Tokenbridge believes the funds industry will tokenise from the periphery not the centre
- Future of Finance
- Mar 15, 2024
- 37 min read
Updated: Jan 30
A Future of Finance interview with Stephen Ashurst, CEO of Tokenbridge
Tokenbridge is a software company which has embraced a tokenised future for the mutual funds industry. Its founders, all of which have long experience of the traditional funds industry, believe tokenisation can make funds cheaper to issue and service but – unlike most blockchain-based start-ups in the industry – their vision has less to do with cutting the costs of production and operation and more to do with widening distribution. The blockchain-based system Tokenbridge has built offers issuers of funds (fund managers) and distributors of funds (wealth managers) the software tools to make tokenised funds easier to find, compare and buy through a single app (aggregation) and in forms and combinations that better suit the needs of the investor (personalisation). The company strategy is based on the conviction that using digital technology to transform how funds are distributed is not a nice-to-have. The Boomers that dominate fund ownership today are yielding to a post-Internet generation that expects investment advice, and fund purchase and sales processes and reporting, to be digitised. Delivering this, especially to portfolios of modest value, cannot be done without transformative technology. Yet fund managers and distributors that fail to use technology deliver a full and compelling digital experience, warns Tokenbridge, will enjoy a smaller share of a global marketplace that tokenisation will enlarge massively. Dominic Hobson, co-founder of Future of Finance, spoke to Stephen Ashurst, CEO of Tokenbridge, about how to apply the experience of the past to building a bridge to the future that does not require a revolution today.
Key Insights
The friction – operational cost and complexity and data latency – created by the legacy technologies used by the funds industry has become such a significant source of cost that it threatens the profitability of the industry, but a combination of blockchain and artificial intelligence (AI) technologies can fix the problem.
Tokenisation using blockchain technologies can reduce the costs associated with buying and selling and owning funds, while AI technologies can make personalised investment advice viable for much smaller investment portfolios, enabling fund managers to sell more funds on a fully advised basis to more investors at lower cost.
The securities industry will gain more than the funds industry from the introduction of central bank digital currencies (CBDCs) because there is as yet no secondary market in funds, whereas having central bank money on-chain to settle the cash leg of tokenised security transactions will enable investors and their advisers to enjoy the risk and cost benefits of atomic settlement.
Mutual funds present an easy use-case for tokenisation because, unlike securities, they are bought and sold on a principal basis at high cost and there is no secondary market, where transactions are difficult to support because of the lack of fiat currency on blockchain networks, but tokenisation will eventually embrace the underlying assets owned by funds.
Tokenbridge is using tokenisation technology to offer wealth managers and their clients services which aggregate funds in a single, white-labelled app (both traditional fund tokens and fund tokens issued and traded on any fund exchange can be captured) and personalise the on-boarding, advice and investing experiences using programmable tokens.
Digitalisation of processes and digitisation of data via programmable tokens is a must-have for asset and wealth managers to survive the transfer of wealth from Boomers comfortable with analogue technology to younger generations that insist on digital technology, including in the provision of investment advice and the management of accounts and tax wrappers.
Although the cost of friction will be reduced, it will not be via disintermediation of functions such as custody, depositary banking, fund accounting, transfer agency and payments because such functions are legal requirements, traditional funds and their service providers will persist for decades alongside tokenised funds, and on-chain fiat currency is a distant prospect.
By using technology to reduce the cost of issuing and distributing funds, and cutting the minimum size of a portfolio at which advice is viable by a factor of five, Tokenbridge predicts that the size of the global fund industry can expand five-fold, because traditional mutual funds will be able to compete with exchange traded funds (ETFs) for the first time in 20 years.
Privately managed assets and alternative asset management strategies are early candidates for tokenisation, not solely because they currently rely on antiquated operational infrastructure, but because tokenisation promises managers wider distribution and investors greater diversification of asset classes.
In the debate over the merits of asset-backed versus purely “native” tokens, Tokenbridge is neutral but expects to aggregate both types of token, and traditional fund shares, and anticipates the development of enhanced services such as calculating NAVs as batches (“blocks”) of transactions are settled and writing prospectus terms into tokens.
Personalisation of investing may include the emergence of outcome-based products, in which managers sell to investors not risk-adjusted market returns (as they do today) but guaranteed outcomes, in a financial services version of streaming on demand, though outcome-driven investing will require the funds industry to be capitalised more like the banking industry.
Transcript
00:14 Dominic Hobson: Hello, I’m Dominic Hobson, Co-founder of Future of Finance. My guest today is Stephen Ashurst, Co-founder and CEO of Tokenbridge, a blockchain-based service for retail funds and distributors that uses tokenisation to transform the infrastructure of the funds industry and enable wealth managers to engage more successfully with potential clients using digital technology. Stephen, thank you very much for taking the time to be with us and share your knowledge and insights with our members.
00:44 Stephen Ashurst: You’re very welcome. It’s a privilege to be here. Dominic, nice to meet you.
00:50 Dominic Hobson: The founders of Tokenbridge have, if you look at their CVs, deep institutional asset and wealth management experience. What has that experience taught all of you about what’s wrong with the funds industry as it’s structured today?
01:07 Stephen Ashurst: Yeah, thank you. So it’s a good point. I’d actually extend that by saying not only the institutional experience, but distribution experience. So we would categorise that as being advice, basically, particularly for funds. And I think the lesson that we’ve all learned in that journey is there is a huge amount of friction in the industry. As we all know, that has grown up for perfectly valid reasons over time, has reached a state, really, where the tech stack of asset and wealth management is now an encumbrance in its own right to profitability, to the wider economics of the industry, both in terms of issuance and distribution. And I think, as I suspect many of your listeners and members will agree with, that, friction is a headwind that we all face into. And I think we came together to found Tokenbridge with a view to really removing that friction and distributed ledgers kind of jumped out and we’ll talk about that a little bit more detail, I suspect. But that’s our background. And our background is our mission is to, not take out friction for the sake of it, but to widen our industry. And the more people that can get advice we believe the better. And I think that’s what we’ve learned and what we want to try and change.
02:37 Dominic Hobson: So the tech stack is legacy. There’s a lot of friction at a high level. That’s your mission is to take that out of the industry. At the risk of asking you the same question again, you mentioned there that you’d like to expand on this a little bit more detail. If I said to you what needs to be fixed in the funds industry and how Tokenbridge is going about fixing it, can you be a bit more specific about what you’re actually doing?
03:00 Stephen Ashurst: Yeah, sure. Let’s characterise friction a bit more closely. So cost, complexity, latency, and I think one of the promises of distributed ledgers is that those things can be resolved in the favour of the consumer and their adviser, where they have one. Chris Dixon, who’s a general partner at a16z [the arm of Andreessen Horowitz that invests in Web 3.0 technologies], just recently published a book Read Write Own:
Building the Next Era of the Internet, and he’s talking about Web 3.0, the promise of Web 3.0 being the marriage of artificial intelligence and distributed ledgers, meaning that really good advice can be automated, and ownership of that, which is what we’re all about, can be offered to the consumer and their adviser, where they have one. So I think taking out that cost is the place to start, but one also takes out complexity and latency in the ownership of assets. And we would say, and again, we can talk about this a little bit more. Putting personalisation into that mix as well starts to bring the consumer a result that they really want, which is low-cost advice and investments in a competitive and personalised way. So those are the things that we’re targeting, those kind of frictions.
04:17 Dominic Hobson: I’ll definitely come back to personalisation, but before I do, can I ask a very basic question? Is the Tokenbridge offering aimed at asset managers or at wealth managers, what you might call fund distributors as well, or is it aimed at both of those groups?
04:31 Stephen Ashurst: Yeah, great question, Dominic. So we describe the world in two distinct halves, if you like. So, issuers, and we start with mutual fund managers, because that’s an almost perfect use-case for distributed ledgers. It’s a type of over-the-counter transaction. There isn’t a secondary market, et cetera, and it’s full of cost and friction, as we’ve just discussed. So we say issuers will and already are beginning to issue tokens. And that’s on the one hand, and let’s call those asset managers, in your words. But in the future, that could extend to companies issuing shares or other exchange traded instruments, like fixed income securities and ETFs [Exchange Traded Funds], et cetera, all to follow. And on the other hand, we also deal with wealth managers, what we call distributors. So this could be IFAs [Independent Financial Advisers], RIAs [Registered Investment Advisors], private banks in the UK and the US, and we’re saying to them, look, if tokenisation is happening anyway in the market, you want to be able to access that and be on the front foot. So our solution plays a part in what issuers are doing with tokenisation, but really becomes very useful for consumers and their advisers, where they have one.
05:43 Dominic Hobson: Just so I’m clear about something I think you just said, which is potentially very interesting. This is not just about funds in the long run. This is about the underlying assets, the underlying securities as well. Is that right? Is that what you just said?
05:55 Stephen Ashurst: I did say that. So, yes, I think it’s a journey. It’s a horrible phrase, isn’t it? But it starts with mutual funds because, as I said, they’re very easy to tokenise because there isn’t a secondary market. So there’s no requirement for exchange yet; there isn’t a secondary market. There’s no requirement for exchange or collateralisation, et cetera, in mutual funds. And we’re talking about mainstream mutual funds here, not the more esoteric ones. But yes, exchange traded instruments, I think, will be tokenised. We’re already seeing that with corporate bonds in France in particular. But there are questions around liquidity, collateralisation, exchange. And I think one of the constraints of tokenising exchange traded instruments is the lack currently, of a wholesale central bank digital currency [CBDC]. So everyone’s having to use make do with different types of private stablecoins. And we think that when wholesale CBDCs are available, you’ll see a real turbo-charging of the tokenisation of ETIs [Exchange Traded Instruments], because counterparties will be able to rely on the currency being exchanged for the security, which currently is a problematic extra leg.
07:06 Dominic Hobson: And as you embark on this long journey of transformation, how would you characterise what you’re doing? Are you providing a blockchain platform to begin this transformation, or are you providing a blockchain service? Are you providing something completely different?
07:21 Stephen Ashurst: We’re an aggregator. We have open architecture at our core, meaning whichever token issued by whichever issuer, on whichever blockchain, we will aggregate that. So currently, for example, in the US, you’d have to download Wisdom Tree Prime’s and Franklin Templeton’s BENJI apps as a consumer, in order to take those and to buy those two tokens, and that’s fine. But we think all we know in an adviser, particularly around model portfolios, our white label aggregation software will enable consumers and their advisers, where they have one, to look at all of their tokens together in a single app. I think that’s very important. We’ll come on to talk about types of personalisation tokens that we’re also engineering, like KYC [Know Your Client], letters of authority and plan admin[istration] and so on. When all of that can be aggregated together, you’re beginning to get to one of our end-states, which is a personalised platform in your pocket. And I think that doesn’t exist yet. There aren’t enough tokenised securities or personalisation data around at the moment. But that’s definitely we think that’s the direction of travel.
08:31 Dominic Hobson: Now, any token on any blockchain in a single app is a great vision. It’s a bold claim. The first objection people would raise to that is this lack of interoperability between the various, not just between the various blockchain protocols, but between those blockchain protocols and the traditional industry as well. So lack of interoperability does seem to be a major obstacle to progress in tokenisation in general. What lies behind what you’ve just said? How are you going to help us get to that vision of any token, any blockchain in one place?
09:07 Stephen Ashurst: Dominic, thank you. So our name actually means interoperability, and blockchains were designed to be interoperable – from the blockchains themselves, if we just boil it down to the distributed ledger, is designed to be interoperable and there are lots of standards and protocols continually being published in support of that. I do take your point about TradFi [Traditional Finance]. Our latest model portfolio design speaks to that and we accept … Well, first of all I think, you know, it’s not a clever observation to say that somewhere in Germany or Switzerland today, somebody might be settling a fund transaction with a fax machine. So we know there are different types of technology in play all the time in our industry. But if we just focus on mainstream funds, which is our target, we do accept that TradFi will continue to be part of portfolio construction for a very long time. And so our model portfolio token actually has a hybrid function. It can rebalance tokenised funds and untokenised assets, including fiat cash, for example, as well. So it can speak through an oracle which, for those of your listeners who don’t know, is a blockchain version of an API [Application Programme Interface] to either a general ledger for fiat cash or a more traditional platform. So I think there’s disruption here, but I don’t think disintermediation, because different types of platform will continue to run in parallel for a very long time, perhaps without an endpoint. I think what’s useful and interesting about blockchain and tokenised model portfolios is that they can interoperate with the outside world using very new techniques around oracles and things like that. So that’s our view of the world.
10:51 Dominic Hobson: So you’re aiming at the mainstream industry. You expect large parts of that mainstream industry – TradFi, let’s call it that – will persist over time. Now, one of the objections that your potential users are going to raise is how difficult is this going to be for me to connect to, have an interface to these services? How much budget do I have to find? How much complexity do I need to overcome? So how difficult and expensive is it going to be for your clients, potential clients, to make use of the services that Tokenbridge is providing?
11:25 Stephen Ashurst: Yeah, great question. So we do all that work. So we connect all the blockchain networks, we do the aggregation. We are live with the top three UK wealth managers with the tool currently, and live minting and burning money market fund tokens on that. So we built that from scratch in three months. We have a large engineering team that’s blockchain-focused. So our offer as a software company is obviously to do all that for clients. And we don’t make an ad valorem charge, we have a flat in app fee, which is what you pay in any app that’s not premium. Advisers will pay a small additional charge on top of that. And as a network play, we’re saying to fund managers and other security issuers for that matter, when you’ve tokenised your security, you can host it on our supermarket shelf if you like. And as a network play, like iTunes allows artists to stream music, we intend if we get our network to allow for managers to stream alpha in the same way. And I think that’s an endpoint, again, Dominic, that doesn’t exist at the moment. But our software – it’s not hard to connect to blockchains. That’s what they’re designed to do, and we provide a view across that. So that bit we make as seamless as possible. And I think, I suspect, that as a white label service, we will be mixed up and commingled with whatever wealth managers are offering in terms of app or laptop data presentation to their consumers currently. So you might be another tab on an app which is around the tokenisation bit.
13:05 Dominic Hobson: You’ve used the word personalisation more than once in this conversation. Now, this is a long-standing dream of the funds industry in particular, to move away from those generic investment products towards something which actually is tailored to the particular needs, right down to the level of the individual investor with their particular collection of assets and liabilities looking over a 40-year period even. Now, as I say, you’ve mentioned personalisation quite a lot. What is that actually going to mean for your clients? Are we talking here about a kind of modernised version of a managed account or we’re talking about bespoking people’s portfolios? And I also wondered what part tokenisation plays in personalisation. So tell us a bit more about what you mean by personalisation, what your vision of it is and what the tools you’re going to use to bring it about are.
14:00 Stephen Ashurst: Yes, of course. So not everything needs to be tokenised. Not everything needs to be on a blockchain or a distributed ledger. In fact, I always set three tasks. Is there a need for the data to be accessible equally? Is there a need for the data to be transparent? And is there a need for the data to be trusted? If a use case passes those three tests, then one has a use case for tokenisation. So in and of itself, personalisation information is digitalised right now, today. There are countless very advanced CRM [Customer Relationship Management] systems out there that do that. But this is different. This is about programmability and control. And we also say that if issuers are taking friction and therefore cost and latency, et cetera, as we discussed, out of issuance through tokenisation, and that’s saving them a significant cost saving on the traditional stack, the same is true for advisers. The advice stack can be tokenised too, and that means friction, latency, cost and complexity is taken out. I can give you some examples, and I should warn everyone that this is where it gets acronym rich, but letters of authority (LOA), KYC [Know Your Client], AML [Anti Money Laundering], there’s a long list of all of those things that advisers do, and it includes data capture and data re-use in all of those areas. Now our approach, and I give you KYC as an example, it’s in the public domain. One of our first customers is a KYC issuer. At the moment this is a subset of digital identity. Digital identity, by the way, I think is the preserve of government and will remain so. But KYC is a subset of that. It’s a gas bill and a passport or a driving licence checked. So one of our first customers, The Trading Group, they do that currently for clients such as Santander and NatWest, and child trust funds and lost pensions. And we’ve developed a token at the end of their existing off-chain, manual basically, KYC checking process. They’re going to mint a new token called Valid, V-A-L-I-D that has a yes/no flag on it and an expiry date. And that goes in the aggregator too. So the consumer only has to do their KYC once. It’s been cryptographically sealed. And the credentials validated put into the aggregator and can be used thereafter in that way that I just described: equally accessible, transparent and trusted. This is a big benefit for the consumer. They don’t now have to do KYC multiple times. And assuming all the issuers accept that KYC, and many do, actually household names do at the moment with our first customer, you can see obviously immediately how useful that could be. We’re proposing to actually extend that design so that each new regulated token that a consumer acquires in the aggregator increases their score by one. So it’s like a credit score and all the private information is off-chain. In fact it’s been burnt off-chain digitally, so it can’t be hacked. And I think, you know, that’s a really good working example of that. But actually advisers, a wealth manager, it will cost between £1,000, £1,500, £2000 perhaps to go and see a client for the first time. So what if fact find, letters of authority, KYC, AML checks and goals and objectives could be personalised and that could be put in the aggregator. We’re actually going to push that further. We’re saying that ISAs [Individual Savings Accounts], GIAs [General Investment Accounts], perhaps SIPPs [Self-Invested Personal Pensions], 401(k)s [Tax-advantaged defined contribution retirement plans offered by employers in the United States], IRAs [Individual Retirement Accounts, another tax-advantaged savings plan available in the United States], can be tokenised too, and it then gets to the place where it’s programmable. So the tokens in the aggregator don’t just represent personalisation data, but they can do things like check an ISA subscription limit or [whether] the underlying token is one of the qualifying investments. So that doesn’t exist yet at the moment – just to say that many times in this interview. But that’s where we are projecting that the industry will travel to and – it’s one of the things we call our thing – it is a personalised platform in your pocket. So a bit like Apple’s iPod, it allows total flexibility of choice by the consumer and a degree of automation that’s not been possible before, through tokenisation. Tokenisation doesn’t solve everything, but it moves us a whole way forward.
18:21 Dominic Hobson: To make sure I understand what you just explained, when you were talking there about making that whole AML, KYC, CFT [Countering the Financing of Terrorism] process more efficient, you were at one level describing the resolution of a longstanding problem in the industry of this customer onboarding experience, if you like. Every time you buy a fund you have to go through this process all over again with your gas bill and bank account and all that. And I can see that is a clear instance of taking friction out of the process. But if I understood you correctly, you’re also thinking of this as a way of what we might call fund distributors, wealth managers, understanding their customers better and using that information to create for them investment portfolios which meet their needs more precisely than any product they have today. And then in order to execute that improved, more bespoke portfolio, you think tokenisation has a part to play. So there’s like the three layers here, improved onboarding experience, more exact portfolios, and actually a tool for delivering those portfolios. Have I understood that correctly?
19:30 Stephen Ashurst: Yes, I think in broad terms that you absolutely have. Look, but this isn’t optional. So global wealth AUM [Assets Under Management] is US$145 trillion. That’s six Americas in terms of GDP [Gross Domestic Product]. That’s probably the largest TAM [Total Asset Management] in human history and the richest cohort in time and space. The Boomers will pass on, and so 50 percent of that, that’s $70 trillion is about to change hands in the next ten years to a cohort who are all digital natives and will be still happy, the stats show, to pay 180 basis points per advice, but they’re going to want it totally on their terms. In other words, under their control, customised and a little bit fleeter of foot in terms of settlement and migration and changing advisers than exists currently. So I don’t think it’s optional. I think we had robo advice, and great strides were made with that, but it was a bit cookie cutter in its approach, I think. I wouldn’t articulate or advocate for personalisation data to be tokenised in and of itself. But when that can be programmable and put in an aggregator alongside assets, you do have, through smart contracts, the ability to tailor outcomes a lot more closely. If ISAs, for example, could be tokenised and the rules around them programmed as smart contracts, the reason why the government is leaning in is this is a way to close the advice gap. So instead of needing US$200,000 minimum liquid investable assets to be economically viable to an adviser, it might be USA$40,000, which by the way is the average US citizen’s retirement life savings. So the government realises that cheaper funds means effectively cheaper advice. Not just cheaper advice, but more advice can be made available and better life outcomes. So the government isn’t altruistic, it’s seeing fewer impecunious old people by closing the advice gap. They’ve been telling us this for a very long time. So tokenisation can not only increase the possibility of personalisation, people trust it because they’re in control of their own tokens and data. It’s on their phone, my tokens on my phone. And I think that gives them that combination of trust and personalisation is actually the key equation, because I will then engage far more with my assets and my plans on the token level to get a better outcome for the right price. Today, I think 70 per cent of inheritors sack their legacy adviser. So when you pull all these things together, and the digital native thing, and the fact that Generation X and below are much more on their phone and much more seeking customisation, this is, to my point, about read, write, own. That control aspect is probably the first time in history that consumers and their advisers have been in total control of the design of the portfolio. We’ve seen with the growth of model portfolios, how popular those things are, and tokenisation could really kind of turbo-charge that. So I think it’s a trend that sounds outrageously science fiction but is actually happening right now.
22:38 Dominic Hobson: Now I think I understand. It’s about creating a digitised service which is fit for this transfer of wealth from Boomers to Gen X and Gen Z. I think that’s clear. Can I ask about one other term you’ve used a number of times in this conversation? That’s the word aggregator, sometimes token aggregator. Can you explain to our members what you mean by that? Because it seems to me it has more than one meaning for you.
23:04 Stephen Ashurst: Yeah, it starts off as a fund supermarket which we all remember – and [which] are incredibly useful. And I was around at the beginning of that industry. And if you think now that most mutual funds are bought through what is effectively a fund supermarket, that’s self-explanatory. And I think that’s where aggregation begins. So we have a super power, which is our open architecture, not because we want to connect to as many blockchains as possible, but [because] we want to have as many different fund tokens as are available. So that’s what aggregation means, but it actually has an extension because as I said, we’re a network play, and once we have a sufficient number of tokens in the aggregator they can be made programmable with each other. Now we’re not an issuer of tokens, we’re not regulated, we’re a software company, we’re a white label B2B [Business to Business] software company. But we want to make it really easy and useful for issuers to issue and distributors to distribute. And I think the word aggregation, it’s an ugly word, isn’t it? And it doesn’t really do justice, but it starts to speak to making all of that interoperable, to a design that fits, let’s say, distributor one versus distributor two, and that’s the promise. I think this is why we talk about commingling asset tokens and personalisation tokens, because that’s the way we get customised results. So aggregation goes further than just being a supermarket. It’s a bit like home shopping on Ocado. They deliver exactly what you want. It comes from a factory full of robot pickers powered by software. That’s a similar analogy to what we’re proposing for assets and portfolio construction.
24:55 Dominic Hobson: You’ve said more than once that your goal here is to make it easy to issue and distribute these tokens – that you’ll be doing all the work. Just on a narrow question. If I’ve understood your model correctly, you’re not actually offering a client a tokenisation engine. They’ll have to find that somewhere else. But if you’re offering to make it easy to issue and distribute, why doesn’t it make sense for you to offer a tokenisation engine service?
25:22 Stephen Ashurst: Yeah, that’s a good question. Millions of dollars are being expended right now on tokenisation. We’re very close to many issuers. They’re all doing it slightly differently. No one yet I don’t think, is building their own blockchain. For example, we’ve seen Hyperledger Fabric, we’ve seen Stellar, we’ve seen Ethereum Virtual Machines like Aptos, Arbitrum, Avalanche, Polygon, a long list. We don’t have a dog in that fight, if you’ll forgive that phrase. But because I think we’re agnostic and that’s our strength. And we’ve witnessed the speed with which, for example, Ethereum Virtual Machines have developed, and I think that will accelerate. So we want our distributors to be able to get access to the best blockchain issued tokens available. So we don’t want to constrain it. We don’t want either to say to people who are thinking of issuing, you’ve got to do it this way, you’ve got to do it that way. I think that innovation will thrive, and we want to just say, when you’re ready to issue, tell us how you’ve done it, and we’ll do that. Some, for example, historically have issued on to very low gas, low smart contract blockchain networks with omnibus wallets. Others are going down the segregated route and so on. So we’re not constraining. And I think we don’t want to be a blocker. We want to say, when you’ve decided you want to issue and you’ve picked your blockchain, tell us how to connect to it safely and securely, and tell us how your consumers and their advisers want to access that.
27:00 Dominic Hobson: A minute ago you mentioned fund supermarkets. And like you, I’ve been around long enough to remember when these first came along. But I’m less optimistic than you are, perhaps, about what happened subsequently. It seemed to me that these fund supermarkets actually morphed into fund platforms which were really … Whose real client was the fund distributors, not the end-investors. And this prompted a thought in my mind. You also brought this word up, the word disintermediation up. To what extent is … The connection here is that fund supermarkets became fund platforms which were a form of reintermediation rather than disintermediation. Is Tokenbridge a disintermediation threat? If you’re to achieve all the goals you want to reduce cost, complexity, risk in this system, are you going to be a disintermediation threat to the incumbents, to all those intermediaries who are out there? And maybe we can talk a bit about benefits you offer some of those intermediaries. But first question is, should incumbents feel threatened by Tokenbridge?
28:04 Stephen Ashurst: No, I don’t think so. I really don’t, because I think know there’s going to be a very long tail of demand for TradFi. As I said, somebody somewhere in Switzerland or Germany is settling a fund transaction by fax right now. Faxes haven’t been disintermediated; they’re used in a different way. Email, ditto. So I don’t believe that actually for a moment, and that’s not what we’re advocating. What we are talking about is choice. So through widening choice, and we’re only really talking about mainstream funds, and I don’t think disintermediation is the word. In fact, if the economically viable cohort of people who can now afford advice widens from those who’ve got a minimum of US$200,000 to those who’ve just got US$40,000, we are literally talking about hundreds of millions, if not billions more people on the planet who will now want to and can afford because of this level of automation advice. So I think that the industry will quintuple in size, not shrink. And I think that incumbents will play a significant role in that as well. With Tradfi assets that just don’t want tokenise, I can’t see that going away. We are quite a way off a Central Bank Digital Currency [CBDC], so there’s still a need, for example, for fiat currencies and general ledgers and the reconciliation of cash and stock on that basis. But I think it wouldn’t surprise me in parallel if we started to see fund managers emerging who are token-only – mainstream funds, actively managed funds that now have a cost profile closer to ETFs and can trade in a similar way. You might see NAVs [Net Asset Values] moving to be much more rapid. Here are fund managers having the ability to get back on terms with ETFs for the first time in 20-odd years. So I think that what tokenisation and removal of friction will do is actually vastly increase the size of the wealth market for all players. I don’t see a disintermediation play in.
29:57 Dominic Hobson: That you’ve talked much more about what’s going to stay the same in TradFi and the market’s going to grow and change won’t happen rapidly because we don’t have fiat currency on chain, and so all these reconciliation processes will go on for a while. You touched there just towards the end, towards an upside, a benefit for the incumbents in the ability maybe of mutual funds to keep up with ETFs, for example. But if we look at all the intermediaries in the industry, the fund accountants, which you talked about a minute ago, the transfer agents keeping the register of who owns what, the depositories fulfilling the functions they’ve been given under the UCITS [Undertakings for the Collective Investment in Transferable Securities Directive] and AIFMD [Alternative Investment Fund Managers Directive] measures – the custodian banks, of course, who are looking after the underlying assets, then these fund platforms we talked about a minute or so ago, and of course the various fund distributors themselves: the banks, the wealth managers, the private banks, the IFAs and so on. So you’ve got more than half a dozen intermediaries there. Do you have clear in your mind when you’re in front of people like that, what are they going to gain from this as opposed to everything staying the same, to see them out of their careers so by the time they retire, the system will not be transformed. But in the long run, what is the upside for fund accountants, TAs [Transfer Agents], custodians, fund platforms, from what you’re doing?
31:21 Stephen Ashurst: Yeah. well, what you’ve described, if I may, are legal functions as much as technical. So I can’t see, for example, custodians disappearing in a hurry because the government needs a party with a balance sheet capable of making consumers whole, where there’s an issue, and ditto transfer agencies and asset servicers and so on. So I think if we live in a world, as I predict, where more people want more wealth advice and more wealth products – funds – because they’ve become more economically viable with less liquid investable assets, you’re going to see more of those roles. And whilst they might not be entities with their own relational database in a stack, they might instead be nodes on a doughnut shaped distributed ledger, they’re all written into all the fund prospectuses that exist currently. And I think that they could continue if people wanted them to, as nodes as much as they can do as discrete elements in a more vertical stack. So I’m not sure is the answer. I think that it will take time, in any case. All of the roles that you’ve talked about are professional in capability and they offer a service. Now who’s going to do that if they don’t? So I think, legally speaking, they’re not going to go away in a hurry. I do think, though, that in terms of data, the promise of distributed ledger – a bit like the calendar, which is one of the first distributed ledgers, we all have equal access to it, it contains all the history that’s ever gone before, each block of time that’s issued, we don’t have to reconcile it – that’s powerful. But calendars existed before they were distributed. It was just more frictional. So I think there is still a role for all of those actors, but they may need to redefine themselves in terms of what their service proposition is. And I suspect that everyone will move up the value chain and become more useful, whether it’s in legal terms or not, by using distributed ledgers. It’s just there’ll be less reconciliation required in all these instances.
33:25 Dominic Hobson: They will survive in the short term because they need to, because they’re needed. Their legal functions, the functions they carry out, cannot be replaced overnight. But you would expect their service offerings to evolve into something different. I don’t know, a transfer agent doing a registrar today may end up reconciling analogue and digital fund registers initially, may find some entirely new role, running a kind of blockchain-based register as well, and so on. What you’re really saying to me is change is going to occur quite slowly here and these organisations will have time to adapt.
34:01 Stephen Ashurst: Well, I think, yes, there are speeds here, though. I think that tokenisation is a fact. It’s happening right now, it’s achievable and the industry is ready to do that. But TradFi is going to be around for 20-30 years. So there’s the tail. It wouldn’t surprise me in five years’ time to see a mainstream of tokenised assets capable of fully functioning and in their own right as tokens, and it being a token only play. That is one of our predictions for mainstream retail investments and savings. But for the more esoteric things, look at private funds. Alts [alternative asset classes] even now run mostly on very antiquated technology. Could they be tokens? So it flips, doesn’t it? Could those things that are hard for consumers to access currently, like hedge funds and private and alts, et cetera, if they were tokenised, would that mean that they could form a part of a model portfolio distribution to the extent that they haven’t before? And I am actually saying, where more consumers can afford advice, more wealth products will be manufactured and sold. So I remember when the spreadsheet was introduced, everyone said, “Oh, this is the end of accountancy.” Well, no. Turned out that it’s 100 times bigger than it ever was and everyone uses a spreadsheet. And I think that we’ll see a similar thing with tokenisation. It will just enable the industry to grow far bigger than it could do on its current tech.
35:30 Dominic Hobson: Yeah, the concern is we just don’t want to give people an excuse not to think about what the future could be like and how the future could better. I mean, talking of which, you mentioned that a central bank digital currency (CBDC) is still a way off. Does that – and I’m going to ask you a very specific question here now, maybe you can answer this as an abstract question as opposed to something which is practically achievable right now – but would the fund industry benefit from atomic settlement? I’m assuming here that we can have fiat currency on-chain, whether it’s a CBDC or a tokenised deposit or something else. But would the industry benefit from atomic settlement?
36:11 Stephen Ashurst: Yes, because it allows greater trust. If right now the industry is making do with a ramshackle collection of fully collateralised private stablecoins, great, and it doesn’t stop atomic settlement happening through those stablecoins. But if, you know, and, well, I should qualify that by saying that for mutual funds because there isn’t a secondary market or questions of, you know, liquidity and collateral and exchange, this actually isn’t a major issue. But if I want to buy a tokenised IIG [Intuitive Investments Group] share off you in the future, I’m sure you’d much prefer me to pay with a Bank of England issued digital pound. So you can see how that’s just going to be better. I actually don’t think there’s a need for retail. I read, you know, the Bank of England talking about payment mechanisms with retailers and consumers. I think that, if I may respectfully say, that’s something of a red herring. I think that what we actually need is a wholesale CBDC. So for example, for my ISA, I could convert 20,000 fiat pounds from my high street bank account into 20,000 tokenised pounds so that I can use for my retail savings and investments transactions. I think that’s the context. And then I could, when I go and buy a coffee, I’ll convert it back to digital money that I have right now. It’s perfectly satisfactory. There’s no need to create that layer of transformation. It’s really just for the wholesale, for the transactional element of it.
37:46 Dominic Hobson: Let’s talk a little bit about the wider environment you’re launching this business into. At one level, you’re, I guess, a technology vendor, a software vendor. Who do you see as the competitors Tokenbridge? Is it companies like Wealth Wizards or is it some of the more conventional vendors of, I don’t know, mutual fund technology? Who are your competitors?
38:12 Stephen Ashurst: I think we have a lot of competitors. I think a lot of former crypto exchanges are retooling around regulated tokens such as fund tokens. For the record, we don’t support any kind of cryptocurrency. We’re not interested in that. So I can see them emerging over time. We also think some of the incumbents have got fabulous networks and integrations running and they could easily work with us or alongside us or in their own right. As another instance of this, remember that we’re talking about personalisation as a real useful add-on here. So I think that there will be competitors emerging. I’m sure there are others out there right now. We’re aware of a couple in the US as well. But our particular thing is open architecture and personalisation. And I think at the moment that’s designed so that we can be really useful to consumers and their advisers. And I should stress that a lot of people are talking a lot about issuance and I get that. We’re not. We’re talking almost exclusively about distribution and personalisation. And so this is, I think, a slightly newer part of the market.
39:25 Dominic Hobson: The Investment Association (IA), which is the trade association for the UK asset management industry, has taken a quite intense interest in the possible benefits of tokenisation of funds for its members. I don’t know how carefully, or whether you’ve had time, to read its publications on this, but is it your sense that the work of the Investment Association on tokenising funds is proceeding in the right direction?
39:51 Stephen Ashurst: Yes, I do. I think so. And we’ve watched what they’ve been doing, we’re participating now as well. And I think that we would always encourage talk about personalisation to happen and distribution. And so I think that they have got themes around that emerging and we’re very supportive of that. I think, you know, issuance is underway and I think distribution is the next chunky subject to discuss. So we would always encourage that conversation to happen. I think the Investment Association has been actually very helpful and useful in that respect.
40:26 Dominic Hobson: A lot of what you’ve been talking about is really about updating – I appreciate your focus is wider than this – but it’s about updating funds for the coming digitisation of the entire investment and savings industry. And you sometimes hear people say that mutual funds in particular are an analogue product in a digital age. Is that a statement you’d agree with? And do you have a clear vision of what the fund of the future will look like? I’m conscious I’m asking you to repeat some things you’ve said already. But this seems to be a live debate now about whether the funds industry can carry on as it is, or whether it needs to be fundamentally reinvented. That’s why the Investment Association has embarked on the investigations it has. And one reason for that need for change is because the economics of the industry are deteriorating. So they need to cut costs, they need to cut risks, they need to improve distribution, they need to personalise products. Would you go along with that? That we need to upgrade an analogue product for the digital age?
41:31 Stephen Ashurst: Well, that’s a really good question. I don’t think many people wake up in the morning saying, “I must go and buy a mutual fund.” And I don’t think that’s ever been the case, nor will it be in the future. And I think, however, actively managed mutual funds, regulated, safe, distribution of underlying, careful management, track record, performance history, those are all things that I would feel comfortable advising if I was an adviser to a consumer, and that remains the case. So I think whether or not they are paper certificates way back when, or units on a relational database, or tokens on a distributed ledger, I think that people still want to buy alpha and they want to buy outcomes. And I am aware of the debate and I think there’s some really powerful and … Ian Hunt has got a great paper out there on the subject and I think it’s a fascinating story. No, I think mutual funds will only increase, actually, I think if they become cheap, if the cost and friction is taken out through tokenisation, more and more people than ever will want to be advised to buy a mutual fund. Look at the growth in ETFs over 20 years. I think funds have been off the boil. Mutual, actively managed mutual funds have been off the boil for that period. But if more people can afford advice, more funds are going to be sold. So we need more fund management and more advice, not less of either. And I think, you know, people get better financial outcomes as a consequence of that.
42:56 Dominic Hobson: You mentioned Ian Hunt, and, yes, he has a radical view of how the industry could evolve. And at the risk of making a mockery of the depth and complexity of what he was saying, the essence of his argument is that tokenisation is going in the wrong direction right now, where we’re in effect producing asset-backed tokens. So the asset continues, whether it’s a financial asset or something else, continues to exist in the real world. And we’re not going the whole hog. We’re not having fully native tokens issued onto blockchains. And in his view, that means that the entire paraphernalia – we’ve talked about this already, of fund accountants, custodians, depositories, transfer agents, all of that remains in place, and so the costs remain in place. Not only that, but it also makes it very difficult to achieve the – you referred to[this] – better outcomes and the ability of investors to buy outcomes. And perhaps we can talk about that separately. But if we don’t go the whole hog towards fully native tokenisation, in Ian’s view, we’re not going to get the benefits. I don’t know where Tokenbridge sits in that debate between the radical Ian Hunt view and the more conservative Investment Association view that we must proceed cautiously. I mean, it’s perhaps a religious discussion, but I wonder if you had a view on it.
44:23 Stephen Ashurst: We don’t have a horse in that race, to twist my own analogy. So we would aggregate whatever tokens fund managers want to produce. We’d love to see the more radical ones emerge. I think they will do in due course. I think we did say that there will be token-only fund managers. And I could see Ian’s ideas being adopted wholeheartedly by them. And why not? And maybe there is about to emerge a fund that doesn’t have all of those actors that we talked about in the stack. I could see that’s viable now; that is actually viable. So I think, again, what tokenisation has given our industry is a fresh breath of life. How about a NAV every block? How about turning each of a prospectus’s clauses, including concentration risk and cash management, into a function of a smart contract, and totally automating all of that? Paraphernalia or not, automation is going to surge like a riptide through what we do. And I think this is power to the arm of fund managers. They could go down Ian’s route and go the whole hog, or they could proceed cautiously. I think we’re seeing both models emerging at the moment. Tokenbridge’s view is we will aggregate them all, and we’d love to. And we’ll also speak to the TradFi world because we think that actually personalisation is where this goes. And Ian’s right on that point. The more that an investment product matches my, for example, or your, preferences and outcomes, the more popular it’s going to be. And we take the friction out and it’s affordable. This is all good. Ledger tech doesn’t change very often. I think the Venetians invented the double-sided ledger. In 1974, I think it’s a British computer scientist called Ted Codd, invented the relational database, and now Satoshi [Nakamoto], by accident, has made distributed ledgers viable, even though we’ve had the concept for a long time, like a calendar. So in 600 years, not much has changed. But each one of those paradigm shifts was absolutely mind expanding and changed the way finance works completely. So I don’t see why that couldn’t be a possibility.
46:27 Dominic Hobson: Can I tease you out a bit more on this outcome question? You’ve referred to better outcomes, the ability of investors to buy outcomes – you did just a second ago. But the Ian Hunt radical view isn’t just that you’ll get a better outcome than you would have had without any change; in other words, these intermediaries take less out of the investment returns than they might have done before. He is talking, in his most radical version of asset managers actually undertaking to deliver particular outcomes. So they’re saying, “Well, we know that in 30 years’ time, you need this amount of money to retire for 20 years successfully. We guarantee to give that to you.” That has huge implications for how the industry operates today. It has huge implications for how the industry capitalises itself. Do you think that tokenisation, as it evolves over the next 20 or 30 years, might actually start to encourage that kind of fixed outcome-based investing? Or is this another dog race in which you don’t have a dog, as it were?
47:32 Stephen Ashurst: Well, yeah, it is that. I mean, we’re aggregator, right? And we’re a software company and a white label one at that. We’re not a fund manager, we’re not an issuer. I mean, the only comment I’d make on Ian’s thing is that guarantees cost money. So someone somewhere is going to need to post the capital to meet the guarantee as well as doing the activity of matching the liability to the goal. That being said, we’re a software company, we’ll aggregate these things. I think, look, artists stream music on iTunes, right? No longer do you have to go and buy a CD with six tracks one side and six on the other. What Ian’s talking about is very similar. So fund managers or fund management or asset management companies could stream alpha right to a tailored outcome. And if that tokenisation can help that, and it does play a part, it’s not everything, then, yeah, that’s possible. So I think that sort of futurology is really relevant, but I’ll leave that to the expert asset managers and Dr. Hunt to tell us how that can actually work.
48:40 Dominic Hobson: I’m not going to let you get away that easily on the futurology thing. I’ll come back to ask you about your vision of the future in a second. Just on a narrow question before I do. You said you’re not a fund manager; you’re not a fund distributor; you’re a software company. Does that mean you’re not regulated or you are regulated? What’s your regulatory status?
49:00 Stephen Ashurst: Yes, so software companies can’t be regulated. That being said, all of our issuer customers are regulated and all of our distributor customers are regulated, and all the things that they do are regulated. And in fact, we are still, even as a software company, caught by consumer duty, for example. So we think and act and behave as if we’re regulated. If we’re required to, we will become regulated. But our view at the moment is as a white label B2B software company we’re not. I mean, I’ve spent my entire career in the regulated industry, so nothing has changed in that regard.
49:40 Dominic Hobson: And you’re not under pressure from those issuers. You describe yourself as a software company, but actually your reach is beyond simply selling people software and charging them a subscription fee for using it. Actually, you’re actually looking to transform the industry. You haven’t yet had conversations with potential users saying, “Well, we are regulated, we’d like you to be regulated as well.” That conversation simply hasn’t arisen yet?
50:07 Stephen Ashurst: No, not yet. We have US attorneys. We’ve checked that we’re not a venue either, for that matter. For example, we’re not an exchange. We are deliberately and specifically positioning ourselves as a software aggregator. But if that arises and changes, then of course we’ll be regulated. We’re not offering crypto assets either, so we don’t need to be registered with the FCA [Financial Conduct Authority] as such. We’re not a direct consumer offering. I take your point, though. As personalisation tokens become more and more specific, then it wouldn’t surprise me if that changed. We are never going to be an issuer of any token. That’s our position. We’re not going to compete with our own customers. So as long as that remains true, then we don’t need to be regulated.
50:50 Dominic Hobson: Stephen, this is my last question, and as I said a minute ago, I’d like you to give us a glimpse of the future as you see it. What do you think the funds industry, I’m talking narrowly of the funds industry here. What do you think it’ll look like when the Tokenbridge model has reached full fruition?
51:08 Stephen Ashurst: Enormous, global, five times bigger than it is today. People getting great financial advice earlier in their lives and having transformed outcomes because of it. Personalisation. Personalisation on the phone, with customised, ISAs, customised SIPPs and model portfolios, literally in every phone of every person on the planet. And that’s before we’ve spoken about pensions, which are almost a perfect candidate for tokenisation, particularly in the developing world, where you have two billion people without any kind of pension. If that’s tokenised, you take out corruption, friction, cost. These are greenfield sites. So I can see also pensions being tokenised in the developing parts of the world as a very powerful use-case. So completely transformed. Five, if not ten times bigger, more financial advisers than ever, and consumers getting really good financial outcomes.
52:08 Dominic Hobson: Stephen Ashurst, co-founder and CEO of Tokenbridge, thank you very much for taking the time to talk to the members of Future of Finance.
52:14 Stephen Ashurst: You’re welcome. Thanks, Dominic.
