A survey conducted among 300 investment institutions, including asset managers, asset owners and insurance firms, has found a mixed understanding of digital assets among investment professionals. The results point to different levels of readiness to using digital assets and investment technology.
The research, carried out by Oxford Economics for State Street at the end of last year, looked into organisations’ preparedness for incorporating code-based smart contracts, blockchains and other distributed ledger technologies into their investment processes for tokenized versions of traditional securities.
When it comes to their understanding of digital tokenisation for trading of traditional financial assets, institutions varied widely. A “potentially surprising” 11 percent of respondents claimed to be pioneers in “using code-based smart contracts to trade tokenized versions of traditional assets on a distributed ledger/blockchain,” and nearly a quarter more - 22 percent - said they were ready to do so but had not yet. Meanwhile, 40 percent said they were not able to do this and were putting strategies and relationships in place to do so. Some 27 percent had not yet reached the planning stage, the survey found.
The study is called “Digital Finance Readiness in Investment Institutions: A Benchmarking Study”.
Alternatives seen going digital first
Alternatives are expected to be traded digitally first, the survey found. Private equity (51 percent), infrastructure and real estate (48 percent) and private debt (44 percent) were the assets most respondents thought would be the first to be commonly traded digitally.
Respondents see benefits of tokenization mostly in better process speeds and cost efficiency. The operational areas where these improvements were mostly expected were risk management (47 percent), transactions management (45 percent) and collateral management (40 percent).
Fewer expect to increase digital allocations in 2023
Institutional investors last year were more likely to decrease their allocations to digital assets (28 percent, compared to 21 percent who increased), while leaving allocations unchanged (35 percent) accounted for the largest single response.
The outlook is more bearish for this year. A quarter of respondents said they would increase their digital asset allocations in 2023, while the same number said they would decrease theirs, and 42 percent said that they were not planning to change their allocations. Of the respondents, 69 percent planned to increase digital assets holdings over the next two-to-five years, and only 26 percent anticipated either a decrease or no change over this period.
Respondents had mixed feelings about the potential ESG impacts of this technology. As many as 49 percent said it would be positive, while 42 percent thought it would not have an impact. Only eight percent said it would be negative, the State Street survey said.