Reimagining Private Markets: Tokenization, Liquidity, and the Future of Alternatives

• Private markets are ripe to build the industrial-scale infrastructure

• Tokenization will help to solve the liquidity problem, but it isn’t a panacea 

• TradFi’s problems are DeFi’s opportunity, Illuminati said

Private markets are growing faster than public markets, with the former expected to reach USD 18 trillion by next year. Yet, it’s still relatively difficult for investors to access private markets, making them ripe for transformation and the development of scaled infrastructure, similar to that found in public markets, through the use of blockchain technology and tokenization.

Centrifuge’s Illuminati said this will make markets faster, more transparent and more efficient. “Adapting now ensures that the markets have created the capital efficiency that is better for all existing holders and investors, but it’s also the language of the next generation of consumers, investors, and users who are on-chain native.” 

The panel debated whether the issue with private markets is a product or distribution problem. In DTCC’s Klein's view, tokenized funds shouldn’t be seen as a panacea. “Currently, it’s a clunky process with tokenized funds. The user experience is poor, which is a distribution problem at its core. It might make an amazing fund, but if you don’t know how to get it and it’s complicated, then it's difficult to get assets into that fund,” she said.

According to Klein, individual assets based in crypto have historically been rooted in an isolationist ethos; however, the next phase will require coming together and developing for collective success.

Moy shared Apollo’s experience as a General Partner and its reasons for issuing private credit funds on-chain. “There is USD 4 trillion of capital sitting in the crypto ecosystem, outside the existing banking and asset management system. This is composed of hundreds of millions of investors, ranging from institutional to crypto, family office, and mass affluent to retail – and they all skew younger,” she said.

She believes that new future-proof technologies can enable superpowers for private markets. “Tokenization will help to solve the liquidity problem by enabling more secondary training or instant liquidity, as well as enabling different types of liquidity, financing and using these products as collateral,” she said. 

In Illuminati’s view, the distribution is the product. Centrifuge has been working with Apollo to understand how to make the on-chain version of the fund better than the off-chain version. 

“The two primary solutions to do that are greater liquidity and greater utility on-chain. For the Anemoy Tokenized Apollo Diversified Credit Fund (ACRDX), we have on-chain, we have instant liquidity,” she said, adding the breaking news that ACRDX is now available on lending protocol Morpho. This means that an investor can buy ACRDX, deposit it into a Morpho market, and borrow against it.

Klein believes that DTCC’s announcement in December is “probably the biggest thing to happen in the tokenized asset space”. Following an SEC no-action letter, it can tokenize a portion of its inventory held on behalf of the US markets, which includes US Treasuries and amounts to USD 100 trillion in asset value. 

“We’re thinking about legal rights and obligations, title transfers, and so on being embedded at the source. That’s an extremely powerful thing if you’re trying to get private assets in the hands of more people,” she said.