Aviva on innovating through the centuries - the telegraph, steam-powered transport, fax machine and now, fund tokenisation

Aviva Investors' Alastair Sewell outlines why they have launched a tokenised money market fund, how they made it work and why other firms should do the same. Find out more about the fund here, IA tokenisation training and the IA-Licuido paper on collateral mobility.

Transcript

SPEAKER_00 0:10

So, welcome to the Investment Association's podcast on innovation. There's been a lot of activity in recent months on tokenization and digital assets with a number of regulatory developments that have been moved this area forward in a very positive direction. And I'm delighted that today we're joined by Alastair Shule, who is certainly a pioneer in this space and has been doing a lot of work on tokenization over the past year and beyond. He is a senior investment director at Aviva Investments, responsible for liquidity solutions across money market funds and ultra short duration bond funds. And his day job includes managing external relationships, new product launches, and research and content in the area. Now he is also the chair of the IA Money Market Funds and Short Term Funding Markets Working Group, which is easy for me to say. But you're also a bit of an industry figure and you work with other trade associations, including Info, a pharma, and you're a bit of an industry figure. You're also one of the very nice guys, if I may say so, uh within the investment industry. You're certainly uh a gentleman. So for those of you who haven't met you yet, I would encourage you to do so at the various IA events uh that I know, Alistair, you like to attend. So thank you very much for joining us today. I know you have a specific item that you want to talk about, but perhaps we could just start first of all by talking a little bit about your work with the Money Market Funds working group, because MMFs are going through quite a number of changes at the moment, uh, and when it comes to innovation as a subject, I think it's quite a ripe area. So perhaps you could talk a little bit about the work of that group and the sorts of challenges and opportunities that are coming up in that space.

SPEAKER_01 2:08

Well, I'd be delighted to, but but first of all, John, let me say what what a kind and warm introduction, and I I can rest assured I'd be delighted to come back to one of these again if you're going to be that nice to me every time we do one of these. Well, you haven't heard the questions I'm gonna ask you yet. I take it all back. But um perhaps grappling with the easy one, I I fear you're you're lulling me into a full sense of security. But m money market funds. So money market funds are obviously a form of mutual fund, and and they've been around since the the early 1970s in the US, they appeared in Europe in the early 1980s. So they've been around for a while, and they clearly focus on a very specific thing and arguably on a very specific niche for investors, and and that need is cash management. But there are also certain qualities of the money market fund structure which make it quite an interesting product that can be used and can be applied in in ways which are perhaps more innovative and perhaps we'll we'll get onto a little bit later. And specifically, I think one of the things that is is really interesting about a money market fund is that it can price at a single stable value, so it has a unitary value. And that's one of the reasons it's um so much in demand as a cash management tool, just as cash has a unitary value, so does a money market fund unit, whereas another mutual fund unit would would you know naturally vary in price as uh as markets go up and down and the fund manager succeeds or or does not succeed. So that that structure and that that, if you like, clarity in the operational structure of the money market fund gives it a certain amount of utility and gives it a certain amount of application. And uh there certainly have been waves of of innovation and waves of thinking about money market funds, but what we're seeing today is really it's it's a really exciting combination of the object, the money market fund, which has been around for 50 plus years doing its thing, and the technology which is arising in financial markets, and bringing those two together is is fostering new levels of innovation, new levels of thinking about how you can use this tool, this product in in innovative ways to address m inefficiencies at one level, but I think also to interact with new cohorts of investors who are have different expectations from many of our customers today. So the money market the humble money market fund it serves a very specific purpose in in conventional markets, but with the addition of a layer of technology, we're at the dawn of it being able to do new and interesting things for financial markets.

SPEAKER_00 4:34

And MMFs are often compared to stable coins. So when we think about the developments that are happening in digital money arena, stable coins in some cases share much of the same backing assets that money market funds also invest in, and there's probably some opportunities there, I think, for asset managers when thinking about how the future of money will develop over time. But also, are stable coins not a threat to money market funds? Stable coins.

SPEAKER_01 5:07

Stable coins, I I like stable coins a lot. Um and and the reason I like stable coins, John, is it's really stable coins that I know I send corrected. It's not stable coins which started me off on this journey. But stable coins are a big part in this journey because when I when I first noticed a stablecoin, I thought exactly what you said. I looked at a stablecoin and I thought, this looks to me almost exactly like a money market fund, except with the difference being that it's not regulated as a money market fund, which is obviously a significant difference. But otherwise, for all intents and purposes, it was a vehicle in which an investor would place cash. That cash would be invested in a portfolio of short-dated securities, I'll say. In the early days, there was obviously a lot of question marks about what those securities were, and if we think about USDT, for example, those question marks over what exactly is in that backing pool remain. There are other ones today which are uh regulated and more transparent, perhaps, and I think that's that's genuinely a good thing for markets. So fundamentally they they look very much alike in in economic terms, and you could even extend that that a little bit further and say that they also look a lot like a narrow bank, in the sense that a narrow bank takes deposits, it only takes deposits and it puts those deposits again into guess what? Short days of high quality securities. So you have these these different concepts which have existed in markets for a time, but with stable coins, you had all of that, but with a technology layer. So are stablecoins a threat to money market funds? Well, in principle, no. And that's because obviously regulation has moved on since stable coins first appeared in what 2019, 2018 or so. And that regulation, broadly speaking, if you look across the major jurisdictions, it puts a ban on them paying interest or paying a yield, whereas obviously a money market fund can. And this is a really important set uh separation because it makes the stable coin a tool for payment, whereas the money market fund is fundamentally a tool for investment. So though those two features are differentiated and mean that the two instruments will serve different purposes. Whereas I think it gets really interesting is when there is a very high degree of fungibility between the two. So we often talk about the the pairing of a stable coin to make a payment, say for example a cross-border payment, with instant fungibility in and out of a money market fund to ensure there is no there is no latency on that cash. So the cash in flight can do the flight part very quickly and efficiently with the stablecoin and the benefits of the stable coin, but also with the fungibility into a money market fund, formerly speaking, a tokenized money market fund, to allow yield generation. Now, if you'll permit me, if we cast our mind a little bit back further back in history, we have of course seen something like this before. And the case study I would give you is the case of a money market fund called U Bao, which is a Chinese money market fund, which rose to prominence in in approximately the early 2010s. And that was very interesting because that money market fund was both a money market fund and a payments vehicle. So this worked almost exactly like an account, which someone could use on a mobile phone, so an early iterance of a digital technology, and they could use this to make payments to third parties, and it would also generate yields. So it was, if you like, a combination of stablecoin and money market fund in the very early days. And I remember seeing that back in those days and thinking, there's something here. And I wonder how this will transplant itself across to Western markets. And lo and behold, here we are. Is that still around, do you know? It is still around. It's um it's changed form. It was uh cracked down on by the the Chinese government uh because it grew rather too big. Uh for a time, in fact, it was the largest money market fund in the world because it was it was so so enormously successful with millions and millions and millions of of retail investors, each with a very small investment in it. So in that sense, it did something that the tokenization technology does as well, which is the promise of providing access. That is to fractionalize something relatively large and um lumpy, for lack of a better word, and making that into slithers which an individual can consume, which and and you know, John and I, John, you and I have talked about this before, but obviously this is what the mutual fund did back in in the 1920s. It turned something which was hard to access, the stock market, into something which became accessible to the the man or woman, or presumably mostly men in those days, but became um accessible to the individual on the street. And this is one of the other promises of tokenization, which again I think is maybe we'll come back to, I don't know, but it's one of the exciting promises of that technology.

SPEAKER_00 9:33

And as part of your work on the money market fund group, I'm sure you will have noted the big trend towards tokenization. And in the digital ecosystem, you can't really move now for examples of so-called money market funds that have been tokenized that perhaps wouldn't already wouldn't always meet the regulatory definition of a money market fund as you and I know them and uh in regulated markets. But there's been an an undeniable trend, probably uh accelerated by your point around crypto or digital native investors wanting to have a yield on their money at rest, should we say? But that has now led to a number of asset managers thinking about launching tokenized funds. So, what have you seen within the industry and how have you then taken that forward, uh Eviva? Absolutely.

SPEAKER_01 10:29

Um it's it's very clearly a trend. You can see observable assets under management in tokenized money market funds. Although I you you make an important distinction, John. There are characteristics of money market funds which make the money market funds. For many of these money market funds which have been launched, they're not necessarily regulated money market funds per se. That's not to say they're doing anything nefarious or wrong. And in many cases, I think they they've done great pioneering work, and I think it's thanks to some of that work that others in the industry have been able to follow that lead and develop their own initiatives, which are taking a variety of forms at the moment as well. It is it is a nascent time of the market and practices are varying. So broadly speaking, when you think about the money market fund landscape, there are regulated money market funds in the US, for example, in the UK, in Europe, in Hong Kong, in Singapore, and in various other jurisdictions, but not all jurisdictions actually have money market fund regulation. So the fact that something is launched as a money market fund in a Caribbean island, for example, does not necessarily make it a money market fund per se, although it can, of course, uh elect to pursue all of the rules that a money market fund would be governed by in a representative in a jurisdiction with those rules. So there is great work being done there. But it is important to note as well that they're not all necessarily money market funds. If we think about uh the the UK, there are no domestic tokenized money market funds in the UK yet. And in Europe, there are very, very few tokenized money market funds, and by that I mean funds which should fall under the USIS Directive and under the Money Market Fund Regulation. So two pieces of regulation to satisfy. There are a few of them so far. There are a few, um, and I'm delighted to say there are more coming from uh including from Aviva investors, but there there are differences there. The other aspect, of course, is on the technology side, and and as you well know, John, there are different models of tokenization. So you might have a third party tokenization where you issue shares to a third party who effectively puts those shares in a box and then tokenizes the box. Now, by box, it may be a trust or some kind of other structure, but essentially a box. Or you might have a digital twin model whereby a conventional unit is issued, and that is simultaneously issued with the digital representation of that unit, and those two would move in a let's say a co-joined manner. And then of course the uh the other option, which I think is the option which will provide the greatest utility long term, although harder to get to for many organizations, at least in the early phase, is the digital native format, where the token is issued natively on a blockchain, and the blockchain is the source, the the golden source of records for that token, and indeed hence for that, for that money market fund. And we're seeing a range of experiments with with digital twins, digitally native, third party, different jurisdictions, slightly different approaches to operating money market funds. But really, it is money market funds where where the focus has been. And I think that is because people are interested in reinvigorating, and and it is a reinvigoration. We this has been tried before, but to make money market funds eligible to move in collateral transactions, that's a big driver for industry. But also to the the you know, the DeFi natives, uh, that is a large and growing community, and this is a financial product, a financial service which can be provided to those customers uh uh and meet some of their needs. So there are multiple aims which can be achieved, and I have no doubt, being an innovative area, there are many use cases which none of us have dreamed of yet, which will become prevalent uh as we progress.

SPEAKER_00 14:03

So you mentioned that Aviva Investors is looking to launch a tokenized fund. Is this an existing fund or are you providing a new a new avenue for investors here?

SPEAKER_01 14:13

Yes, so we we are launching a tokenized money market fund, and we're we're very excited about this. It's been a long journey, John, and it's uh it it's a big it's a big lift for a traditional asset manager to get to grips with the technology, to understand the technology, to govern the the technology, to onboard new third parties and new counterparties to engage with to enable this technology. So it is a significant lift for a traditional investment manager. And we are we have pursued that and we have indeed launched uh a tokenized money market fund. The fund is an Irish domicile money market fund, which is sold cross-border into the UK. And the model that we have taken is the digital twin model. So in this format, an investor will access the fund in a normal way. They will be issued with a conventional fund unit by a conventional custodian, conventional um parties in the fund value chain, and they will also receive a digital token, and that digital token will also represent that unit, uh that conventional unit in the money market fund. Now, if you compare that with a digital native, where you have on-chain books and records, then that will give you more functionality uh in the future, and that is something we will be aspirationally building towards. But the the attraction of the digital twin is you can build from what you have. With a digital native, it's it's very likely you would need to create a brand new structure. Maybe not necessarily, but it is probable that you'd need to create new structures, you would need to engage in a even more significant operational transformation, you would face perhaps regulatory barriers depending on on where you elected to set that up. But the quid pro quo is the the benefits that you would achieve from that structure in terms of collateral mobility, the ability to use all kinds of interesting features which which we can all get very excited about. They are great. But but as a traditional investment manager, a s a prudent, risk-governed stepping stone approach is the route that we've chosen to take into this new area.

SPEAKER_00 16:16

Super. Well, congratulations on on taking the leap. It sounds like a big lift, and I want to get into that in a moment. But just before we do, you mentioned that this is a stepping stone, but it also allows existing investors, the existing relationships that you have to be able to interact with the fund in a means that they are comfortable with and are used to doing. So presumably this is a product that is aimed at conventional or traditional investors, if I can call them that, rather than some of the money market funds that we've seen launched recently, which are marketed to crypto natives or digital asset natives. Would that be right?

SPEAKER_01 16:54

Yeah, that's that that is correct. We have attracted new investors, which come from uh the uh Web3 community, shall we say? But we we are primarily targeting it at more traditional users, and our primary focus will be on collateral, so enabling the token to move it as a collateral transaction.

SPEAKER_00 17:14

That will be a primary focus. So you mentioned about liaising with new types of counterparties and providers. Who are you partnering with on this project?

SPEAKER_01 17:24

Yeah, so we we've had to uh partner with with new uh new third parties. Um obviously we we continue to partner with with existing third parties as well. So Bank of New York Mellon is our transfer agent and custodian, and indeed is a strategic partner of uh of EVE Investors. And we we've worked closely with them on this process, but we have uh selectively onboarded some additional third parties where appropriate. And of those, the the important, most probably the most important entity is is the is is Ripple. So we have agreed a partnership with Ripple, which we announced uh earlier in February this year, earlier this year. Uh and the intention is to work with Ripple on creating tokenized funds. And and the tokenization of our US dollar liquidity fund, which will shortly be followed by a sterling liquidity fund as well, is is really one of the first steps um in that direction. Alongside that, we are also working with a digital asset custodian who will provide uh certain infill services to us, and that is Kaminu, who we are we are working with, and also a tokenization platform called uh Liquido. Now, Liquido, you may well know, John, because uh Liquido and the Investment Association partnered on some of the uh investment association's earliest work on fund tokenization. So we have a selection of new counterparties that we're working with. We're very excited to work with all of those, and we are we have we have a strong multilateral partnership which we hope will be able to work collaboratively to uh make the product a success and to grow assets beyond the initial $50 million uh that we have in the tokenized money market fund.

SPEAKER_00 18:56

And what does the fund invest in? Is it government debt and sort of traditional money market fund assets?

SPEAKER_01 19:02

Well, that there's a really important point. It is no different in many ways from a normal money market fund. Uh, in fact, it is a share class of an existing money market fund, and the underlying money market fund continues to invest in exactly the same securities as it always has. So that will be government securities, it will be short-dated bank debt, it will be commercial paper, all of the normal things that a money market fund would invest in, and it will comply with all of the regulatory requirements of a normal money market fund, it will comply with all of the requirements of a usage fund. So it is regulated. It was regulated yesterday when there was no tokenised share class, it'll be regulated in exactly the same way, it'll be exposed to exactly the same risk factors in the new format. And I think that's a really important point because when when you you talk about this technology, I think there is the risk that people jump to the conclusion that it might be doing something different, it might be taking on additional risk. Whereas in reality, the portfolio is fundamentally the same, same basket of risks as it always was. Now there is new technology being used on the liability side in terms of getting access to the fund structure, but this is done in a very robust and risk-governed way, and the fact that in the digital twin model the conventional unit, the conventional process remains the golden source, the book of record, means there is uh the governance standards of a conventional fund are exactly the same in this case.

SPEAKER_00 20:20

So why now? You mentioned that the digital twin model is a stepping stone to what might come uh later on. Why not wait and see how the market develops? Why have you decided to enter the market now?

SPEAKER_01 20:33

Well first of all, I I'd say the digital twin is a stepping stone, and we do think there are uh there is greater utility, greater functionality when you move to digital native. But I wouldn't for a second want people to think I'm being pejorative about the digital twin. I think a digital twin does a lot of really good things. Certainly from our perspective, we've been on a learning journey and we've gone from a position of awareness of the technology to having a fund which is applying the technology. And that is a steep and um between us, I can say arduous learning journey to go through, but it's important because that equips the not the organization with with skills, with knowledge. And in fact, I should also offer a thank you to the investment association. We have even investors um asked the investment association to work with us on a bespoke training program on fund tokenization, which we put a not insignificant portion of our entire workforce through that training program in order to really cement and formalise the skills that are needed really at a grassroots level, because a tokenization project is not a technology project. It is not a product project. It is a project which involves, which touches on almost all areas of the investment management organization. So to that end, all of the stakeholders need to be involved, all need to be equipped with the skills and knowledge to to interact with the technology and what is required of it, and then to to deploy that. So it has been arduous, but why now? Well, really what what triggered it for us is We could see evidence in the market that this was happening. So you look back, say, a year and a half to two years ago, we could see the beginning of assets being raised. We could see funds had been launched in the US, in the British Virgin Islands, for example. We could see they were gathering assets. We could see that they were operating effectively in practice. So these were not pilots, they were small, sure, and tokenized money market funds in relative terms remained very small compared with the wider universe amount of funds. But we could see it was tangible, it was happening. And we're also aware that the underlying technology, the blockchain technology, offers efficiency gains, offers utility gains, which in our view will be beneficial to financial markets. So therefore, we felt it incumbent on us to develop the ability to transact in a blockchain and in a tokenized format. And from one perspective, John, you can you can see this as a risk management exercise. If financial markets move in in any serious degree towards tokenization and blockchain as a primary mechanism of activity, of interaction in financial markets, then you need to be able to transact it in that market as well. If you're not, then you you face, frankly, quite existential risk to your ability to operate effectively. So we felt it was incumbent on us that we we learn this technology and learn how to do it. And the way to do that really is experimentation. But equally, sandboxes and you know sandboxes are are obviously a great way to learn because you can you can learn and practice in a you know in a controlled uh environment, but I'm not here to sit around and play in the sand. I'm here to build things. And to do that, you need to have something which is funded, something which has real money in it and has has real edge in it, so that you can actually raise assets, you can deliver a funded commercial case, and you can deliver a tangible benefit to your own clients. It's only when you're delivering benefit and you're gaining benefit on on your side, when both sides of the trade can work, that's how it will gain traction, that's how it will scale. And if either of those those legs fall away, then you're still uh sitting around throwing money, quite frankly, because these projects are expensive, into into pilots or proofs of concept which will never work. You need to you need a funded business case, and then you can start to to act really. We we we found that business case, and after that it was simply a matter of execution, and that was a long period of time.

SPEAKER_00 24:35

So tell me tell us a little bit more about that arduous journey as you describe it. So you've you've obtained the commercial case, but then you've got all these new service providers who haven't necessarily got a long track record of engaging with traditional financial services firms, if I could if I could describe it as that. And of course Aviva tracks its history back many centuries, not least the uh the many decades that you've been running money market fund products. But how do you navigate an organization of that size, scale, and heritage through quite a complex and pioneering journey towards actually getting something off the ground?

SPEAKER_01 25:17

Yeah, 325 years of history. It goes back to the the Lloyd's coffee shops of the uh the 16th century. Aviva has a long history, and uh you can think about that in two ways. One, you could think about maybe it's it's a large, um, old organization, but on the other hand, you can think that this is an organization which has been through waves of innovation before. Um Viva Investors has successfully survived the invention of the telegraph, for example. It has successfully uh survived the transition from sale as a primary primary means of transport to steam. It has survived the advent of the fax machine. We still have fax machines, uh, ironically, as do many on the street, I hasten to add. So Aviva is an organization which has, by definition, by definition of its existence through history, been through multiple waves of innovation. I'm very conscious that that other people who may have looked like me, may have not looked like me, but would have gone into a room at some point in Aviva's long and storied history and said to a room full of august, wise, and seasoned persons that they've come up with a great idea which is going to revelise the revolutionise the future. And of course, that that that room full of august senior management will have looked on that with some degree of scepticism. I don't think that's changed. I don't think that will ever change. It is the it is the right and it is the role of senior management to interrogate harshly, one might say, the ideas which are put forth to them. Now, I think what is also universal truth is that level of executive management will also be looking at a strategy board. And on that strategy board will be listed a number of other priorities which are all ever so important at that particular point in history. Now, at the point of history we are today, things that will be familiar to many investment managers are the democratisation of private wealth, for example, the role of active ETFs, etc. etc. There are many big ticket items which will be featuring on strategy dashboards at the moment. And then the question becomes, where do I put something like tokenization into this? And I think what makes it challenging is that the the long-run payoffs from a tokenization project are not necessarily clear. We can go to the the likes of Boston Consulting Group or City Institute or or ANOT and see some fairly large numbers being forecast for tokenised markets. And I hope they're right. I really, I really do hope they're right. But also, as we all know, forecasts have the habit of being wrong. So the the payoffs are uncertain. I think that does deliver a degree of scepticism. Um and therefore the the approach that we needed to present and we needed to achieve agreement on from the exec was that we would achieve a funded a funded first step foray into this world, which we did, and we would do it with really quite strictly and clearly defined KPIs and a nodal-based investment strategy. And what I mean by that is execution of project to a given node would then trigger more investment, or conversely, a cessation of investment should should that node not be achieved, or should you reach that node and discover there are other facts which were unknown earlier on, which now make this this um non-viable. So it's a venture capital mindset, if you like, in terms of those those triggers for further investment. And clearly for us, launching the money market fund is a significant trigger point for looking at the tokenization technology and and thinking about it further. So a very long-winded way of answering your question, but the first step really was to achieve the buy-in of the exec, and that was to demonstrate the potential, but also so top down the potential, but also bottom up how you would do it with a funded and very specific commercial case. That done, you then really got into uh the hard work, I'd say. And and alongside this, there was still the winning of hearts and minds around the organization. But this was understanding the regulation, understanding the evolving regulation that goes around this, understanding the technology, assessing the technology, understanding your new counterparts. You're quite right, um that there are there are many new counterparties, they often have short operating histories, they may have less observable features that we're used to in the investment management world with with our core counterparties. So, again, we need to go through quite detailed procurement and and and you know third-party review processes and due diligence to ensure that the parties we were working with we were we were happy to work with. And all of these are involving different people. These are going to bring in different skill sets from different parts of the organization to do to do disparate different things. So that requires project resource, um, it requires a multifaceted team, and and that's what we did. We created a project team, we went through all of the areas that we would need to go through, and we we reached fulfillment. But but a personal reflection is to make that work, you need you need the culture to be right. And culture you can direct to a point as a project sponsor, but ultimately it it comes from the team. And in our case, we had we had a we had a wonderful team, really, really a wonderful team that was working on this, where there was camaraderie, there was enthusiasm, there was energy, and there was there was drive, but also a deep degree of mutual respect in everyone understanding that we were all motivated by the same objective to get to the point of tokenization, but we are all committed to executing our specific parts of that. And quite frankly, it was a it was an absolute joy to work with and showcased what an organization can do when it's it's really at its best. And I think that's because the technology is exciting. I think that's because the promise of what this can do, the promise of transformation is exciting, it's appealing, it's intellectually stimulating, and you put that together into a task-oriented environment with you know pace and with energy, and you you can create amazing things. It it is genuinely amazing what people can do when they they really work hard and with enthusiasm towards it.

SPEAKER_00 31:05

That's really an inspiring story. So you had the commercial case, you had an innovation culture, but then you also had to contend with the regulatory framework, which as you say has been evolving quite a pace in recent months. And you mentioned that this is an Irish domicile fund, so you had to work with the CBI who did publish a paper on tokenisation uh a couple of months ago. So, how did you find that process in terms of the level of understanding of the regulator, the different types of considerations that they would be making, and how you know how did you get it off the ground, really?

SPEAKER_01 31:43

Obviously, regulatory engagement is is critical. And we we also have a further complication that a Viva Investors is a UK investment manager, so the the Financial Conduct Authority is our principal UK regulator. Our management company for our European funds is based in Luxembourg, so the CSSF, the Luxembourg regulator, is interested in what we do. Central Bank of Ireland regulates our money market funds, which are dumber sold in Ireland for historic reasons, and uh some of our share classes are also registered in Singapore, so the Monetary Authority of Singapore um has also taken an interest in in our activity. So I think it is fair to say that we have gotten our regulators even better uh than than we we all already knew them. Now, I think what's interesting is there's there there there has been uh uneven pace uh from from regulators. You you've seen you know very very rapid movement in in Singapore in particular. I I would I would I would really call out Singapore for being and in fact Hong Kong for being very advanced in terms of what they're doing with with the technology. And I know John you you've spent time out in Singapore as well, and you've seen firsthand some of some of the developments there which are you know frankly cutting edge. I think Europe is is a bit behind where they were, but I don't think it's it's a position where Europe or the UK is is necessarily at a disadvantage or has has lagged behind excessively. I think I think the prize is there. I think the prize is there for the UK. I have a I have a lot of faith and a lot of confidence in what is actually happening here in the UK. Um I think there is great promise for tokenization of funds in the UK and and for UK investment managers because of the work the FCA and increasingly the Bank of England are are doing as well. I think we're in in a good position and I look forward to the work of the digital asset champion working across government and industry to progress uh fund tokenization and the digital asset agenda more broadly. I think we're we're in we're in a great time. And I would, if if I could make an action call or a rallying cry to my peers in the industry, it would be to act and it would be to move forwards and to execute on your plans and your projects. But specifically going back to the regulators, you know, it's it's engagement, it's engagement, and it's getting an engagement. We went through a long back and forth process with the regulators where we submitted very, very detailed plans before submitting a prospectus to the regulator. We had quite detailed backwards and forwards conversations based on the memo. We then transposed that into our proposed governing documentation, and then there were further questions at that point. So it was it was a long backwards and forwards process of addressing points which are raised. And and really key things which came up were around the resilience of the approach that we were taking. And by that I mean traditional things as much as digital or technology things, and such as how do you reconcile between your physical records and your digital records? How do you ensure those records match? What do you do if there is a discrepancy? Is there a scenario where there can be a discrepancy? For theoretically, no, but obviously one must think of an unlikely and unimagined scenario where there is. How would you manage that? And then the resilience of the technology. Why are you using that blockchain? What are the characteristics of that blockchain as opposed to another blockchain? Why are you using that one? What are the resilience standards that you looked at? How do you demonstrate that you you assessed and tested the resilience of that blockchain? Your counterparties, how are you sure that they are sufficiently resilient to execute on the services that are provided? How contractually, how are those services embedded in the relationships you're creating with those third parties? So it it it is it is certainly a very detailed process, but I think rightly so. Because my belief is that our regulators want us to act, want us as industry to bring projects forwards and to be successful. So I think this is a great time, a great, great time of partnership between regulators and industry because everyone wants there to be success in digital assets, not least because of all of the activity in the US. But there is a desire to be successful, but to be successful in a grounded, risk-oriented, risk-aware, prudent, fundamentally a prudent manner to adopting this technology, accessing the benefits, delivering value for our customers and delivering more utility. So it's a great time. I think it's it's it's a great time. It's a very interesting time to be to be launching these kind of projects. And I I would I would call on anyone else in the industry, if you're thinking about it, if we can convince you through this podcast to move, please move. Because the more the more industry moves, the better it is for all of us.

SPEAKER_00 36:06

Yes, a very exciting time. And you and I have been in a number of meetings uh over the past year or so with regulators at peers, where they've described open door policy, trying to work very collaboratively with industry and the sharing of use cases and experience. So I certainly uh share your your optimism and your excitement about the time that we're currently living through and the opportunities that are provided by that. Um you've given a very compelling call for action there for your peers in other asset management firms to come forward and and innovate in this area. What do you think needs to happen more broadly, however, when it comes to tokenized securities, which perhaps haven't moved as as quickly as uh the funds industry has? Digital money, where we started our conversation, custody, interoperability, all of these sorts of subjects that we hear about when discussing tokenization. Are there any areas that you feel are particularly important that where peers need to move?

SPEAKER_01 37:06

Well, the pithy answer would be all of the above, Sean. I mean, I think you you you've you've hit there the bucket list of of all the things that really need to move. So I'm I'm only gonna pick on on one of those. Um we could talk about all of them, but but the the one I'd I I which is most interesting to me is that's just simply not true. They're all of interest to me. I'm gonna I'm just gonna restrict myself to one though, and that's digital securities. So when when we think about what we've done in fund tokenization, and and actually this applies to all of the examples you can see across the industry so far, is that it's been it's been a tokenization of the liability side of the fund balance sheet. That is, we have tokenized whether natively or whether a digital twin or where whether some other model, we've tokenized the units of the fund, though the the liabilities of the fund. And then if you look on the other side, the assets, the things that the fund buys, there are relatively few tokenized or digitally native securities. Now, there there are there are some, and I I hear wildly competing numbers being quoted, but if you think about the the major programs, there are relatively few. There's been a few from some of the quasi-government agencies in Europe, for example, there have been a few European government bonds, and of course here in the UK, we have the digital guilt coming. But a few examples does not make a portfolio that you need for a diversified and fully functional mutual fund. The sunlit up plan we want to get to is where the liabilities, the units of the fund are tokenized, and the assets in which the fund invests are also tokenized or digitally native. And then at that point, you move from a inevitably from a mixture of conventional or traditional, let's say fiat, for example, assets and and tokenized fund units. So a mismatch, clearly a mismatch, to a situation where both your assets and your liabilities of the fund are tokenized. And at that point, you you really are in the sumlit uplands of being able to transact with near near instantaneity, uh, which will unlock very, very significant benefits for funds. And that that's going to be a way off. I think so. I think digit is going to be really interesting in that sense. I see I see digit as a catalyst really for a lot of investment managers to begin focusing more on tokenization, because the inevitable question will arise, can I buy digit? And that and and that's a specific question. I separate that from the question, do I want to buy digit? Some investors may want to, others may not. There are reasons they would or there are reasons they would not. But that's a different question to can I, is a different question to do I want to? And I think it's that can I do it question, which is probably going to be be the motivator. And really the time is now, because digit is coming, and and the ability to transact in it will require an operational lift from investment managers to understand whether they have many other things that will be needed, which funnily enough, appear on your on your um your shopping list there, John. So do you have the custody which would enable you to hold digit where you to buy it? Do you have uh will you be able to use digital cash to buy digit? You won't necessarily have to, but in theory, could you use digital cash to buy a digital security at some point in the future? The answer is that's a combination which seems fairly probable. Can you do that? For many investment managers, I suspect the answer will be no. So there's a lift coming there. And I think it'll be all too easy to think that is simply part of tokenization, because it is, uh, but at the same time, it's a different thing to tokenising liability side to changing the way you you transact on the asset side. But I think I think the two will come. And I think that that's going to be a really important area of focus. And obviously their sell side and buy side interests are going to be aligned in the sense that we we we will we will want to and we will need to be able to transact in digital securities.

SPEAKER_00 40:43

Yes, the digit pilot is again something that um regulatory-wise has moved on in recent months, and we look forward to that becoming available for asset managers to be able to purchase. And we understand that that's going to be available in Q1 2027. So Which is not far away. Not far away in uh in terms of how how quickly things are moving in in this area and the lift that needs to happen to be able to make sure that it works operationally. Thank you, Alistair, for coming in to tell us about your really exciting news and we wish you every success uh for that uh project. Assuming that it is a resounding success, as I'm sure it will be, what are the next steps from Aviva and how do you develop your product set further?

SPEAKER_01 41:25

Well, I'll be delighted to leave an application form with you as I as I leave, John, although I should warn you the uh the minimum share class is uh one million pound minimum investment. So have a root around behind the back of the sofa, see what you can do. In all seriousness, though, we we we we have that product, we want to iterate on that product as as really a first step and add new functionality to that. And uh chief among that I think would be the enablement of stable coins to use stable coins as a means of subscribing into or redeeming out of the money market fund. Now there are some uh regulatory considerations there in terms of jurisdictions, which allow certain things to happen in some jurisdictions but are more problematic in others. So there's there is a regulatory dimension there that we'll be working on. But fundamentally, this means that those those people who hold stable coins today as a dormant asset, as a dormant instrument, uh they would be able to deploy that into a money market fund, into a tokenized money market fund in an efficient manner, and therefore to be able to earn yield on that on that asset. So that'd be a that'll be a first step. Obviously, continuing our work to enable the the money market fund to function effectively as a unit in collateral transactions, for example, to be posted as variation margin in a derivative transaction, or to serve in the cash leg of a repurchase agreement. And then from there, it's really the big strategic question, and it's going back to the executive to look at that strategy dashboard, which says democratisation of private markets, which says active ETFs, and which absolutely says tokenization, and to ask the question, where else should we go? And obviously, Aviva Investors is uh a full spectrum investment manager, we have a range of capabilities across public and private markets, and they're really where I hope and I would be pushing for the conversation to go is what do we tokenize next?

SPEAKER_00 43:16

What a wonderful note to finish on. Alistair, thank you so much for coming in to tell us about your exciting and pioneering news in this area. In the show notes, there are details of the Aviva Tokenized Money Market Fund, the Investment Association's tokenization training, and other resources relating to fund tokenization. Please do tune in to our next episode on the IA Talks Innovation, which will be coming soon, and please leave a rating so that others are able to find it more easily as well.