These funds were historically designed for institutional investors. They have high minimum investment amounts, low liquidity, long terms and complex structures. On the one hand, we need to work on the costs of fund distribution and, on the other hand, ensure greater liquidity for these products. With Eltif 2.0, legislators have tried to take a step further at the product level, but new technologies are also needed to bring about a significant improvement in processes.

Of course, adjustments can still be made to the current system, but this will not be enough to achieve the big breakthrough. New technologies are needed to achieve these goals, and distributed ledger technology (DLT) or blockchain can deliver this. DLT can be used to automate many processes and make them much more efficient: subscription, registration of share transfers, distributions, regulatory audits. This means fewer intermediaries, less coordination and fewer errors.

DLT is the first technology to create a shared, immutable database for all parties involved. Today, a transaction is recorded multiple times in the systems of the various parties involved, such as in a kind of silo, by the issuer via the central securities depository or transfer agent via several custodians with the help of many intermediaries. This involves a great deal of coordination and high costs for the investor.

When blockchain is used optimally, the transaction is recorded once, that is, it is recorded in a so-called golden record with the support and validation of all parties involved, and that's it. Blockchain entries are immediately visible, traceable and tamper-proof for all parties. There is no longer any need for a central trustee because the infrastructure and the transparent cooperation of all parties creates trust. Blockchain becomes a settlement and ownership platform – this not only significantly reduces costs, but also makes financial products more secure and accessible. A Madoff scandal, where one party misrepresents facts, is made impossible by the other parties involved.

As the name suggests, it is now the fourth law on blockchain and finance. Among other things, the previous laws enabled the legally binding custody of fund units using blockchain technology. This has led to Franklin Templeton and Hamilton Lane launching funds on the blockchain and regulated financial service providers such as ourselves holding around 3,000 UCITS fund tokens for clients. However, this was without being able to use the golden record principle. The two-tier system with a central and subordinate custodian remained in place, which still required reconciliation despite DLT.

Blockchain 4 allows the issuance and dematerialisation of tokenised fund shares under the Golden Record principle on a legal basis for the first time. With the role of control agent, a securities institution can take over the register management on blockchain for the issuer. The control agent coordinates the DLT registration process for the issuer with all parties involved and the investors and records the transaction on the blockchain. It controls and assumes responsibility for the DLT entries. This eliminates the need for multiple entries in accounts along the distribution chain and everything that goes with it. Luxembourg is thus creating a regulatory framework for fully digitised fund structures that is unique in Europe.

Tokenised funds enable direct contact with investors, bypassing the previously opaque supply chain of custodian banks or platforms. This means greater transparency, faster processes and more personalised offerings. Blockchain has the potential to fundamentally transform customer interaction.

Studies show that 40 to 60% of a fund's operating costs can be saved. A McKinsey study even estimates that the potential savings across the entire capital market through DLT could amount to several billion euros annually. So it's not about optimisation, but about structural transformation.

Firstly, there are the operational processes. Many activities that are currently carried out manually or sequentially by several parties can be made more efficient with blockchain. Coordination and reconciliation processes are largely eliminated because everyone has access to the same real-time data set.

In fact, tokenisation opens up completely new opportunities for the secondary market for alternative fund shares. Until now, there has been no organised secondary market for non-exchange-traded funds, such as private equity or real estate funds. If investors wanted to sell before maturity, they had to go to the trouble of finding a buyer bilaterally. With tokenised shares, such fund shares can be made tradable on digital marketplaces. This creates liquidity where there was none before. Traditionally illiquid areas – private equity, private debt, infrastructure, but also real estate funds – will benefit in particular.

Even today, it is possible to trade a fund on stock exchanges, but this is currently very complicated and expensive. Smart contracting of tokens allows such secondary markets to be operated at unbeatable prices. We are already seeing the emergence of specialised secondary market platforms for tokenised assets. Overall, tokenisation is blurring the boundaries between the primary and secondary markets, which would then also further drive retailisation.