During this week’s Citi Digital Money Symposium, Russell Barlow of UK asset manager abrdn described DLT and tokenization as ‘transformational’ compared to AI which delivers efficiency improvements. Barlow is Head of Multi-Asset and Alternative Investment Solutions, the division with over £150 billion ($190bn) in assets under management.
“I don’t think in our careers we’ll have an opportunity to be part of something that could be as disruptive as we are looking at in terms of the enhancements that come from DLT and everything that’s associated with it and the ecosystem,” said Barlow.
In his comparison between DLT and AI, he noted that AI has taken off because people can use it and see its benefits. In contrast, DLTs are “a bit boring and they’re quite complex and they use a whole load of terminology that’s not normal for us,” he said. Hence, he sees a need to demystify the sector.
While the discussion was focused on tokenization, he observed that tokenization is built on the infrastructure of the world of crypto, which provides an opportunity to offer clients a new asset class.
It was refreshing to hear someone who fully appreciates the potential of the technology but is also aware of the long road ahead. For example, he emphasized that to encourage adoption, providing something special is necessary to get people to try the technology. So if tokenizing real estate, rather than starting with an industrial building, tokenize a high profile building such as London’s Shard. In the case of bond issuance, it needs to offer a higher yield.
He’s not wrong. Germany’s Union Investment has been one of the most prolific buyers of digital bonds. Last year Union’s Christoph Hock was clear that it gets an extra 15 basis points on a one year bond.
Tokenization: Silos versus collaboration
Meanwhile, from Barlow’s perspective he’s seeing too many companies and projects “doing their own thing” resulting in new silos. There’s a need for companies to work together. At Citi he was preaching to the converted because the concept of the Regulated Liability Network – a shared market infrastructure for institutions – came from Citi’s Tony Mclaughlin.
Barlow raised the question of whether it needs a regulator to act as the “adult in the room” to encourage collaboration. In the UK, the Investment Association is working with the government’s Asset Management Taskforce on the topic.
Choosing your tokenization partners
When engaging with tokenization there are challenges in choosing partners. Barlow noted a natural bias towards working with existing partners who are incumbents. However, they may have an agenda because the technology represents a disruption risk. Or they simply move slower because they’re large. Either way, there’s a risk they can hold back progress if you’re partnering with them.
On the flip side, you might partner with startups that move faster. However, the sector isn’t yet generating a lot of revenue, so that involves operational risk (of your partners not being able to survive).
24/7 trading or one day a week?
Barlow also encouraged smaller steps to prove the utility of the technology. That said, another panelist, Richard Skeet of Hivemind, warned that it’s challenging to get institutional backing for incremental improvements. Broadridge, which has a DLT repo solution processing more than a trillion dollars in monthly transactions, recommends something in between. Choose a narrow focus or niche that can deliver a big win that is more than an incremental step.
For example, there was some discussion of DLT enabling 24/7 trading, something which has opened up some debate. Many have argued that there could already be 24/7 trading today and it’s been tried in a few cases, but there’s no need because people don’t want to transact in the middle of the night. Barlow was of a similar opinion. If tokenization is going to target relatively illiquid assets, there’s an argument for the opposite.
Barlow suggested what he called ‘real estate Thursday’, where one day a week, “real estate or infrastructure assets will trade on a market. And it doesn’t need to be live trading. It can be a bulletin board style trading,” he said. The key is it provides a single day a week where there’s more likely to be guaranteed liquidity versus a dead market 24/7.
“That’s how I think we can maybe drive some of the adoption of the tokenization engines being able to provide liquidity, drive demand, drive participation. It’s through these smaller steps rather than this ‘tadda’ moment when all of a sudden everything’s perfect,” said Barlow. “And if we wait for perfect, it’ll never happen.”
