Of all the adages about wholesale change taking time to achieve, the turning round of an oil tanker seems the most applicable to the tokenisation of the asset management industry.
Get it right, and the tanker sails off smoothly into the sunset with its precious cargo intact. Get it even slightly wrong, and the potential for disaster – including lost assets, substantial ecosystem damage and a tremendous bill at the end – is significant.
This is why the proponents of change are taking things slowly – oil tanker slowly – to ensure not just the direction of travel works for the vessel, crew and cargo, but the methods by which the manoeuvre will be completed are achievable and with the right partners standing by.
One of the largest vessels looking to make this change of direction is often described as a supertanker itself. With more than £1.1 trillion in assets under management, Legal & General Investment Management is the UK’s largest allocators of capital and steward of thousands of pension and insurance accounts.
It broke the news last year that it was dipping a toe in the digital asset waters and had developed a range of tokenised money market funds. The LGIM Sterling/USD/Euro Liquidity Funds, it announced, would be held on Archax, the UK-based, FCA-regulated exchange, broker and custodian for digital assets. They would sit alongside funds being launched by fellow tankers State Street Global Advisors and Fidelity International.
Archax said it would issue beneficial ownership tokens representing the holdings Archax clients had in such funds and initially make these tokens available on Hedera Hashgraph, XRPL and Arbitrum.
Behind much of the LGIM work was Edward Wicks, global head of trading and liquidity management, asset management at L&G and his team. The pivotal role they play within one of the country’s largest financial institutions indicates the seriousness with which it is taking the project.
Wicks and his 40-strong team undertake all the trading for the firm globally, with desks in Hong Kong, London and Chicago, across asset class. Wicks reports to Chief Investment Officer, Sonja Laud.
The team also oversees the cash management function for the firm and manages all its money market funds. If that’s not enough, it has started to look at securities lending recently.
“We’ve changed the team quite a bit in the last five years, bringing those three activities we weren’t always doing in one place together to capitalise on synergies,” says Wicks. “We execute around £7trn a year across the globe, and we manage in excess of £50bn in money market funds across the principal currencies, sterling, euros and dollars — this is really relevant to the conversation about tokenisation.”
First steps
Wicks doesn’t put the company at the vanguard of innovation in digital assets, but it has started to think about where it makes sense for the business. He’s involved across several areas of transformation in this area, and the first one has been the tokenisation of some of its fund ranges.
“The structure, and the way we think about them, money market funds (MMF) lend themselves very neatly into that space,” says Wicks. “I have been working with internal stakeholders including our chief technology officer and others to think about how we best approach tokenising our MMFs.”
It is likely to take decades to fully tokenise the capital markets system, leaving any first mover advantage relatively meaningless and with few players yet moving with any real intent towards a tokenised future, there’s still timeto take a thoughtful approach.
Wicks and team sees several potential advantages to get going, with many of them spanning multiple fund ranges.
“There are arguments around better efficiencies to be derived and we think there’s potentially additional utility for investors in being able to transfer assets in digital format,” he says. “In investment broadly, there’s the advantage of democratising assets through fractional ownership. There’s an argument around increasing transparency, too.”
Potential increased efficiency, thanks to better liquidity and faster settlements, can’t be overlooked, says Wicks and allowing investors to be released from traditional fund cut off times due to the ability to circumvent some of the traditional timings throughout the trading day are definite benefits.
“But most of what we are looking at the moment is specifically relevant to MMFs,” he says, noting why he is so deeply involved.
“There’s the added utility of being able to think about these tokens as collateralisation agent parts,” says Wicks. “Today, in a very simple scenario, you could have someone that was invested in an MMF, who wants to post cash collateral. Potentially they need to disinvest from an MMF, take that cash back, move it into a collateral account. All that takes time and is relatively inefficient.”
Divesting and investing can also have implications for being in and out of the market from a return perspective. So, a second order idea of tokenising MMFs is that they may have that additional utility to be posted as collateral in certain circumstances.
“The other point to consider, in my view, and we know others have been ruminating around it, is the evolving approach of investor groups,” he continues.
At a very high level – on the one hand, there is a group of investors that invest traditionally in funds, ETFs and other vehicles that use platforms for their investing journey. On the other, there’s a whole swathe of digital investors who are investing in various types of instruments.
“It’s logical to think that there may be a time when these digital investors will want to move between investments or want to go into more cash-type returns, particularly now that we’re in a higher rate environment than we were five years ago, but they don’t want to remove their investments from the digital space,” says Wicks. “To do that, they need access to vehicles like MMFs, so it quickly becomes more relevant.”
With the twin aspects of the rate environment and growing investor base in the digital arena coming together, LGIM took the view that there could and, “we suspect will”, be more demand for tokenised MMFs, particularly in base currencies where people hold digital assets.
“At a very simple level, it could be that people want to take money out of more risky digital investments and park it in a more stable digital one,” he says. “In part, some of the journey we’ve been on and the success we’ve seen bears some of that out in the sense that we have seen some inflows from digital platforms into our MMFs.”
Next steps
The innovation doesn’t stop there.
The partnership with Archax was phase one, the second phase, which the firm is now evaluating but not yet taken live, is thinking about whether it has viability from a collateral perspective.
This may bring in a huge segment of the LGIM – and L&G, for that matter – client base: institutional investors.
“That has relevance to DB schemes and pension funds more broadly, as they are relatively large users of derivative contracts, which comes with the requirements of posting margin in many circumstances,” says Wicks.
While his role is not focused on this area and he is not involved in specific conversations, he is thinking more broadly about efficient margining and collateral management.
“This is a part of the debate we’re having that requires a multilateral conversation with our custodians, executing and clearing brokers, and making sure that people are on the same page,” he says. “This collateral piece is going to be really important over 2025. We’re continuing to make inroads and work with sell-side partners and custodian relationships to really ascertain what’s possible and what a timeline could look like.”
Wicks notes one successful example of posting a tokenised MMF as collateral but describes it as a test case. “It’s definitely not in any way market standard – rather a proof of concept.”
That the vast majority of Wicks and co.’s latest conversations have been within the firm’s own custodian, and sell side or banking relationships, rather than engaging in broad buy side debate is significant and could indicate real progress is being planned or made.
Industry working groups enable high-level discussions to assess general evolution, rather than revealing the recipe to any special sauce.
Origination – the final frontier?
Getting the assets in the tokenised funds to use and function using the same digitalised approach as the funds and infrastructure is the third phase. It is something even a behemoth the size of L&G or LGIM cannot work out alone.
“We are speaking to various stakeholders around digital issuance, and how that might come to the market,” says Wicks. “Whether that’s supranationals, the UKgovernment, whatever it might be, that is something we want to be prepared for and it’s something that we’re talking to multiple stakeholders about.”
Examples in different global jurisdictions have shown how digital issuance can be successful and an effective way of raising funds – but as yet, any full ecosystem shift needs decades of work.
“I see a lot of benefits to it says Wicks, “and it’s something we continue to evaluate internally on how we want to participate in those types of issuances.”
There are plenty of challenges, too, including which platforms any issuances may come to market on, the interoperability between them and impact on secondary market trading, yet Wicks seems optimistic the industry will find a level of operation – and cooperation.
“Different companies and providers of blockchains move at different speeds,” he says. “You’ve almost got to hedge your bets on where this is going to land. I’m certainly in conversations with many of the larger providers and we’re trying to understand the best approach.”
And the key question Wicks is posing both himself, along with third-party individuals and firms is how they are thinking about addressing the challenge of interoperability.
“That’s where most of the questions are being directed at this stage.”
Tokenising together
For a business that dominates the UK finance landscape, sourcing potential partners is not usually a problem – sorting the wheat from the chaff, however, is a task not undertaken lightly.
“I’m fortunate in that we have a very well-sized and resourced technology team,” says Wicks. “I’m working more closely than ever with our chief technology officer to evaluate opportunities as they come in – assuming they pertain to my area.”
Due diligence for such a systemically important firm is clearly important, as is keeping the whole, vast L&G team informed on potential interesting tie ups to continue the push towards innovation.
“There is almost an initial conversation that will be sponsored by the CTO, then we would open it up to relevant groups to see if there’s any mileage in partnering,” says Wicks. “There are different phases or stages of partnership. Certainly, in my experience, on the money market side, we went through various iterations of thinking about who best to partner with.”
And these partnerships are not exclusive; the company may be working with multiple partners on specific elements at the same time, which also means the internal teams have to fit the bill.
The skills, knowledge and behaviours needed by Wicks – and others’ teams – are subtly shifting, depends on the seniority of the role and what you’re looking for specifically.
“For the global trading and liquidity management function here, in the last 12 to 18 months, we’ve certainly wanted to and have been successful in hiring individuals with greater technical and data skills, which includes coding and other similar elements,” says Wicks.
It is these teams that are going to be pivotal to L&G, its investment arm, the broad buy side and capital markets turning towards a tokenised future – and a desire to make it happen is vital too.
“The technology is super-exciting and the ability to play a small part in involving the market structure for the better is probably the most exciting part for me,” says Wicks. “It has such relevance for my area, as it covers trading, it covers money markets, it covers securities finance, so it’s super relevant for the teams and the responsibility that I have at L&G.”
