Welcome to the future of finance interview. I'm Dominic Hobson, co-founder of future of finance. My guests today are Graeme Rodford, founder and CEO of Archax, a regulated digital asset exchange brokerage and custodian based in London, and Brian McNelte, general partner at Lingfang Capital, a venture capital firm that launched the first tokenized venture fund on the London Stock Exchange digital assets platform this year in partnership with Archax, but also the founder of the funds industry digital investor onboarding platform Token, which is now owned by the Apex Group. Graeme, Brian, thank you very much for being with us.
Thanks for having me, Dom. Pleasure to be here.
Brian, I thought we might throw the first question at you. It's an investor question really. What is the case for investing in this tokenized fund, the Lingfang Digital Venture Fund?
I think it starts with the strength of the underlying fund investment case itself before we talk about tokenization. And interestingly, still a key thing that's sometimes overlooked in the tokenization space. Lingfang have got a strong track record. Freddy had six successful funds. The approach there, the thesis is that they can access proven underlying opportunities through what they refer to as a corridor strategy and move them into other geographies where they've already got them contracts. So they've got a strong reputation. And then when we add the tokenization wrapper around it, which we refer to as the DVF, the digital venture fund. So what we're doing there is by adding that wrapper, that's adding to the use case and allowing broader access, lower minimums, improved transparency, and a clearer route to liquidity on that underlying fund.
Graeme, why should investors be interested in buying a tokenized fund?
I think just taking a step back on what tokenization is, it means a lot of things to different people but from my point of view I just think of it as a record of ownership. So you can keep a record of ownership on a piece of paper, a spreadsheet, a database or you can have it on a chain and when you do it on a chain then people think of that as tokenization. And when you've got a tokenized asset, it's the same asset as it was before. So if you're investing in the Lingfang fund in tokenized form, you're still getting the Lingfang fund. So to Brian's point, you still need to lead with the fund. But the fund has extra utility. So if you imagine if you're ever holding a fund investment, you might see your statement, the position sits there, but you usually can't do much with it. Maybe you can subscribe or redeem, but pretty much that's all you can do. Whereas with a tokenized fund, it opens up the potential for more utility. Maybe you can transfer it. Maybe you can use it as collateral. Maybe there's a secondary market. So what you have is the same asset but better. So really investors should be interested just because they get the same exposure but with more utility.
You've explained Graeme that you get away from this principal-based model where you have to subscribe and redeem with the issuer as a secondary market. But investors do still have to subscribe in the first place and might indeed want to redeem with the fund manager at the end of the day if they can't sell it at a price that's attractive in the secondary market. How does that mechanically, how does that process of subscription and redemption actually work?
Yeah, you're right. I think with tokenization generally these worlds of subscription, redemption and secondary markets are coming together. Subscription and redemption is what I'd think of as primary activity buying and selling direct from the manager. And historically, you know, you fill in a long subscription document, you commit yourself for a while, and then you're drawn down. And probably that process doesn't necessarily change too much. However, the world has moved on technologically. So subscriptions and redemptions now can be in the similar form. They can be automated. You can subscribe and redeem through APIs. But also excitingly you might be able to use stable coins as well. So where we're looking at in the future is a world where you can send in a stable coin and atomically receive shares in a fund. Then hopefully in the future you'll be able to redeem out of a fund or redeem in kind as well.
Brian didn't mention this when he talked about the advantages of issuing a fund in tokenized form. He talked about distribution and transparency but does tokenization improve the operational efficiency with which a fund is run?
I think ultimately it's going to improve everything. I think tokenization improves issuances from the issuer's point of view, infrastructure point of view, and the investors. We talked about the investors. I guess from the issuer's point of view, a lot of people talk about the cost savings. They're not necessarily apparent right now because people are investing in this kind of new way of being. However, it changes a great amount. So, being able to see the holder at any point in time using blockchain technology. As I mentioned, it's a record of ownership. When those tokens move around, your cap table is going to be automatically updating with who's receiving it. Being able to use compliance gates. So, ERC 3643, one of the token standards has compliance built into it. A lot of people are talking about this being able to check who receives and sends a fund is eligible. Complete transparency. You can have transparency on the holdings. One of the things we've talked about with Lingfang is tokenizing the underlying holdings in the future and potentially being able to show those in the fund as well. And this kind of verification of all of the assets that are issued at any point in time. So, you know, you end up with a, it's probably more complicated in the short term. However, in the long term, the amount of synergies and the way that feeds through the industry is going to be a significant saving to an issuer.
Some of the things you talked about there like record of ownership and compliance checks are tasks which in a traditional fund would be done by a transfer agent. Now the transfer agent survives in this particular tokenized structure which feels counterintuitive in the context of tokenization which is in its purest form all about disintermediation. Now is the survival of the transfer agent necessary to perform those functions you've described like keeping a record of ownership, the transactions, and enabling the issuer I suppose to update its view, a completely updated cap table? Is the TA surviving here to do those things or is it really surviving here to maintain interoperability between the tokenized and traditional forms of the fund but somebody's got to do that, this fund is going to exist in those forms, isn't it?
Well, maybe answer that. So, in practice, yeah, the TA still matters. We still need some entity to maintain the authoritative investor record and the controls and the operational governance. As Graeme said, in due course, it will look very different from the TA function right now. But it's not just about interoperability with traditional formats. It's ensuring that the tokenized structure is still working within the regulated fund operations. So some of the TAs are rapidly advancing their capabilities to be on the front foot of understanding this even although they've got a foot in both camps of traditional and tokenized which I think will be the case for a long time. We need that regulated entity to still be there to protect the investors and all the other parties.
Graeme, you mentioned transparency, tokenization improves transparency. Transparency for who?
Well I think for the industry at large is kind of the quick answer. So from an investor point of view. If you think about all of your touch points of a fund, you know, if let's say I'm invested in a venture capital type fund as Lingfang in the past, I kind of send my money in and then every now and then I receive a statement for a kind of a liquid fund maybe on a quarterly basis. Then at some point I might be drawn down. At some point I might start receiving capital back. These kind of are all happening in a vacuum and you kind of rely on the independence of a fund administrator or someone usually to make sure that the fund's being operated correctly. Now, pretty much every process that I've just mentioned can be put on chain if you'd like it to be. So, I mentioned earlier you could tokenize the underlying positions. So, you can see a full portfolio on chain. You could tokenize every single cash transaction if you do it with digital stable coins. And you can even price each of the positions on some sort of oracle if you'd like to. So, you know, all of that can culminate if you like in a kind of real-time NAV. Now, obviously, someone still needs to verify all of the inputs into that, but it helps the investor hugely if they're able to look into a fund and see what's going on. And the reason I mention the industry at large is I think just generally alternatives are kind of a bit of an opaque industry really when it comes to investors. It's, you know, in the past at least it's been kind of funds of funds, institutions, pension funds that kind of invest into this space and usually there's some dedicated journals about investing in alternatives maybe some indices but it isn't very transparent whereas especially if these are on public blockchain imagine in the future that you've got all the alternatives out there producing all of their information on chain and suddenly you have transparency of an industry and some good comparables that you just wouldn't get with the headline data today.
That tokenization of the underlying which you refer to, that's not happening here. This is part of your future vision of the benefits of tokenization, the great increase in transparency. I'm right to think that, aren't I?
Yeah, we've discussed it. It probably is something we're looking at and we're open to it still in the fund. I mean ultimately all funds will move in this direction. I think most people across tokenization right now are tokenizing at the fund level. But where this gets really exciting is where you tokenize at the underlying level because that means you can realtime price the NAV of your fund. But you can also do things like redeeming kind, transfer underlying positions between vintages. These are all things the Lingfang team have been exploring and just deciding the best process to go live with. But yeah, it's not something that we're necessarily implementing now, but it's something we definitely believe is the future.
A nice workshop on that to look forward to Wednesday, Graeme.
Okay, let's talk about the benefits for the issuers. Brian, you touched on this at the outset, but has tokenizing this fund actually widened the distribution net for Lingfang? Are you reaching new types of investors with this structure?
Yeah, I think let's just come back on a few points there. I think it's exciting enough tokenizing at the fund level. I think as Graeme said, we want to explore further benefits around investors. But I mean many of us, their payments has put us off investing in the VC world. You put your money in you maybe in 5 years plus you get something back. So the liquidity that we're driving here to give the opportunity to buy and sell on a quarterly basis is already transforming the VC model. So that is attracting new investors. But adding on top of that because we've tokenized with Archax, the DVF allows you to come in a much lower minimum. So rather than our traditional funds being X00,000 to come in, you can come in a much smaller amount. So we're allowing broader range of investors, appropriate investors to come in that would otherwise be excluded and allowing them to have liquidity. So this is transformational, Dominic. This is venture capital 3.0 before we look at tokenizing the underlying.
