Blockchain 4 Law:

Blockchain 4 Law: All stars aligning for a major breakthrough for Private Equity and Alternative Funds

Is retailization and enhanced liquidity in the Private Equity (PE) and alternatives space a dream, or is it on the verge of becoming reality?

Sectors like PE, private debt, and infrastructure funds are pushing boundaries to extend their reach, aiming to penetrate deeper into the retail market. But can this ambition truly materialize, or is it just wishful thinking?

I recently spoke with a seasoned professional in asset management services in Luxembourg. His response was straightforward: "Retailization? I don’t see it happening." He elaborated, "How can we offer investor tickets of EUR 10,000 when it costs EUR 2,500 just to open an account?" His conclusion: "Unless we dramatically reduce operational costs across the industry, it’s not feasible."

I couldn’t agree more. The cost of investing in actively managed funds must be significantly reduced. However, I believe the industry will not meet these goals by merely optimizing existing processes with traditional technologies. The real game changer lies in Distributed Ledger Technology (DLT).

Yes, I know – skeptics have been saying for years that blockchain (a form of DLT) is perpetually “on the horizon.” But here’s the thing: it is here. The real question now is whether we can apply it at scale to crack the retailization/liquidity nut.

DLT: An undeniable game-changer

Blockchain technology is revolutionary, particularly in the fund industry. Its potential to reduce operational costs, increase safety, and streamline processes is undeniable. McKinsey recently conducted a study on blockchain adoption in regulated financial services and concluded that the benefits are clear. However, for blockchain to be effectively implemented, several pieces need to fall into place: a comprehensive regulatory and legal framework, and a commitment from financial players to move beyond pilot projects and into large-scale deployment.

Luxembourg’s role in blockchain for funds

Luxembourg has already led the way by implementing several pioneering laws in blockchain, but the framework has yet to fully evolve to support the decisive shift from traditional accounting ownership records to blockchain-native digital ownership records. This limitation has dampened enthusiasm for further adoption in the fund industry. Some pioneering players in Luxembourg (Moniflo by invesTRe SA) and Switzerland (Sygnum)  have already started offering DLT safekeeping for funds on their digital marketplaces.

But that’s is not enough and about to change.

The imminent vote on the Blockchain 4 Law will be the missing piece of the puzzle. The new law will establish a “controlling agent” authorized to act as a DLT transfer agent for funds, alongside traditional transfer agents and central securities depositories (CSDs). This controlling agent will issue and manage fund units using DLT technology, and even serve as the DLT custodian for investor units. 

A new era for asset management

In the near future, asset managers will be able to launch funds using DLT registration, whether or not they want to take advantage of smart contract to issue fund prospectuses. DLT TAs will have the flexibility to offer safekeeping services or deliver fund units directly to investors' private wallets. This will allow asset managers to interact with investors in an entirely new, digital-first manner and completely disintermediated way. The prospect of retailization and the ability to trade funds on a secondary market—such as under the European DLT Market Infrastructure Sandbox (MTF regime)—is no longer a far-fetched idea.

A perfect storm of innovation and regulation

For a significant shift in well-established markets, several trends must converge. This is exactly what’s happening with the adoption of DLT in the fund industry. We’re seeing investors hungry for new market opportunities, asset managers eager to tap into new investor pools, and a technology that has the potential to reinvent the investment process—making it leaner, faster, and more cost-efficient. Most importantly, the legal and regulatory frameworks necessary for this transformation are being imminently completed and put into place.

All these stars are aligning in the coming months. It will take vision and courage to venture into these new territories, but those who possess the technical capabilities are positioned to acquire substantial market share. The stage is set for those ready to act. The next wave of growth is upon us—are you ready?