UBS piloting tokenized market fund on Ethereum

UBS sign. – CC BY-SA

UBS, through its asset management arm, has launched a pilot for a tokenized Variable Capital Company (VCC) fund on the Ethereum public blockchain.

The fund is organized as a Variable Capital Company (VCC), a new corporate structure designed to support investment funds in Singapore. The new structure allows for greater flexibility and scalability.

Represented as a smart contract on the blockchain, the pilot allows UBS Asset Management to facilitate financial activities such as fund subscriptions and redemptions.

This pilot is part of Project Guardian, an initiative in partnership with the Monetary Authority of Singapore (MAS) and the Japan Financial Services Authority.

Thomas Kaegi, the chief of UBS Asset Management in Singapore and Southeast Asia, expressed that this pilot represents a turning point in understanding fund tokenization.

“This is a key milestone in understanding the tokenization of funds, building on UBS’s expertise in tokenizing bonds and structured product,” Kaegi said. “Through this exploratory initiative, we will work with traditional financial institutions and fintech providers to help understand how to improve market liquidity and market access for clients.”

UBS and tokenization

Tokenization, which involves converting rights to an asset into a digital token on a blockchain, is gaining traction among traditional funds and asset managers.

This involves using blockchain technology to transform tangible or “real-world” assets like real estate, artwork, stocks or commodities into digital tokens that can be traded on a blockchain network. Now, large institutions such as Franklin Templeton, KKR and Hamilton Lane are exploring tokenized funds.

UBS is playing a major role in pushing forward toward a more decentralized and automated future and bridging the gap between traditional finance and emerging technologies. To do so, UBS is partnering with other financial institutions and fintech providers to improve market liquidity and increase investor access.

UBS’ recent venture into tokenized funds isn’t isolated, as UBS has been actively leveraging its in-house tokenization service, “UBS Tokenize,” to explore various use cases in the decentralized finance (DeFi) space. UBS Tokenize enables UBS to carry out activities like fund subscriptions and redemptions on-chain.

Following the first pilot transactions of its new VCC fund, UBS is now “looking to execute further live pilot use cases under Project Guardian and work with a wider set of partners [to] explore various investment strategies.”

The consulting firm PWC brands VCC as a “game-changer” for Singapore’s asset and wealth management industry, claiming that the invention could incite interest from other hedge funds.

PWC explained that VCC could be utilized for a variety of investment strategies, including information listing, trading, vehicle investment and wealth management strategies. The benefits include improved operational and tax efficiency, as well as anonymity, as financial statements are not required to be made publicly available.

UBS’s digital asset innovations

UBS has been actively involved in blockchain innovations, starting with the introduction of the world’s first digital bond that can be traded and settled on both conventional and blockchain networks.

Following the launch of the digital bond in November 2022, UBS issued a $50 million tokenized fixed-rate note in December of the same year. This was then followed by helping the Bank of China International Holdings (BOCI) issue 200 million yuan worth of exclusively digitally structured notes in June 2023, which makes it the first Chinese financial institution to issue a tokenized security in Hong Kong.