To our readers: Paperjam is running a series on the tokenisation of funds. This article is the second instalment in the series.
In this global race, Luxembourg stands out as a European pioneer. However, contrary to a widely held belief, this lead in tokenisation cannot be explained solely by the blockchain legislation adopted in recent years.
For Sébastien Schmitt, advisory partner at PwC Luxembourg, the Grand Duchy’s strength lies above all in its ecosystem. “Luxembourg operates within a European framework where the main rules are decided in Brussels. However, everything relating to the issue of shares, the maintenance of the register or the interpretation of company law falls under local law. And this is where Luxembourg has been able to make the most of the leeway it has been given.”
Successive blockchain laws have provided legal recognition for the issuance of securities and fund units on the blockchain. However, in his view, the other decisive factor is far less visible: the regulator’s growing expertise. “Major asset managers regularly tell us that their dealings with the CSSF are nothing like those they have with other European authorities. They find that the people they deal with genuinely understand the technology and the operational challenges.”
This proximity partly explains why several major names in asset management have chosen Luxembourg to launch their first European initiatives. Franklin Templeton, Amundi, BNP Paribas, DWS and State Street have all announced plans for tokenised funds domiciled in Luxembourg. For Sébastien Schmitt, this choice is significant. “When a global asset manager has platforms in Ireland, Luxembourg or other European jurisdictions, the fact that it chooses Luxembourg to launch its first tokenised fund sends an extremely strong signal.”
The real risk is that Europe will become a ‘flyover zone’.
Added to this is another advantage that is rarely highlighted: the concentration of market infrastructure already present in the financial centre. Clearstream, Tokeny, Ripple, Zodia Markets and Bitflyer have chosen Luxembourg as their European base or are developing part of their business there.
A lead… but a global race
However, this European lead does not mean that the battle has been won. Quite the contrary. On this point, Sébastien Schmitt is particularly cautious. “The real risk is that Europe will become a ‘flyover zone’.” The expression is deliberately provocative. It reflects a growing concern: whilst Europe is still fine-tuning its regulatory framework, the United States and several Asian markets have already moved on to the next stage. The example of stablecoins perfectly illustrates this difference in pace.
The EU’s Mica Regulation has clarified the legal framework applicable to crypto-assets and helped to secure the market. However, at the same time, it has significantly restricted the conditions under which stablecoins can be issued. As a result, today nearly 99% of the global stablecoin market is dominated by US players, whilst European issuers remain marginal.
“[The Mica Regulation] has brought about many positive developments. It has stabilised the market and established an initial regulatory framework. But on certain issues, particularly stablecoins, it has also slowed down the development of a European ecosystem,” continues Sébastien Schmitt.
We are not in the midst of a revolution. We are in the midst of a transformation.
This international competition extends far beyond the issue of crypto-assets. In the United States, Coinbase is already working on the tokenisation of listed shares. Major Wall Street players are stepping up their live trials. The DTCC is accelerating its projects. US infrastructure providers are investing heavily. In Europe, the DLT pilot scheme remains… just a pilot scheme. “We’re still talking about pilot schemes, with limited thresholds, whilst other jurisdictions have already moved on to fully operational infrastructure.”
The next challenge: speaking the same language
That said, technology is no longer the main obstacle. The two experts interviewed are categorical. Blockchain works. It is robust. The real challenge now lies elsewhere: in interoperability.
Today, every player is developing its own infrastructure, its own ‘smart contract’, and sometimes even its own blockchain. “We still have an extremely fragmented market,” notes Sébastien Schmitt.
This fragmentation is now the main obstacle to widespread adoption. If the various blockchains do not communicate with one another, and if each operator adopts its own technical standards, the efficiency gains will remain limited.
Several initiatives are already seeking to resolve this issue. The ERC-3643 standard, developed in particular by Tokeny, is specifically designed to create a common language for tokenised securities. At the same time, major infrastructure providers such as Clearstream, Euroclear and DTCC are working on solutions to ensure interoperability between different networks.
For Olivier Portenseigne, this phase is perfectly normal. “We are not in the midst of a revolution. We are in the midst of a transformation.” In his view, traditional infrastructure and new blockchain networks will coexist for several years. The aim is not to abruptly replace existing systems, but to gradually build bridges between the two worlds.
The real battle: distribution
As the interviews progressed, one idea gradually became clear. Tokenisation does not merely transform the way assets are recorded. Above all, it transforms the way in which they will be distributed. This is probably where the most profound shift lies. At present, asset management firms still rely heavily on traditional banking networks to distribute their products. In the future, digital platforms, neobanks or certain players from the crypto sector could become new distribution channels.
As part of the ecosystem of its parent company, the Deutsche Börse Group, Clearstream is already working with platforms such as Kraken and Bitpanda to prepare for this development. “Our aim is to enable funds to be distributed across these new networks whilst remaining connected to traditional infrastructure,” explains Olivier Portenseigne.
This development could also transform the business model of the entire industry. By reducing the number of intermediaries, distribution costs would fall. Clearstream already claims to have helped certain clients reduce their operational costs by nearly 50%. In one specific case, the cost of a product reportedly fell from 150 basis points to 50 basis points thanks to a completely overhauled distribution model.
For Sébastien Schmitt, however, the real opportunity goes beyond mere cost reduction. Blockchain, combined with artificial intelligence, could enable a much higher degree of personalisation in financial products.
The tools are in place. The infrastructure is in place. We now need to decide to invest and transform our operational models.
“We must not pit artificial intelligence against blockchain. The two technologies feed off one another. A programmable infrastructure will, in the future, enable us to envisage products tailored not to a category of investors, but to each individual investor.” In other words, asset management could gradually shift from a model of mass production to one of mass personalisation.
A strategic opportunity for Luxembourg
Ultimately, the two experts are conveying a surprisingly similar message. Technology is no longer the problem. The regulatory framework is now sufficiently mature. The first use cases are working. Major infrastructure providers are investing. Leading asset managers are launching their products. “The ball is now in the asset managers’ court,” sums up Sébastien Schmitt. “The tools are there. The infrastructure is in place. The next step is to decide to invest and transform operational models.”
For Luxembourg, therefore, the stakes go far beyond tokenisation. The Grand Duchy has built its success by becoming the world’s leading centre for the cross-border distribution of investment funds.
The next step could be to become the platform on which the digital infrastructure for this distribution is built. But this advantage will not be secured once and for all.
In a market where the United States is gaining momentum, where tech giants are investing heavily in financial infrastructure and where technical standards have yet to be defined, the real risk may not be missing out on the tokenisation revolution. Rather, it would be to let others build the tracks on which tomorrow’s financial assets will run.
