Funds network Calastone has a vision of tokenizing the entire asset management sector, not just the funds but the underlying assets. In the future, in place of standardized mutual funds, every investor might have a bespoke portfolio of tokenized assets based on their risk-reward preferences.
The Calastone funds network connects 2,500 asset managers, fund distributors and their services providers and processes ?200 billion ($276 billion) every month. Despite its scale, it’s still a tiny part of the fund sector globally valued at more than $50 trillion. Calastone’s core order routing has used blockchain technology since May 2019, but that’s just the start.
CTO Adam Beldingspoke to LEDGER Insights about the future potential to “reconnectasset managers with retail customers more directly and createsomething that goes even beyond a mutual fund.”
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.”
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.
We noted themodel portfolio has some similarity with eToro’s social investingidea where consumers can choose to clone another investor’sportfolio, 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. The ESG angle is covered really nicelybecause you can see directly that you haven’t been put into an oilcompany or a tobacco company. So we see that as the endpoint thatwe’re trying to get to by enabling the industry to take these steps,”said Belding.
But that’s notgoing to happen overnight. Let’s look at where Calastone is today andthen the potential path to that future.
HowCalastone uses blockchain
At the heart ofthe Calastone solution is order routing. If an investor buys somefunds through a bank, the order goes via Calastone to the fundmanager or their transfer agent. This functionality has leveragedblockchain since May 2019 at scale, and Calastone refers to it as aDistributed Market Infrastructure (DMI).
More recently,Calastone has introduced DMI Fund Services that goes significantlybeyond order routing towards fund administration, with the firststage targeting transfer agents. One might expect an automationplatform like Calastone to disintermediate transfer agents, butBelding said it’s “enabling transfer agents rather than lookingto eliminate them”.
With DMI FundServices, the Calastone platform doesn’t just store the transaction’sgolden record but also the asset manager’s entire fund register.Apart from making it simpler to execute corporate actions such asdividends, the ‘single source of truth’ should eliminatereconciliations.
A key point with any funds network is new integrations with asset managers or service providers are done by the network operator, rather than every transfer agent or distributor needing to implement them.
Thepath to the big blockchain vision
On the topic of integration and interoperability of blockchain solutions, Belding is not so optimistic.
“Thisamazing vision of this global blockchain, where everything runs andthere’s real DVP (delivery versus payment) and all the cash is thereand all the assets are there. That’s pretty much blue sky,” hesaid.
He believes theinternet of blockchains is a distant future because there arenumerous different systems being developed, which likely won’t benatively interoperable for a long time. “You just really end upwith the same ecosystem that already exists now that you have toorchestrate and bring together potentially in a slightly new waybecause they’re all blockchains. But it’s still a massive challenge,”said Belding.
So how does thistally with Calastone’s big vision? The slightly self-serving answeris for the funds industry to use Calastone’s one-stop shop solution.It’s a shared market infrastructure for the funds industry, butinstead of being owned by the sector, the network is owned byCarlyle’s Calastone.
In reality, such a vision might save the entire sector a ton of money, even if it results in monopoly profits. More likely, there will be a small handful of players given there are others eyeing a similar idea, including FundsDLT and Allfunds. However, Calastone has a head start.
Blockchaintechnology and its challenges
One of thebiggest issues with enterprise blockchain is adoption friction.Belding highlighted that this is a non-issue for Calastone because itprovides so many ways to integrate, ranging from APIs and SWIFTmessages to spreadsheet files.
A major challengehas been the fact that blockchains are not databases and businessesneed relational databases to query data in the usual way. So thetransactions from Calastone’s private permissioned version ofEthereum are synchronized with a database.
When asked howmany third parties host blockchain nodes, the lack of response leadsus to conclude that Calastone’s blockchain network is currentlypretty centralized.
However, Beldingmentioned some changes in its blockchain technology are being drivenby discussions with partners 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.”
While the currentversion uses permissions for various parties to access data, theattraction of Besu was that it is “natively capable ofsupporting proper privacy out of the box,” said Belding.
We also notedthat Besu has been designed by its creators and ConsenSys backers asa path for enterprises to public blockchain.
Beldingacknowledged this and noted that “if new distribution channelsor other capabilities can be built there (public Ethereum), we’revery well positioned to take advantage of that.”
