Fund tokenisation: from experimentation to scale

00:00:03: Hello and welcome to this Alfie podcast part of the annual report series.

00:00:07: Today we are looking at a topic that has moved steadily from theory, to practice fun tokenization.

00:00:14: For several years Tokenization was seen as an emerging concept something with clear potential but still waiting for the right conditions.

00:00:23: This is now changing.

00:00:25: There has been progress in distributed ledger technology, we have a more mature regulatory framework and the growing market interest in more efficient fund infrastructure.

00:00:35: To help us understand what this shift means for industry and investors I'm joined today by Isadora Pardo Senior Vice President of Industry Affairs at Alfie.

00:00:45: Hello

00:00:45: Isadora Good morning Michaela.

00:00:48: Why is tokenization gaining momentum?

00:00:51: Well, fund organization is building on the distributed ledger technology.

00:00:56: And tokenization allows for a fully digitized single process to legally document all of relationships between the fund, investor, distributor, depository and custodian.

00:01:10: so no more paper or mail fax etc... While legacy system may remain they need to be integrated in this digitize framework.

00:01:23: So the companies that are launching tokenized fonts, they're no longer in pilot phase.

00:01:28: now.

00:01:28: regulation is mature for these products.

00:01:31: The technology is up to speed and ready And investor demands which has been slow in picking-up speeds In the past.

00:01:41: it's not in progress through various use cases so Now investment firms are really starting to see the value going forward.

00:01:50: for instance, tokenized money market funds is a use case that is really gaining momentum.

00:01:57: And on that topic we will have our webinar under the twelfth of May so don't hesitate to participate in this webinar and listen to our experts!

00:02:08: On the other hand some other large players like asset services are implementing operational frameworks and organizational structures tokenized funds like hybrid TA and digital TA.

00:02:21: What are the benefits of fund tokenization from an investor point-of-view this time?

00:02:26: Well, there many benefits And I see in particular five benefits that include first faster and streamlined settlement That will be also enhanced with a possibility for the settlement of subscriptions and redemption to be processed In Emoni Token which will further facilitate and streamline the settlement of the transactions.

00:02:50: Second, I would mention increased transparency auditability and traceability.

00:02:56: Third, I'd mentioned reduced administrative frictions as automated processes reduce reliance on intermediaries.

00:03:06: Fourth is the flexibility in access and holding models.

00:03:09: Investors could obtain a twenty-four by seven self service access, And last but not least – The cost!

00:03:18: The use of smart contracts on automation can reduce operational overheads and bring potential costs saving to both investors & issuers For instance In white listing for KYC in more streamlined corporate action processing, in transfer restrictions etc.

00:03:40: The use of the distributed ledger technology will lead to a better user experience and lower cost operations which can partially be passed down into the investor.

00:03:50: so this is really our benefit.

00:03:52: Okay how are regulators and regulation paving their way for tokenization?

00:03:57: There has been progress there as well.

00:04:00: That's very true and there has been progress both at EU level, as well as Luxembourg.

00:04:06: Let us start with the EU.

00:04:08: The EU is recently starting to look into simplification.

00:04:14: In particular in digitalization space.

00:04:17: there have been issues of a proposed digital simplification package.

00:04:23: Also MISP is looking to extend the DLT pilot regime, which was initial regulation for all transactions on blockchain into a more forward-looking regulatory framework with higher thresholds and broader scope etc.

00:04:45: Alfie supports some of proposed regulatory measures while others remain controversial.

00:04:52: In Luxembourg now, in twenty-twenty five the blockchain follow which is the fourth opus of the Blockchain law in Luxemburg was dealing with issuance.

00:05:03: non listing securities on the block chain and investment fund shares are part this non listed security.

00:05:10: so very much concerned.

00:05:13: The Blockchain Follow also introduced a concept for control agent function and there are some actors that have very much interested in the topic.

00:05:24: Very recently also, The CSSF amended their FAQ on the law of December twenty ten And especially Question one fourteen.

00:05:35: In this amendment they allowed for the settlement of subscriptions and redemptions electronic money tokens, so this is a big improvement for the whole subscription and redemption process.

00:05:50: You mentioned the introduction of the control agent function.

00:05:53: what does it mean to tokenize funds?

00:05:56: Well blockchain follow allows investment firms & banks To issue dematerialized shares on the DLT using a control agent as an alternative to the former central account keeper.

00:06:09: What It Means?

00:06:10: Traditionally, under the Luxembourg law investment funds were allowed to issue shares in registered, bearer or dematerialized form.

00:06:20: And this remains.

00:06:21: but the blockchain follow and a control agent operating model consequently exclusively addresses in the dematerialized form, and this is very important.

00:06:36: These dematerialize shares will be issued and maintained in tokenized form on the blockchain.

00:06:42: We discussed that with a CSSF And they recently confirmed that investment fund share issuance could be processed differently depending On the form of the issuances.

00:06:52: So the former register shares still require transfer agent and registrar according to traditional operating model The dematerialized shares, if their issues and maintain on a DLT biocontrol agent do not require the intervention of transfer agents providing all controls under governance processes are duly performed by the IFM or outsourced to control agents with proper oversight as prescribed in sectoral law.

00:07:26: So the control agent is a CSSF supervised intermediary mandated by the fund to issue, record and deliver dematerialized funds units on the DLT.

00:07:38: The control agent also maintains single authoritative golden source records for these tokens.

00:07:46: Alfie has published in twenty-twenty five explaining the control agent function and interest for the investor in particular.

00:07:56: We have also published a recent update on our member collaboration hub, on March fourth of May twenty-twenty six.

00:08:06: so if you are members do not hesitate to go look at it

00:08:09: Isadora!

00:08:10: Are we already seeing some market players active in the issuance tokenized funds especially maybe in the usage space?

00:08:18: Oh yes, we are.

00:08:19: In twenty-twenty five for instance Franklin Templeton issued the first money market fund in a tokenized form so native tokenize Money Market Fund in Luxembourg and they chose Luxemburg as their European jurisdiction.

00:08:36: but Franklin is not an isolated case.

00:08:39: Kasei, for instance is now having a service of a hybrid TA.

00:08:45: So they can service funds that would have part of their fund shares in the traditional form and part of there fund share in dematerialized forms also with single TA.

00:09:01: BNP Paribas also looked to issue tokenized money market fund shares, so as you see there are many players looking into this.

00:09:10: Fund tokenization really enables for more efficient fund distribution via regulated digital marketplaces with potential of trading around the clock.

00:09:22: So more and more traditional crypto platforms, which were active in crypto assets have obtained or are now obtaining MIFID license.

00:09:32: We can see some actors on the market like Crankin or Bitstamp.

00:09:37: Tokenization could enable users of these platforms to diversify their portfolio from risky crypto asset towards investment in Luxembourg funds.

00:09:47: And last but not least, I would like to mention that the first control agent license was granted in twenty-twenty five To invest rate and other licenses for control agents are now in progress as Other actors are really looking into the benefits of this operating model.

00:10:04: Maybe you had to conclude could you tell us what our Luxemburg strength?

00:10:09: In positioning itself For the future have tokenized fans in Europe?

00:10:14: First, I would mention the CSSF.

00:10:16: The CSSF is really a proactive regulator and in particular they have dedicated innovation hub that's ready to look at all of different projects from industry players.

00:10:26: They're easy-to-contact and skilled to look into different projects.

00:10:33: The second aspect are historical cross-border distribution and ecosystem.

00:10:39: that has been in Luxembourg since the beginning.

00:10:43: Today also, we cannot avoid noticing that tokenisation is high on the regulatory agenda.

00:10:50: It's a major topic for the Ministry of Finance.

00:10:54: so this is not an isolated initiative by industry but together with all players in the industry and ecosystem Alfie now has a dedicated conference for all digital matters and digital finance professionals.

00:11:12: It's the Alfie Digital Conference, which had an occurrence in twenty-twenty five and another one in twenty twenty six And we can see based on the topic and high attendance that definitely The topic is of very much relevance in Luxembourg or Europe.

00:11:30: Thank you very much Isadora.

00:11:31: My takeaway is that tokenization is becoming a more practical and strategic topic for the fund industry.

00:11:38: what was once mainly seen as innovation at the margin, it's now closer to how funds may be issued, serviced or accessed in the future And As The Market Evolves, Luxembourg seems well placed to contribute its fund expertise and bring together the ecosystem needed to turn innovation into something operational and scalable.