its full potential, significant technological upgrades are necessary to achieve a scalable, compliant, and efficient ecosystem for tokenized finance.A Blueprint for an Ecosystem with New Capabilities

A Cost-Effective Path Forward: The Modular Technology Stack

Tokenized asset ecosystems are inherently complex, encompassing various types of assets, solutions, and compliance requirements. For effective adoption, financial institutions need to develop a modular technology stack with four essential layers:

  • Asset Layer: Manages the different types of tokenized assets, providing a solid foundation for asset diversity.
  • Solution Layer: Encompasses the specific business applications of tokenization, such as fund management, lending, or trading.
  • Permission Control Layer: Ensures compliance with regulatory requirements by controlling access and validating participants.
  • Infrastructure Layer: Provides scalability, resilience, and security, supporting the safe operation of tokenized assets across networks.

A modular stack allows institutions to integrate and update each layer independently, enhancing flexibility and ensuring the system evolves with market demands. (See Exhibit 16.)

Deep-Dive #1: Permissioned Control for Compliance Needs

Ensuring robust compliance is paramount in tokenized finance, as institutions must safeguard data privacy, enforce cybersecurity, and develop protocols for disaster recovery. This involves addressing key questions in three critical areas:

  • Security and Encryption: Are blockchain protocols resilient against threats like hacking and unauthorized access? Can assets be securely transferred only to verified wallets? Additionally, ensuring only authorized participants validate transactions and implementing safeguards to prevent malicious actions are vital considerations.

  • Data Privacy and Confidentiality: Blockchain infrastructure must support privacy at all levels, from asset transactions to individual wallet details. Incorporating cryptographic techniques such as zero-knowledge proofs or multi-signature wallets can maintain confidentiality while safeguarding data integrity.

  • Disaster Recovery and Continuity: Institutions need continuity plans to ensure operational resilience and data integrity during system upgrades or potential network failures.

While some institutions have opted for private or consortium-led blockchains to meet these compliance requirements, they often find these solutions expensive. Although public blockchains can offer a cost-effective alternative, their perceived lack of permission controls presents an adoption challenge. However, advances in "permissioned" public blockchain setups are making it possible to reduce costs while maintaining the necessary control. For instance, leading firms like BlackRock, ABN AMRO, UBS, J.P. Morgan, and Franklin Templeton have begun to leverage public chains such as Ethereum and Avalanche for their tokenization initiatives. This shift highlights a growing preference for the cost efficiency of public chains without sacrificing the permission control critical to institutional operations.

Deep-Dive #2: Blockchain Scalability for Economic Efficiency

For tokenized finance to be economically viable, transaction costs must remain low, especially considering that subscription and redemption fees in tokenized funds could be as minimal as 10 basis points. Transaction costs, known as "gas fees" on public blockchains, can vary significantly—ranging from less than $0.001 to $2 per transaction, depending on the network used.

The complexity of secondary transfers in tokenized funds often involves executing multiple transactions to validate conditions through smart contracts, which can increase fees. To maintain economic feasibility, the total gas fee for each transaction should ideally stay well below $0.10. This is crucial to ensuring that tokenized funds remain attractive to investors and scalable for large-scale adoption.

Unlocking Tokenized Finance: Collaboration for a Frictionless Ecosystem

To reach the full potential of tokenized finance, institutions must work collaboratively to develop a universally accessible financial ecosystem. This collaboration is essential for establishing clear, globally recognized standards in three key areas:

  • Regulatory Clarity: Developing robust guidelines for tokenized funds, including AML/KYC protocols, digital asset security, and secondary transfer procedures, will facilitate smoother compliance and adoption across borders. Institutions must also define the qualifications required for tokenized fund management and clarify the types of on-chain money accepted within the ecosystem.
  • **Operational Standards: **Ensuring consistent operational standards is critical for cross-jurisdictional distribution and scalability. Leveraging existing mutual recognition frameworks, such as the Mutual Recognition of Funds (MRF) arrangements, can support compliant cross-border transfers. A standardized set of automated controls will further reduce compliance complexity and streamline fund distribution.
  • Technical Interoperability: Cross-chain operability is essential for a cohesive ecosystem, especially when smart contracts are deployed across multiple blockchains. Defining common cross-chain interfaces will ensure that key smart contract features—such as transfer controls and collateral management—remain functional across platforms. Implementing risk-based security protocols will further enhance data integrity, creating a reliable and secure infrastructure for tokenized finance

A New Era in Asset Management

The evolution of tokenized finance mirrors the early development of exchange-traded funds, which transformed asset management through innovation and cross-industry cooperation. By establishing standards, fostering interoperability, and focusing on secure, compliant frameworks, financial institutions have the opportunity to build an inclusive ecosystem for tokenized assets. As these efforts progress, tokenized finance is poised to redefine the landscape of global investment, creating a more accessible, efficient, and secure market for institutions and investors alike.