Citi has announced that it has successfully completed a proof of concept on tokenization of private funds along with Wellington Management and WisdomTree.
The proof of concept, which was conducted on the Avalanche Spruce institutional test Subnet, found that smart-contract capabilities could deliver new functionality and operational efficiencies, which are currently unavailable with traditional assets. These new functionalities could enable buy- and sell-side institutions to engage with distributed ledger infrastructure in a lowrisk, low-barrier-to-entry manner that is consistent with regulations.
Private markets, although a $10-trillion asset class, are characterized by an infrastructure that is complex and manual, with a lack of standardization and transparency, leading to inefficient distribution and operations. There are often complex legal and regulatory restrictions related to private assets.
With ABN AMRO simulating the role of a traditional investor, the proof of concept tested the tokenization of a Wellington-issued private equity fund by bringing it onto a distributed ledger technology (DLT) network. The underlying fund distribution rules were encoded into the smart contract and embedded in the token transferred to hypothetical WisdomTree clients. The proof of concept demonstrated how smart contracts could be used to enable greater automation and potentially create an enhanced compliance and control environment for issuers, distributors and investors.
As part of the experiment, Citi also evaluated multiple scenarios of transfers using smart contracts relying on simulated identity credentials issued by WisdomTree and using a private fund token as collateral in an automated lending contract with DTCC Digital Assets (formerly Securrency).
By evaluating relevant technical, legal and operational frameworks needed to bring traditional assets onto a digital platform, Citi explored how to support clients issuing and accessing tokenized private assets in a controlled and scalable manner, while ensuring interoperability with the traditional ecosystem.
“Smart contracts and blockchain technology can enable enhanced rule enforcement at an infrastructure level, allowing data and workflows to travel with the asset. We believe that by testing the tokenization of private assets, we are exploring the feasibility to open up new operating models and create efficiencies for the broader market,” stated Nisha Surendran, emerging solutions lead for Citi Digital Assets.
“The Avalanche Spruce test network has proven to be an ample technical sandbox environment for coming together with partners and exploring the potential of blockchain technology within our industry. We look forward to continuing to collaborate with Citi, strong long-term partners who are providing meaningful developments and thought leadership in the blockchain space,” said Mark Garabedian, director, digital assets and tokenization strategy, at Wellington Management.
Maredith Hannon Sapp, head of business development, digital assets, at WisdomTree said, “We believe blockchain-enabled finance is the future of the industry, and this proof-of-concept showcases the ability to explore the transferability of tokenized funds and related compliance in different markets. This will inform future in-production use cases of how blockchain technology and smart contracts can be used in on-chain transactions.”
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