Wealth managers seek clearer rules for tokenised assets

Institutional investors and wealth managers are seeking greater regulatory clarity and cross-border harmonisation to make tokenised assets easier to adopt, according to an ST0x study.

The study found almost two-thirds (63%) of institutional investors and wealth managers say tokenised assets would become mandate eligible if they were Securities and Exchange Commission (SEC) registered, while almost half (48%) believe tokenised assets would be mandate eligible if the associated trading venue was licensed

The global study, covering 200 institutional investors and wealth managers found 42% say they are more likely to invest if the instrument has a prospectus approved by an EEA regulator, while 26% would like to see sponsorship or backing by a global systemically important bank, the research across North America, the UK, continental Europe, the Middle East and Asia Pacific found.

The research across North America, the UK, continental Europe, the Middle East and Asia Pacific found firms would value a single approved instrument which is distributable across multiple EEA jurisdictions. Nearly two out of five (38%) say this would remove a significant compliance burden, while more than half (55%) say it would make a moderate difference.

When asked what would be most likely to increase their firm’s traded volume in tokenised securities over the next year, 29% of professional investors say automatic and predictable corporate action handling across all event types. More than a quarter (27%) say named, regulated custody of the underlying with independent verification.

Just under one-fifth (19%) of study participants say a legally enforceable claim on the underlying security would most increase trading volumes in tokenised assets, while 17% say approval by an EEA or equivalent regulator. Six percent cited deeper secondary markets and tighter spreads while 3% said lower transaction costs.

The biggest potential regulatory changes in the next 24 months that would concern tokenised asset investors highlighted by the survey is divergence between US and EU treatment creating fragmented liquidity cited by 39%. Just over a quarter (27%) say instruments being reclassified after allocation has been made, while 25% point to enforcement action against a major venue or issuer. Just 7% say the continued absence of any clear framework would be the biggest concern.

Nick Magliocchetti, Director, S01 Issuer GmbH and Director, ST0x Group, said: “Regulatory certainty and institutional-grade infrastructure will be critical to unlocking the next phase of tokenised securities adoption. Investors want confidence that a tokenised security represents a legally enforceable claim on the underlying asset, that it can be held with a recognised custodian and traded on a regulated venue, and that corporate actions can be handled reliably. As these foundations develop, tokenised securities can move from being treated as an emerging digital asset category towards becoming a familiar and mandate-eligible way of accessing traditional markets.”

Tokenised ETFs are identified as offering the greatest near-term utility to one-third of survey respondents versus 28% who say tokenised single name equities are an easier entry point. Almost two-fifths (39%) see both as offering equal near-term utility.

The study revealed a preference for a consented and narrower universe of stocks when investing in tokenised assets. When asked to choose between two tokenised equity products offering exposure to the same underlying shares with one requiring the consent and participation of each underlying issuing company, comprising around 40 names, versus one with no such consent covering over 2,000 names, just under half (49%) selected the former. Just over a quarter (27%) chose the larger universe while 24% said it would depend on the names available in either product.

Nick Magliocchetti, Director, S01 Issuer GmbH and Director, ST0x Group, added: “Investors are saying breadth of choice is not the same as utility. They want names they know, with clear rights and reliable custody.

“Tokenised ETFs can provide an equally compelling entry point, particularly given their diversification and familiarity, but the common thread is clear: investors want tokenised products that they can understand, trust and incorporate into existing portfolios.”

Re-disseminated by Wealth and Society