Q&A with John Allan, Head of Innovation and Operations Unit, The Investment Association
Capital Pioneer: What’s the IA’s role within tokenisation and the shift to digital assets?
John Allan: We’re very conscious that we are at the start of a transformation in capital markets. We’re also conscious of investors’ changing needs and behaviours in the modern world. Asset managers – our members – sit between the end consumers and capital markets, so when there is pressure from both sides to innovate, we must look at things differently and come up with new products and services that are compelling. If the buy side wasn’t involved in the discussion and the analysis of how this might change, we could find ourselves very quickly falling behind.
Ultimately our aim is twofold. Firstly, because the firms we represent are UK-based, we need to ensure that the business environment for UK asset managers is as conducive to success as possible. From a regulatory and policy perspective, we need to make sure that the environment enables them to innovate confidently and within regulatory parameters.
Secondly, the transformation is already underway. There is huge upside potential for individual firms and the industry collectively. We want to help connect the dots within the industry and outside to help firms maximise their opportunity for success.
CP: What’s happening within the IA’s network?
JA: Most of our work with members is about incoming mandatory regulatory change. While the shift towards tokenisation and wider technological innovation isn’t mandatory from an incentive perspective, in many ways it’s moving from ‘a side of desk optional extra’ to something firms need to tackle. We have seen a large number of our members create specific internal groups or new functional teams within their businesses to position themselves effectively.
These digital assets or tokenisation teams might be a branch of an investment desk within the alternative investment space, for example, or from an IT or innovation function. Within the vast majority of our members there is at least one person, if not a whole team, looking at these issues.
While they might not yet be spending huge amounts of money, lots of firms are actively monitoring developments and ensuring they are maintaining or building new relationships with the types of entities who can support them – and this might not be existing service providers. They are keeping tabs on what other members are doing, as this industry, like many others, tends to aim to be fast moving.
There is interest in some quarters to, at the very least, keep track of what’s happening, so that when the time is right, they’re able to get involved in a more meaningful way.
Of course, the larger firms have more resource available than the boutique or the smaller-sized firms. Additionally, they have more visibility within the wider financial services industry and might be higher up the list when the investment banks are developing their own solutions and want new clients to take them on, for example.
CP: Are you seeing collaboration or competition?
JA: There’s been a marked shift over the last two years. A couple of years ago, we were asked by the Asset Management Task Force, which was a group sponsored by the City Minister under the previous government, to work with the FCA and industry to highlight the barriers and opportunities provided by tokenised investment
funds, i.e. the piece of the infrastructure with which we are the most closely tied and control as manufacturers and issuers of funds.
We had some fantastic open discussions about what firms wanted to aim for and how we could collectively achieve it. We then ran a regulatory sprint with the FCA, where we reviewed the rulebook together. We identified that there were no actual impediments for firms to utilise DLT within investment fund administration.
That was published 18 months or so ago, but we’re still working closely with firms on these topics. Now, we keep members updated with market developments, provide messaging from regulators and give information about the Treasury’s digital security sandbox.
The change has been that we’re not really able to continue a completely shared, open conversation at the moment – but I think that’s positive. I understand this to mean that firms have taken it away and they are now in implementation mode, establishing commercial partnerships, and launching tokenised funds.
Over the last six months or so, the number of tokenised funds has certainly significantly increased – albeit from tiny base. There’s a huge raft of momentum and activity, and that’s fantastic, and the feeling within many firms is that we need to progress now.
Rather than stay focused on tokenised funds – or just the piece that we are responsible for and control – we want to talk more broadly about the wider capital markets ecosystem and the assets that we buy and package up into funds and other investment products.
We need to talk and work with the sell side on equities, bonds, UK sovereign debt instruments, infrastructure, property, alternative assets – all of it. The buy side needs to be involved in those discussions to make sure that any infrastructure that’s spun up works for us; that any assets that are provided, we’re able to buy. The legal framework, the regulatory framework – it all needs to be effective for the buy side for the whole ecosystem to really move together.
CP: What’s next for the IA and its members?
JA: We consciously decided not to do too much work on equities because there’s an efficient market already. The real benefit is in liquidity products and alternatives. What we’ve run up against in alternatives is that tokenisation is great to reduce initial minimum investment levels, but it doesn’t necessarily provide you with greater liquidity. This leads us to think about how to best develop secondary markets.
For liquidity products, tokenisation opens up greater utility, enabling the owner to do more by owning the asset. You can use a money market fund token as collateral or perform a repo transaction or transfer ownership intraday but still receive some hours of yield. Those are things you can’t necessarily do outside of that market, and that’s why that part of the industry has been the pioneer.
CP: Who are members connecting with to push forward?
JA: We have been running a fintech accelerator – Engine – for around seven years and it’s been very successful in partnering the fintech community with asset managers to solve their problems, but equally to provide problem statements to get fintechs to solve them. We’ve created a Tokenisation Hub which enables innovators to showcase their capabilities.
There’s certainly been a lot of maturity in that market over the last few years. In some cases, the firms have probably outgrown the fintech label and have become very well established with mature products.
The existing fund and investment service providers are keen to operate in these areas as well and have been building their capabilities, but fintechs often have the advantage of usually being a bit nimbler, which explains some of their success.
The fintechs within the Engine programme have been able to professionalise, obtain the connections to get the funding that they need, but also be able to partner effectively with asset management firms on a credible basis.
CP: So, the industry is looking beyond crypto?
JA: The conversation has definitely moved on education-wise and maturity-wise. Individuals within firms now don’t necessarily associate DLT with crypto, whereas a year to 18 months ago, that was still a challenge, and provided a barrier to adoption as internal teams focussed on the risks that that asset class is associated with.
My role is innovation more broadly and covers technology including AI – and the two elements have to be thought about together. We’re not just focused on DLT on its own.
We see DLT as the rails and AI as the brain. Both technologies rely on a huge amount of data. It’s AI’s ability to analyse huge data sets at speed and at scale that can then be provided to the DLT infrastructure to act upon
and support.
We’re not ready for this yet, but in 5-10 years the outlook is amazing. When you can see the kind of things that are happening in the AI space and you put the two together, there’s a fabulous world out there for us in
the future.
CP: What’s the timescale for all this?
JA: It’s going fast, but it’s also going slow in some cases – it’s like the saying that things happen very slowly and also all at once. This is why firms need to keep up, otherwise it soon overtakes you.
I don’t want to estimate a timeline, but we’re very keen for the government to issue a digital gilt sooner than in the two years they announced at the end of last year. We’re positive that it could be done more quickly.
In that instance, you could see a tokenised money market fund buying a tokenised gilt, proving the end-to-end value chain. It will show the ecosystem working together. Once you’ve proven it, I think things will scale very quickly.
The UK government is clearly behind the gilt side and digital securities more broadly, the FCA is clearly behind the tokenised fund side. That gives people the confidence and the legal and regulatory clarity to invest, to make it happen, to collaborate and really scale up.
