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CONTRIBUTORS

Sandy Kaul

Head of Innovation
Franklin Templeton

Robert Crossley

Head of Industry Advisory Services
Franklin Templeton

Alegria Apikelis

Senior Analyst
Franklin Templeton

Janice Deringer

Senior Analyst
Franklin Templeton

Samuel Huddart

Senior Analyst
Franklin Templeton

This is the fifth article in the Future of Investing series, drawing insights from our annual industry-wide survey, The Future of Investing.1 The Overview summarizing the top 10 key findings can be found here along with a series of articles, each exploring a key finding in more depth.

Preview

“ETF-ization” of assets is likely to be the first step on the pathway to real-world asset tokenization

However large and widespread the cost and efficiency advantages of adopting new technology, current technology and systems are too entrenched to be replaced wholesale. This is limiting the ability of the industry to tokenize “real world assets,” i.e., traditional assets, such as equities, bonds and funds. Instead, based on feedback from survey respondents, we anticipate a multi-stage pathway to the migration of exposures, processes and ultimately instruments to tokenized forms able to run on blockchain rails. While the end goal will be to move toward an ecosystem where tokenized assets are exchanged on the same rails as digital currencies, there will likely be several intermediate steps. This pathway will be marked by key milestones in the coming years as shown in the following exhibit and unpacked in this article.

Envisioned Pathway to New Financial Ecosystem

Source: Franklin Templeton Industry Advisory Services. For illustrative purposes only.

The first stage—the “ETF-ization” of the industry—is already underway, but as the new crypto-inspired infrastructure is being built and regulations being defined, there is likely to be a growing push to place more assets into exchange-traded fund (ETF) wrappers. As noted in Optimizing portfolio returns with new investing models, ETFs are being used to facilitate the efficient transport of sets of securities or assets and allow non-traditional assets to be processed and commingled in portfolios with traditional offerings. This can be seen as a steppingstone toward the even greater portability that tokenization would enable.

ETFs can be created under a variety of regulatory guidelines and offer significant flexibility. BlackRock—the world’s largest ETF provider—recently bought Preqin, the leading private markets data provider,2 which could enable the creation and embedding of exclusive indexes into new types of private asset ETF exposures. State Street Global Advisors and Apollo Global Management announced a proposal for an ETF that invests in both public and private credit. A proposal for a private credit collateralized loan obligation ETF was put forward just a few days later by BondBloxx, a credit-oriented ETF issuer.3

As noted earlier, there are also already a variety of exchange-traded products (ETPs) that provide exposure to gold and other commodities. The SPDR Gold Trust ETF and iShares Gold Trust ETF have over US$100 billion in assets according to data from ETF.com.4 The Investment Company Institute estimates that total net assets held in commodity ETPs more than doubled in the last four years.5

The inclusion of spot bitcoin into an ETP wrapper in 2024 resulted in the most successful launch of a new ETP ever in January 2024.6 Nine months later, the total market cap across the top 11 offerings totaled more than US$49 billion.7 In September 2024, the US Securities and Exchange Commission approved the listing and trading of options for Blackrock’s spot bitcoin ETP (iShares Bitcoin Trust).8

One of the keys to enabling new types of ETF products is the ability to track ownership of the underlying assets that are being held in the vehicle. Today’s securities processing infrastructure provides a ready ecosystem to facilitate such tracking for equities and bonds. As more types of assets are included in ETFs, however, the challenge grows. The ability to identify the holder or custodian of the actual asset and the ability to verify its safekeeping are critical. Already, the launch of spot bitcoin and Ethereum ETPs has forced traditional financial institutions to add new crypto-enabled partners into their operations. For these structures, the actual supplies of spot cryptocurrency are being held in custody in cryptographically protected wallets on blockchain to help track the underlying assets and provide “proof of holdings.”

This is an important milestone in how today’s financial ecosystem operates. Collaborations across crypto-native firms and traditional financial organizations are yielding important lessons for the industry and for regulators on the mechanics of the new blockchain-affiliated technologies. It is creating real-time use cases that introduce new concepts such as “dusting” into the industry’s vernacular. This is a new type of account attack where unknown entities send tiny amounts of cryptocurrency known as dust to a cryptographically protected wallet to uncover the identity of the wallet’s owner. Learning to identify and deal with these new practices will be an important key to the more widespread use of the new technologies.

For more information or to request a presentation on the 2024/25 Future of Investing findings, please contact your Franklin Templeton representative or reach us directly at [email protected]

Endnotes

  1. On an annual basis, Franklin Templeton’s Industry Advisory Services team conducts off-the-record, unscripted interviews of leaders across the financial services investment management industry. This year, we were fortunate enough to hear from 85 leading thinkers controlling over US$50.1 trillion of assets under management across the financial services industry about their views on the future of investing between March and September of 2024. Input came from a broad cross-section of the industry—asset owners, private banks, wealth managers, consultants, investment managers, crypto firms, academics, industry leaders and fintech firms. Conversations took place formally as part of free-ranging, qualitative, off-the-record, survey interviews, and informally during one-on-one sessions where the implications and plans for each organization are discussed and explored. Each of these inputs added to an emerging picture of an industry that is changing rapidly and across multiple dimensions. Interviews were conducted globally with about two-thirds of discussions held with leaders of firms based in the United States, and the other third spread between Europe and Asia.
  2. Source: “BlackRock to Acquire Preqin, Leading Private Markets Data Solutions Provider.” BlackRock. June 30, 2024.
  3. Source: Celarier, Michelle. “Apollo-SSGA ETF Is Groundbreaking—But Questions on Valuation, Self-Dealing Remain.” Institutional Investor. September 26, 2024.
  4. Source: “Gold ETFs (List).” etf.com. Accessed on October 01, 2024.
  5. Source: Longley, Alex. “Commodity ETFs Pull in Most Cash Since 2022 on Sticky Inflation." Bloomberg. April 30, 2024.
  6. Source: Weber, Joel and Balchunas, Eric. “It’s Been a Banner Year for ETFs.” Bloomberg. June 20, 2024.
  7. Source: “Bitcoin ETF Tracker.” Blockworks. As of September 29, 2024
  8. Source: “SEC approves BlackRock’s spot bitcoin ETF options listing.” Reuters. September 20, 2024.

 

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Companies in the technology sector have historically been volatile due to the rapid pace of product change and development within the sector. Artificial Intelligence is subject to various risks, including, potentially rapid product obsolescence, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations.

Blockchain and cryptocurrency investments are subject to various risks, including inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk; an investor can lose the entire amount of their investment. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.

Digital assets are subject to risks relating to immature and rapidly developing technology, security vulnerabilities of this technology (such as theft, loss, or destruction of cryptographic keys), conflicting intellectual property claims, credit risk of digital asset exchanges, regulatory uncertainty, high volatility in their value/price, unclear acceptance by users and global marketplaces, and manipulation or fraud. Portfolio managers, service providers to the portfolios and other market participants increasingly depend on complex information technology and communications systems to conduct business functions. These systems are subject to a number of different threats or risks that could adversely affect the portfolio and their investors, despite the efforts of the portfolio managers and service providers to adopt technologies, processes and practices intended to mitigate these risks and protect the security of their computer systems, software, networks and other technology assets, as well as the confidentiality, integrity and availability of information belonging to the portfolios and their investors.

ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.

Non-fungible token (NFT) investments carry substantial risks. The market is volatile, liquidity can be challenging, and regulations are evolving. Technological risks, such as smart contract bugs, hacking, and platform failures, can result in the loss of an NFT or its value. Transactions may also involve counterparty risks, including default by the other party. Unlike stocks or bonds, NFTs lack intrinsic value, with their worth solely based on market demand and sentiment.

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