Finance

Citi proof-of-concept tokenizes private equity funds on Avalanche

Citigroup has teamed up with Ava Labs, other traditional financial institutions and digital asset companies to complete a proof-of-concept for tokenizing private equity funds. Despite outstanding legal and technical issues, Citi is convinced that blockchain technology could transform the private equity industry.

The project used simulated workflows in a Wellington Management-issued private equity fund with ABN AMRO acting as the investor and WisdomTree simulating the platform on the permissioned Avalanche Evergreen Spruce Subnet.

The partners tested smart contracts to enforce distribution rules for a simulated fund. They used a variety of methods to verify identities provided by WisdomTree and partnered with DTCC Digital Assets to use a private fund token as collateral in an automated lending contract. Then the resulting loan was “subject to a haircut and collateralization ratio set based on the pool parameters.” The Citi report on the project stated:

“Assets can be automatically allocated, fractionalized, and rebalanced by intelligent applications supported with instant implementation.”

Tokenization unlocks value from standardization, automation and improved operating models, Citi said. Nonetheless, legal issues, such as the regulatory status of tokens, contractual rights, Anti-Money Laundering and Know Your Customer and taxation, remain outstanding. The use of the most “matured” identity standards will be crucial for private fund tokenization, as will secured data flows that balance transparency and confidentiality.

Participant roles on the project subnet. Source: Citigroup

Further, Citi said work needs to be done on technical issues such as end-to-end data rails, end-to-end servicing workflow and a tokenized cash leg to facilitate atomic settlement.

Related: Private equity tokens aim to bring greater liquidity, transparency and accessibility

In spite of the work that remains to be done, Citi concluded that, with a flexible onramp, blockchain technology could transform private equity markets. The bank has been bullish on tokenized assets, and particularly private equity assets, for a while, calling it the “killer use case” for crypto.

Hedge fund Brevan Howard and alternative investment manager Hamilton Lane have explored similar tokenization functions with the Libre protocol on the Polygon network.

WisdomTree and Wellington Management participated along with T. Rowe Price Associates and Cumberland in an earlier project on Avalanche’s Spruce subnet to test the use of blockchain in foreign exchange transactions.

The Citi Token Services blockchain was created in September. It enables liquidity and automated trade finance solutions for the bank’s institutional customers.

Magazine: Real AI use cases in crypto: Crypto-based AI markets, and AI financial analysis