Deutsche Bank (DBK), in collaboration with the Memento Blockchain, has successfully completed a proof of concept called Project DAMA.
The Project Digital Assets Management Access (DAMA) provides a more efficient, secure, and flexible digital fund management and investment servicing solution. This collaboration between the two companies demonstrates their commitment to providing innovative solutions that meet the needs of their customers.
The bank’s proof of concept was also awarded the Financial Sector Technology and Innovation (FSTI) Proof of Concept (POC) grant by the Monetary Authority of Singapore (MAS) in August 2022.
Talking about this partnership, Nicola Lanteri, CEO of Memento Blockchain, said that they provided the technical and implementation expertise while the bank shared the functional requirements, and together they collaborated on the platform’s design.
This collaboration resulted in an innovative, practical, and open infrastructure that combines core components of fund administration, transfer agency, custody, and payments for the digital fund environment while enabling self-custody of assets, said Lanteri.
In its report published on Tuesday, the German bank said that the existing process of launching or accessing cryptocurrency funds is time-consuming, as well as risky and costly. This discourages most asset managers and institutional investors from entering the market outside the most well-resourced players.
As such, Project DAMA would work as a one-stop digital fund investment servicing platform for asset managers and their existing fund administrators, custodians, and transfer agents to plug in and play, the bank said. This would drastically reduce the effort and cost required to launch and administer digital funds, it added.
According to the bank, digital asset management and digital funds are the natural next steps after asset tokenization. And through Project DAMA, the bank has demonstrated the viability of transitioning into this future of digital finance, said Anand Rengarajan, Deutsche Bank Global Head of Sales & Head of Asia Pacific, Securities Services.
Emerging Interests in Tokenized Funds
The bank noted in its report that digital investment funds enable qualified investors to manage their investments in a cheap, easy, and responsive way. It sees this emerging asset management product as an exciting prospect that brings new possibilities such as distribution models, investor suitability tests, mass customization features, transparency, and investor record integrity.
The report then goes on to mention that Memento’s market research reveals that there is a growing group of institutional investors who want exposure to cryptographic assets in their portfolios, but they are held back by the complexity – with some reluctant to undergo and understand self-custody due to a lack of choice in licensed secure third-party digital assets custodians.
While there has been an emergence of digital funds, Deutsche bank noted in the report that there are challenges in terms of launching a fund and accessing it by suitable investors. And Project DAMA has been launched, a MAS Financial Sector Technology Innovation Proof of Concept collaboration between Deutsche Bank and Memento Blockchain to address these issues.
Besides providing a one-stop digital fund investment servicing platform, Project DAMA aims to be an open architecture platform that can facilitate investors’ access to different funds from different asset managers.
With its project, Deutsche Bank AG Singapore demonstrates how a permissioned investment servicing platform can facilitate the management of digital funds investing in tokenized securities. Emerging interests have been found in the potential of tokenized financial instruments and tokenized funds globally.
Tokenization technologies, such as cryptographic private-public keys, can be combined with account-based book entries to optimize manufacturing and provide cost-effective last-mile delivery, with the user experience unaffected by the need to manage complex cryptographic keys, it said.
According to the bank, hedge funds, wealth management, and index funds will likely be the first segments to adopt this new permissioned fund network infrastructure model for digital native funds.
With this in mind, the project aims to:
(i) Setup digital asset-based tokenized funds in an agile and cost-effective manner, distributing digital assets funds with different investment strategies to accredited investors;
(ii) Provide the data needed for regulatory reporting or risk management activities, facilitating efficient KYC, AML, and sanctions filtering that can be based on digital identity, test smart-contract-based, modularised fund valuation, accounting, and third-party custodian capabilities;
(iv) Facilitate financial inclusion by distributing cost-effective tokenized funds over a wide geographic area.
Opportunities & Features
Talking about the addressable market in the report, the bank noted that digital assets could offer unique investment opportunities not available in traditional asset classes. This includes the ability to develop a wide range of digital asset funds, including funds providing regulated exposures to crypto assets/DeFi, tokenized securities, and structured digital asset products that include hedges, derivatives, and environmentally-friendly components.
Here, the underlying DLT can be an efficient distribution platform, while smart contracts can offer new features to differentiate funds cost-effectively.
The bank said that the digital asset market is rapidly evolving and growing, creating “opportunities for asset managers to stay ahead of the curve and offer clients access to cutting-edge investment products and strategies,” the bank said.
Project DAMA is designed to take advantage of these opportunities in the digital asset management space by providing an infrastructure for professional digital-asset management services, in particular active portfolio management, to financial institutions, asset managers, and wealth management banks.
For this, the project integrates with traditional investment servicing systems to enable digital asset and fund servicing using existing capabilities. The POC showcases the potential for a permissioned investment intermediation process for digital funds that provides institutional investors access to this new emerging asset class.
As part of the project, the bank developed a unique and non-transferable token to represent digital identity on an Ethereum-based DeFi investment platform. The Soulbound Token (SBT), which means that it is tied to a specific object, represents the digital identity of a wallet owner. The ERC-721 token can also be used to restrict access to certain services or provide benefits to token holders.
To keep digital assets safe, Project DAMA used Metamask, but it can integrate with multiple custody wallets to function effectively as an open architecture for custody. As for converting fiat money to digital currency, they partnered with a third-party payment provider to assist with it.
The POC used crypto as a proxy for tokenized assets, as well as its own asset class. Based on crypto, the team created digital funds on the Ethereum testnet with five different investment strategies:
- Passive weighted cap blue chip index-type fund
- Portfolio of long-short crypto
- “Green” Bitcoin fund
- Yield portfolio
- Structured notes with crypto derivatives
The bank also mentioned four different ways to subscribe to the fund through project DAMA: direct minting, DEX, DEX aggregator CombSwap, and the marketplace.
Fees on the service, meanwhile, were provided by Domani, a Memento blockchain product that issues DEXTF tokens. In response to the announcement, the DEXTF token rallied past $0.30. The $8.34 million market cap coin has since lost some of these gains and, at the time of writing, is trading around $0.20, according to CoinGecko. DEXTF coin is up 11,425% in the past 30 days but still down 95% from its all-time high (ATH) hit two years ago.
Key Findings of Project DAMA
Talking about the project’s key findings, Deutsche bank said that DAMA brings down the barriers to entry and fosters adoption by aggregating key investment servicing activities onto a single platform. This significantly reduces the due diligence effort by asset managers seeking to launch digital funds and for traditional intermediaries to participate in digital funds.
One of the key learnings from the POC was the importance of digital identity technology in enabling a compliant and efficient investment process, said the bank. And for this, the bank used SBT tokens for asset managers and their transfer agents to perform KYC checks and sanctions filtering without the need for a proliferation of private or personal data. The bank said this technology could help asset managers comply with relevant regulations and ensure that only certain investors can invest in digital funds.
Having a digital identity is important for accessing the on-off ramp between fiat and digital currencies. This will reduce friction when trading fund tokens for more liquid tokens.
The report noted that investing in fund tokens should be a seamless experience once the investor owns SBT, which is only obtained once they have passed all necessary KYC.
Moreover, instead of just redemption, fund tokens can be traded peer-to-peer. Funds tokens, which represent a claim to the underlying digital assets, are issued by the asset manager, recorded by the transfer agent based on blockchain records, and kept safe by a custodian.
Another key finding has been blockchain as a source of investor records. With near-instant API between the blockchain records and “traditional” records maintained by a transfer agent, which are presently recognized by regulations and laws, this helps in maintaining the legality and integrity of investor records as such adding to investor protection and reducing the barrier to investor adoption, as per the report.
The project also discovered that on-chain data, like expenses accrued to a fund’s expense ratio, could be efficiently captured by smart contracts, as such valuation and accounting functions are performed off-chain.
Moreover, there has been no disintermediation of traditional roles. After all, transfer agents acted as trust anchors of digital identity tokens while custodians operated mass customization activities akin to existing asset servicing activities and the DAMA platform offered by fund services providers to asset managers.
At last, the project enabled new innovations, including mass customization, personalized experience through digital identity, open-architecture custody, open-market rebalancing, and decentralized self-hosted custody.
The potential of Digital Securities
Digital securities, according to Deutsche Bank, are heralding a new era in asset management and are the future of capital markets.
Also known as security tokens, digital securities are digital representations of ownership in assets such as stocks, bonds, real estate, and other financial instruments. These digital securities are built on blockchain technology, which enables them to be more transparent, secure, and efficient than traditional securities.
The latent potential of digital securities lies in the fact that they have the potential to revolutionize the way we invest, trade, and manage assets.
This is achieved by offering increased liquidity, as digital securities can be traded 24/7 on a global market, potentially increasing liquidity for buyers and sellers. This increased liquidity could lower issuers’ capital costs and provide investors with more opportunities to buy and sell securities.
Digital securities could further streamline the issuance, settlement, and clearance processes, reducing transaction costs and improving efficiency. They can also provide investors with increased access by democratizing access to investments, providing smaller investors with opportunities to invest in assets that were previously out of reach.
Digital securities can further be customized to meet the needs of issuers and investors, which could potentially provide more flexibility in the way assets are structured and traded. Moreover, blockchain technology enables the tracking of transactions in real time, which could potentially enhance transparency and reduce the risk of fraud.
Grayscale Bitcoin Trust (GBTC) and Arca US Treasury Fund are popular tokenized funds. Just this month, Hong Kong became the first government to raise over $100 million with the tokenized green bond offering, and Germany’s tech giant Siemens (SIE) also issued its first digital bond on the blockchain.
Despite their potential benefits, several regulatory and technological challenges still need to be addressed before digital securities can become mainstream. However, as the technology matures, digital securities have the potential to transform the way we invest and trade assets. And with that, we can expect to see more investment vehicles that use digital tokens to represent ownership of a range of assets.
