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Funds network Calastone has a vision of tokenizing the entire asset management sector, not just the funds but the underlying assets. Tokenized assets may one day replace mutual funds, with each investor having a portfolio uniquely tailored to his or her risk-reward preferences.
Approximately 2,500 asset managers, distributors and service providers are a part of the Calastone funds network that processes ?200 billion ($276 billion) in monthly transactions. Yet despite its size, it’s still a small proportion of the total value of the sector, which stands at more than $50 trillion worldwide. We’ve been using blockchain for order management since May of this year, but blockchain is just the beginning.
CTO Adam Belding, spoke to LEDGER Insightsabout the future potential to “reconnect investors and asset managers even more directly and create something that goes even beyond an investment mutual fund.In addition to the following,This sentence could be translated as follows: he continued,
He continued, “Soit’s almost like a scaled model portfolio with millions of differentvariations that directly invests in any of the underlying assets thata fund wants to invest in.In addition to the following,This sentence could be translated as follows: he continued,
That involves tokenizing cash, equities, bonds, derivatives and other assets, and is the reason why Calastone is a member of tokenization standards body the Interwork Alliance.
Our analysis found some striking parallels between the model portfolioand eToro's social investing concept, where the public can clone a participant's portfolio, usually an amateur.
One of the benefits of tokenization is the ability to fractionalize the underlying stocks, bonds or other derivatives, much like mutual funds fractionalize portfolios. It also brings transparency.
“They(investors) can very clearly see exactly what they’re invested in,how they’re performing. Since you can easily see that you are not taking a tobacco or oil company, the ESG angle has been covered very well. “So the endpoint that we’re trying to hit is enabling the industry to take these steps,In addition to the following,This sentence could be translated as follows: he continued, Belding added.
Those things don't happen overnight. Let’s first look at where Calastone stands today, before going over the potential path to that future.
Calastone's use of blockchain
Calastone's solution is built on order routing. If the investor buys funds through a bank, the order is routed via our Calastone solution to the manager or transfer agent of the fund. The Calastone platform is aDistributed Market Infrastructure (DMI) which leverages blockchain technology since May 2019.
Originally introduced by Calastone, DMI Fund Services goes beyond order routing toward fund administration, with the first stage targeting transfer agents. An automationplatform such as Calastoneshould eliminate transfer agents, butBelding said it’s “enabling transfer agents,In addition to the following,This sentence could be translated as follows: he continued, rather than eliminating them.
Through DMI FundService, Calastone not only stores the gold records of transactions, but also the asset managers’ entire fund registers.Apart from facilitating corporate actions such as dividends, the ‘single source of truth’ could eliminate reconciliations.
One key point with a money market network, however, is that only the network operator's integrations with asset managers or service providers are made. Every transfer agent or distributor needs to implement these integrations themselves.
The path towards the big blockchain vision
On the topic of integration and interoperability of blockchain solutions, Belding is not so optimistic.
This amazing vision of a global blockchain, where everything runs reliably and there's real DVP (delivery versus payment) and all this cash is there, and it all works. The sky is about as blue as it gets, said he.
He believes the internet of blockchains is in an indefinite future since there area large number of different components being created, all of which may not be interoperable at all for some time. You’re simply redesigning a system that already exists and bringing them together in a slightly different way because they are all based on the blockchain. Belding said “it’s a massive challenge, but it’s worthwhileIn addition to the following,This sentence could be translated as follows: he continued,.
How does thistle with Calastone’s big vision? Calastone’s one-stop shop solution is ideal for the funds industry, and serves its self-interest a bit.A shared market infrastructure exists between fund managers, but the network itself is in fact owned by Carllyle's Calastone rather than being owned by the funds industry as a whole.
However, in reality, if such a vision is applied to the entire sector it might save the entire industry thousands of dollars, even if it results in monopolistic profits. More likely, there will be a small handful of players given there are others eyeing a similar idea, including FundsDLT and Allfunds. Despite that, Calastone is still a head start.
There are several challenges associated with blockchain technology.
A big obstacle to enterprise blockchain adoption is adoption friction.Calastone can handle this on a number of levels, including APIs and SWIFT messages as well as spreadsheets.
There has been difficulty due to the fact that blockchains are not databases, and that companies need relational databases to query data normally. So thetransactions from Calastone’s privateEthereum blockchain are synchlated with a database.
When asked how many third parties host the Calastone blockchain, we came to the conclusion thatCalastone’s network is still pretty centralized.
In Belding's comments, he noted some changes to its blockchain technology are being driven by discussions with companies who plan to host nodes.
To date, Calastone used a private permissioned version of Ethereum using Proof of Authority, but it’s close to completing an update to a different Ethereum version, Hyperledger Besu, which Belding described as being “purpose built for an enterprise financial services environment.In addition to the following,This sentence could be translated as follows: he continued,
Besu is a newer version that has the capability to support privacy out of the box and uses its own permissions system rather than permissions granted by various parties.
Our team has also noted that Besu's creators and ConsenSys' backers have designed Besu as an entry point to public blockchain for enterprise.
According to Belding, if new channels of distribution can be built “there (public Ethereum), we’re in a great position to take advantage of this.In addition to the following,This sentence could be translated as follows: he continued,
