UBS Launches Tokenization Trial on Ethereum

The tokenization trend continues to gather steam.

Today, UBS Asset Management, the asset management division of Switzerland’s largest financial holding, announced the launch of its inaugural live pilot of a tokenized Variable Capital Company (VCC) fund.

The fund represents a legal entity for investment funds in Singapore that was introduced in January 2020 to enhance the city-state’s position as a hub for fund management activities.

The firm will leverage its in-house tokenization service called UBS Tokenize to initiate a controlled pilot of a tokenized money market fund, which comes in the form of a smart contract on Ethereum and lets the firm facilitate fund subscriptions and redemptions.

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New Blockchains Boom Creates Opportunity and Challenges

Billy Sebell of the XDC Foundation discussed the proliferation of new layer-1 and layer-2 blockchain solutions. While this expands possibilities, he noted projects must still attract users amidst growing competition. Sebell highlighted the benefits of targeting niche use cases and bringing real-world assets on-chain via tokenization. He was interviewed by André Beganski of Decrypt at Messari Mainnet 2023.

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“This is a key milestone in understanding the tokenization of funds, building on UBS’s expertise in tokenizing bonds and structured products,” said Thomas Kaegi, Head of UBS Asset Management, Singapore and Southeast Asia.

He said that within this initiative UBS will collaborate with both traditional financial institutions and fintech providers. The goal is to gain insights into how to enhance market liquidity and provide better market access for their clients.

The pilot is part of Project Guardian, the broader MAS-led VCC umbrella initiative, which aims to tokenize various real-world assets. The Monetary Authority of Singapore (MAS) is the city-state’s financial watchdog and central bank; Variable Captial Companies (VCC) are an alternative corporate structure to limited partnerships, trust structures and others.

Tokenization of real-world assets is the process of converting ownership or rights to physical assets into digital tokens on a blockchain or distributed ledger.

This approach uses blockchain technology to transform tangible assets like real estate, artwork, stocks, or commodities into digital tokens that can be conveniently purchased, sold, and traded on a blockchain network.

UBS joins tokenization wave

The financial regulator’s previous efforts within the blockchain space included the exploration of potential decentralized finance (DeFi) applications in wholesale funding markets.

To that end, in November 2022, JP Morgan Onyx, DBS, and SBI Digital Asset conducted trials for foreign exchange transactions and government bond trades using modified public lending protocol Aave and the decentralized exchange (DEX) Uniswap on the Polygon blockchain.

The UBS Tokenize platform was also utilized in Hong Kong for the recent issuance of digital structured notes by Bank of China Investment (BOCI), amounting to CNH 200 million ($27.3 million). These tokenized notes were created and issued on the Ethereum blockchain.

In a similar development toward the end of the previous year, UBS launched the world’s first publicly traded digital bond—a 375 million Swiss franc-denominated three-year bond with a 2.33% coupon, which has the same instrument structure, legal status, and rating as a traditional UBS senior unsecured note.

Despite its interest in blockchain technologies and allowing its customers to invest in cryptocurrencies, UBS CEO Ralph Hamers has in the past ruled out actively offering trading, custody, or lending services related to “alternative” crypto assets, while also calling cryptocurrencies an “untested asset category.“