Citigroup is testing the tokenization of private equity funds on the Avalanche network. Blockchain technology can standardize and automate processes, thereby enhancing operating models for private equity funds. However, several technical and legal hurdles must be addressed before implementation.
Financial giant Citigroup conducted extensive testing of the possibility of tokenizing private equity funds. Citi’s report noted that systems based on distributed ledger technology (DLT) could potentially empower private equity funds in banks and other financial institutions.
The initiative modeled all workflows and involved several financial and technology companies, among which are:
- Wellington Management, the asset manager simulating the role of the issuer.
- ABN AMRO, the largest bank in the Netherlands acting as the investor in the fund and mimicking the transfer of funds from a traditional fund to a digital wallet.
- WisdomTree, the investment company providing infrastructure for KYC verification, onboarding end-investors, and testing token receipt and usage scenarios.
- Ava Labs, the blockchain company providing infrastructure for the Avalanche Evergreen Spruce Subnet private testnet.
- DTCC Digital Assets’ blockchain unit, the clearing and settlement company, participated as an infrastructure provider to implement smart contracts mimicking credit and collateral management.
- Tokeny, the tokenization technology provider testing the ERC-3643 standard token and the ONCHAINID framework.
The project simulated workflows in a private investment fund on the Avalanche network. Participants tested smart contracts to ensure compliance with asset allocation rules within the fund. Besides, they tested the ability to use tokenized assets of a private fund as collateral for a loan based on an automated contract. Discounting capabilities and the collateralization ratio of the resulting loan were also checked.
Citigroup analysts concluded that tokenization technology unlocks the value of private equity funds through standardization, automation, and improved operating models. However, several legal issues remain unresolved, including:
- regulatory status;
- contractual rights;
- anti-money laundering measures;
- identity verification;
- taxation.
Furthermore, Citigroup’s initiative highlighted the importance of addressing technical challenges such as:
- improving end-to-end data rails;
- automating end-to-end servicing workflows;
- facilitating atomic settlement.
Last year, Citigroup introduced its own private blockchain network for institutional clients, as research proved that implementing DLT systems would save TradFi firms up to $100 billion per year.
