Asset tokenization

Towards the unified secondary

market: The evolution of
distribution channels and
evaluation of Asset Tokenization
Benefits

September 2023

Prepared for
External
Relevance of asset tokenization

Tokenization has the potential to bring trillions in value to blockchains ($28.7tr by

FY30F). This is already transforming the way assets are managed and traded
Asset tokenization market
Asset tokenization market forecast (FY23B-FY30F), in $tr Asset tokenization – supply and demand

Equity Fixed-income Real estate Private equity Other

1 Demand – investing in tokenized assets
28.7
Investors believe in the long-term value of tokenized assets and plan to
invest in tokenized assets this year or the next.
“Based on a EY-Parthenon survey, 57% percent of the institutional
8.6
23.1 investors indicated an interest in investing in tokenized assets,
particularly tokenized private funds, equities, fixed-income, and public
funds.”
7.0
18.2

6.7
5.5
13.9
5.4
0.7 2 Supply – tokenization of (existing) assets
0.6
4.2
10.1 4.2 0.6
Leading firms in the industry are reassessing their growth and
0.4 fundraising strategies, taking into account the evolving competitive
3.0 landscape and the role of individual capital.
3.2 0.3 0.5
6.7
Global funds (e.g., from KKR, Hamilton Lane and Franklin Templeton)
2.0 2.3 0.2 0.4 12.1
9.8 have experimented with Blockchain-based tokenization and are
3.7 0.2 0.3 increasingly moving towards public infrastructure.
1.6 7.7
1.1 0.1 0.2 5.9
1.1 0.9
0.1
4.3 “Based on a EY-Parthenon survey, 47% of hedge funds and
2.9
0.3 1.6 institutional asset managers are interested in tokenizing their own
0.5 0.3
assets.”
FY23B FY24F FY25F FY26F FY27F FY28F FY29F FY30F

Source: EY-Parthenon analysis Page 2

Relevance of asset tokenization

Asset tokenization is the process of converting ownership rights of an asset into a digital
token stored on a blockchain, which enhances a.o. accessibility and efficiency
Asset tokenization at a glance

Securities and real-world assets (RWA) Asset tokenization Tokenized assets

Equities, fixed-income, public/ private funds, real Tokenization converts the ownership rights of an Enhance accessibility, transparency, efficiency and
estate, commodities and other assets custodied by asset – such as real estate or a share in a liquidity of traditional assets. These benefits are
financial institutions. company – into a digital token that is stored on a maximized when trading across decentralized
blockchain. finance (DeFi).

Source: EY-Parthenon analysis Page 3

 Relevance of asset tokenization

Lower transactions costs, increased liquidity are the main drivers for investors to switch
to tokenization. However, uncertainty in regulatory environment holds them back…
1 Demand – investing in tokenized assets
Investor motivations to tokenize assets1

Institutional investors HNWI

58% 56%
50% 51% 53%
46% 46%
40%
29% 31%
23% 21% 19% 20%
17% 15%
9% 10%

Lower transaction costs Increased liquidity Improved Increased transparancy Portfolio diversification Access to new asset types Faster trading / near Fractionalization Enhanced portfolio
performance / returns instant settlement (T+0) construction

Investor hurdles

i Uncertain regulatory environment v Up-front investment required to hold tokenized assets

ii Lack of trusted service providers in the market vi Unproven technology

iii Lack of internal education about blockchain technology / tokenization vii Lack of established liquidity / secondary market liquidity

iv Lack of established marketplaces / ATS viii Lack of privacy associated with blockchain

1. Rank order determined by % of respondents that ranked each choice 1, 2 or 3

Source: EY-Parthenon Tokenization Survey (HNWI n=234; Institutional Investors n=78) Page 4
 Relevance of asset tokenization

…institutions are most interested to tokenize funds and securities as they see
opportunities to access new capital, increase liquidity and enhance operational efficiency
2 Supply – tokenization of (existing) assets
Asset classes that are considered for tokenization1 Motivation to tokenize assets1

Public funds 49%

28%
Private funds 45% Immutability
30% and 40%
Cost saving/lower Operational
transparency of
Real estate funds 38% admin fees efficiencies
data

Securities 35%

38% 23%
Private equity 33% Gaining
Ability to offer
ownership 28%
fractionalized
visibility
Loans and mortgages 30% ownership of Instant
funds/assets settlement

Commodities 20%

Digital cash 17% 53%

Access to new
investors and new
8%
Hedge funds 17% 47% capital
Increased liquidity
Gaining pricing
Money market funds 17% visibility

Real estate 15%

1. Rank order determined by % of respondents that ranked each choice 1, 2 or 3

Source: EY Parthenon Tokenization Survey, n = 256 Page 5
Content
 Evolution of distribution channels
 Benefit evaluation per asset class
 Towards the unified secondary market
 EY-Parthenon tokenization approach

Page 6
Evolution of distribution channels

To satisfy investor demand and sustain their competitive advantage, fund managers
need to re-evaluate their long-term distribution channel strategy…
Distribution channel evolution
Factors driving the evolution of distribution channels… …leading to changes in how to distribute funds and ecosystem structure

Changing investor preference

 Investors' expectations have shifted towards digital-first.

Cost pressures
Investors  Certain cost pressures for investors, such as transaction and
processing costs, could be alleviated via a more efficient infrastructure. Platform and technology
(e.g., customer portal)
Regulatory support
 The expanding demand for regulatory support and guidelines from
organizations such as the SEC, FCA, or EU has facilitated increased
retail investor access to private markets.
Operating model
Shift to digital and scalability (e.g., new capabilities)
 Digital distribution platforms designed to be stand-alone from end-to- Distribution
end enable funds to trim costs while maintaining transparency and can channel
be tailored to integrate with digital ecosystems. transformation
Consolidation Ecosystem
Industry  Consolidation and forming partnerships with fund distribution channels
(e.g., digital focused partners)
offer opportunities for expanding market coverage and building scale.

Evolution of marketplaces and FinTech

 Utilizing digital platforms to distribute private market products and
provide fractional ownership opportunities, making it easier for retail
investors to access private markets.

Source: EY-Parthenon analysis Page 7

Evolution of distribution channels

…in particular, fund managers are actively seeking digital (on-chain) distribution
channels that can integrate multiple capabilities in the value chain
Fund value chain transformation

Traditional value chain  Allows investors to buy

Transfer Clearing
Linear relationship Fund managers Custodian
agent house
Fund platform Distributor Investors and sell securities from
other investors.
 Providing liquidity and
 Tailored  Secure and  Seamless fund  Settlement
and  Accessto a  Market  Investing capital.
investment reliable fund transactions. risk wide range of expertise and efficiency to investors.
solutions. access. management. funds. investor  Ultimately contributing to a
education.
more dynamic and
accessible investment
landscape.

Emerging value chain

Roles converge and Fund managers Digital (on-chain) distribution platforms / channels Investors Secondary market
interconnect themselves

1  The industry is undergoing a value proposition transformation, prompting traditional channels to adjust to new participants and roles.

2  Fund managers are relying on multiple intermediaries and collaborating with digital investment platforms.

3  Distribution channels need to embrace one-stop shop platform capabilities, including efficient fund feeder structures/services and robust compliance measures.

4  This adaptation enables players in the value chain to stay competitive, streamline processes, and reduce operating costs for a better experience.

Source: EY-Parthenon analysis Page 8

Evolution of distribution channels

The distribution landscape primarily comprises traditional segments, but innovative

players are introducing digital and tokenized solutions in public and private markets
Distribution channel landscape ILLUSTRATIVE
Tokenization
Public equity

Banks and advisors Neobanks Investment platforms

OTC / Specialized Web 3 enabled
proprietary security trading secondary
marketplace platforms market trading

Direct to
UHNWI1
individual

Private market
investment platforms

Traditional distributors
Private equity

Traditional Digital
Tokenization channels Traditional channels

1. UHNWI: Ultra High Net Worth individual

Source: EY-Parthenon analysis Page 9
Content
 Evolution of distribution channels
 Benefit evaluation per asset class
 Towards the unified secondary market
 EY-Parthenon tokenization approach

Page 10
Benefit evaluation per asset class

Tokenization is better suited for inefficient and illiquid assets that are easy to
authenticate, such as real estate, which are currently inaccessible to most investors
Asset tokenization benefits per asset class
1 Expanded upon in the subsequent pages 2
Benefits Access to new Increase liquidity Enhance operational Fractionalization Enhance Reduce costs
capital/ asset via secondary market efficiencies transparency
Asset class classes trading

Public equity funds

Private equity funds
Equity securities
Fixed income securities
Cash / currencies
Real estate
Commodities

 Access to new capital/ types of assets: Tokenization can lower the minimum investment required to access certain assets, making them more accessible to a wider range of investors, particularly in
private capital markets.

 Increase liquidity: Tokenization can increase liquidity in traditionally illiquid markets by allowing investors to buy and sell tokens on secondary markets, but regulatory uncertainties currently pose
obstacles to the liquidity of secondary markets. A forward-looking approach to token design is required to unlock the liquidity potential of tokenized assets.

 Enhance operational efficiency: Tokenization can automate various tasks through smart contracts, including administrative processes, reconciliation, auditing, and transaction execution.

 Fractionalization: Asset tokenization enables fractional ownership of assets, such as real estate properties, which improves liquidity and allows for broader participation in the investment process.

 Enhance transparency: Blockchain technology, which underlies tokenization, provides a transparent and immutable record of transactions on-chain, which can help build trust among investors and
increase confidence in the market. However, it's important to note that the internal operations of the security or fund may not be included in the transparency.

 Reduced costs: By using smart contracts, transactions can be automated, reducing the need for intermediaries and potentially lowering operational costs, which can be passed on to investors in the form
of lower fees.

Extent of benefit derived from asset tokenization.

Source: EY-Parthenon analysis Page 11

Content
 Evolution of distribution channels
 Benefit evaluation per asset class
 Towards the unified secondary market
 EY-Parthenon tokenization approach

Page 12
 Benefit evaluation per asset class

Tokens should be designed with the intention of being traded on an open decentralized
market, thereby enabling the liquidity potential of tokenized assets...
1 Increased liquidity via secondary market trading
Current state with regulatory clarity1 Unlikely future Likely future state that should already be included in the token design

1a Decentralized exchange 1b Decentralized exchanges

OTC / custom marketplace Security exchange Centralized exchange (Whitelisting wallets) (On-chain ecosystem)

Private or public Public (permissioned) Public (permissioned) Public blockchain Public blockchain
permissioned blockchain blockchain blockchain or off-chain

KYC / AML efforts with KYC / AML effort with KYC / AML with issuer
KYC / AML with issuer via whitelisting only at issuance /
KYC / AML with issuer issuer via whitelisting
security exchange wallets of all holders redemption or
wallets of all holders
conversion
Examples Example Example Example Example

None

Example enablers Example enablers Example enablers2 Example enablers Example enablers3

Less secondary market liquidity More secondary market liquidity

Less accessible, efficient and cost-effective More accessible, efficient and cost-effective
Less (as-is) risks / challenges (e.g. regulatory) More (as-is) risks / challenges (e.g. regulatory)

1. In the future, the traditional value chain enabled by blockchain technology is expected to continue existing because many traditional investors are unlikely to participate in a fully decentralized ecosystem.
2. Parties that could enable it, in practice no centralized exchanges support security trading currently
3. Secondary market liquidity is currently very low due to regulatory uncertainties around security trading on decentralized exchanges, liquidity pools exists but not supported on the platform front-end
Source: EY-Parthenon analysis Page 13
 Benefit evaluation per asset class
…however, the lack of clear regulations hinders secondary market liquidity. One interim
solution is to "whitelist" wallets in close cooperation with regulators to operate in DeFi…
1a Interim solution – Whitelisting wallets ILLUSTRATIVE

Issuer Real-world Centralized exchanges Decentralized Finance (DeFi) on

assets Securities
(RWA) public blockchains
Consortium (optional)

Ethereum Ecosystem
Token design / Whitelisting
Payments wallets
structure
Trade
SPV Issue
tokens
Decentralized exchanges
Tokenization platform Trade
Deploy smart
Payments
contracts &
Tokenization token standards Ledger KYC /
provider
AML Security token holders
(via a service Redeem
checks Decentralized applications
provider) tokens
Annual (dApps)
subscription fee Custodian
Payments Use dApps (e.g. lending, staking)

Design tokens on a KYC and AML has to be To take the burden away from
(permissioned) public blockchain performed at issuance and exchanges, issuers can perform
network where peer-to-peer redemption, but also on everyone KYC / AML checks and whitelist
trading is possible, while taking who acquires tokens on the all wallets that are allowed to
into account investor protection secondary market. Engagement trade securities on every
regulations. with regulators is required to platform. This unlocks
determine the rules and secondary market trading
guidelines for these checks. potential.

Source: EY-Parthenon analysis Page 14

 Benefit evaluation per asset class
…in the long term, free trading could occur by proactively steering regulations towards
the concept of locking security tokens in a smart contract and unlocking a utility version
1b On-chain ecosystem (with KYC / AML at conversion) ILLUSTRATIVE

Issuer Real-world Decentralized ecosystem on public blockchains

assets Securities Whitelisting
Consortium (optional) (RWA)
wallets Ethereum Ecosystem

Token design /
Payments Trade
structure KYC / AML
checks Decentralized exchanges
SPV Issue
tokens
Tokenization platform Smart
Deploy smart Utility
Payments Security contract &
contracts & token
Tokenization token (un)lock KYC / AML (un)lock
token standards Ledger holder Trade
KYC / holders security checks utility
provider
AML tokens tokens
(via a service Redeem
checks Decentralized applications
provider) tokens
Annual (dApps)
subscription fee Custodian
Payments Use dApps (e.g. lending, staking)1

Highlight the distinctions between Initiate dialogue with regulatory The decentralized ecosystem's
utility tokens and security tokens, authorities and educate them about true value lies in the ability to
emphasizing that security tokens the concept of securing security trade tokenized real-world assets
require KYC and AML tokens within a smart contract to (RWA) without barriers, which
verifications before they can be access utility tokens without results in maximum secondary
transferred. Additionally, clarify security features. It's essential to market liquidity.
the characteristics that classify a emphasize that this step entails the
token as a security. mandatory KYC and AML checks.

1. Security token holders can only use decentralized applications (dApps) without additional KYC / AML checks if they do not transfer ownership of the token.
Source: EY-Parthenon analysis Page 15
 Benefit evaluation per asset class

DEXs are gaining more market share compared to CEXs due to a.o. self-custody, easier
entry for issuers, fewer regulatory obligations, and additional investor access
1 Increased liquidity via secondary market trading
450 DEX to CEX spot trade volume (%) DEX volume in billions 25%

 Self-custody of funds: Centralized exchanges (CEXs)

require users to trust the exchange with their assets
400
before trading, while decentralized exchanges (DEXs)
let users hold their crypto in their own wallet for greater
350
20% control (self-custody).

300
 Lower barrier for entry for issuers: DEXs have lower
15% market cap requirements and lower / no listing fees
250 making it a more suitable platform for security trading.

200
10%

150  Regulations: DEXs are not (strictly) regulated, which

provides more room for innovation compared to CEXs.

100
5%

 Additional investor access: Anyone can create a

50
wallet and trade on DEXs. Furthermore, DEXs are used
and supported by a tech-savvy community that are
0
constantly looking for innovation and expansion of the
Jan Jul Jan Jul Jan Jul Jan Jul web3 offering.
’20 ’20 ’21 ’21 ’22 ’22 ’23 ’23

Source: DeFiLama; TheBlock; EY-Parthenon analysis Page 16

 Benefit evaluation per asset class

Investors desire greater asset transparency, but tokenizing assets often results in on-
chain transparency instead of asset transparency, which can potentially cause confusion
2 Enhanced transparency

a Asset transparency
Information relating to the digitalized assets

 Asset transparency refers to clear and accessible information

related to assets represented by digital tokens on a blockchain.
 Investors benefit more from understanding the underlying assets'
characteristics, risks, returns, and how they are managed within the
Asset tokenization at a glance
tokenized ecosystem compared to the visibility on the blockchain.

a b Illustrative metrics
Asset / fund Asset / fund
composition performance Compliance

b On-chain transparency
Blockchain exploration and transaction tracking

 Due to the nature of blockchain (decentralized and immutable),

stakeholders can verify and trace platform actions. On-chain
transparency contributes to the trustworthiness of the network.
 This level of visibility extends to tokenized assets, providing access
to transaction histories, ownership records, and other pertinent data
directly on the blockchain.
Illustrative metrics

Price Market cap Transactions

Source: EY-Parthenon analysis Page 17

Content
 Evolution of distribution channels
 Benefit evaluation per asset class
 Towards the unified secondary market
 EY-Parthenon tokenization approach

Page 18
EY-Parthenon tokenization approach

Our comprehensive approach encompasses the breadth of EY services, thoroughly

validating the tokenization concept, before entering the market
EY-Parthenon’s tokenization approach

Asset tokenization Business case and Go-to-market Execution and

validation feasibility study strategy deployment

1 2 3 4

Confirmatory analysis of Comprehensive asset-based GTM strategy, covering target Liaise between vendor and client
tokenization potential, including assessment combining strategy, distribution ecosystem definition in realizing token development,
asset suitability, legal and tax legal, and tax. The analysis including vendor selection, ensuring effective project
blockers, and strategic fit. covers distribution methods, clarification with regulators, legal management and stakeholder
competitive landscape, investor documentation, tax communication.
needs and requirements, business consequences.
case, jurisdiction overview, and
token classification.

Page 19
EY-Parthenon tokenization approach

The EY-Parthenon strategy framework ensures that the tokenization concept aligns with
market needs, is financially viable, and can be realistically executed
The EY-P digital distribution analysis framework

Assess strategic rationale and Determine top -and bottom-line

market attractiveness implications

 Review strategic plans and  Model potential decreases in

objectives Desirability Viability operational cost
 Assess current market dynamics EY-P digital  Assess secondary market
distribution opportunities
 Analyze fund capabilities
framework  Sensitivity analysis
 Identify first follower advantages analysis
 Assess the upside potential
 Determine potential (cost) pressure
headwinds

Feasibility

Examine the practical aspects of

each distribution option

 Assess risk appetite, effort, costs,

and legal implications
 Assess the target ecosystem

Page 20
 Igor Mikhalev Prashant Kher Arno Meijer
Partner Strategy Senior Director (US) Manager

Get in touch with us

Christan Doornhof Wouter Heijink Ruben Knopperts

Senior Consultant Consultant Consultant

Page 21
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