• Christophe Diricks, Partner |

Tokenization is spearheading the emergence of a new internet — the internet of value — impacting the centralized model of online value management. It offers natively digital, decentralized and peer-to-peer services accessible to all, challenging banks’ business models and the financial sector’s barriers to entry. 

What is tokenization?

Tokenization is the creation of a digital representation (token) of a real-world object, such as a shareholding, debt instrument, an Andy Warhol painting, or a Ferrari F12. While all tokens are a digital representation of value that can be digitally traded or transferred, they can be classified into the following categories:[i]

  • Security tokens that are on-chain digital representations of underlying off-chain securities, such as private debt fund units, debt portfolios, or sui-generis financial instruments.
  • Utility tokens that provide access rights to certain services or privileges, such as Filecoin (FIL) or a Basic Attention Token (BAT).
  • Exchange tokens that are used as a form of payment, such as Bitcoin, Litecoin or Ethereum.

A token may hold the rights and features of multiple categories over time, and their characteristics may be so specific and unique to make them non-fungible (NFTs). However, all tokens result from the establishment of a legal link between the physical asset and its representative digital token.

Luxembourg will play a significant role in the tokenization of the private debt industry, either through tokenizing (i) the debt investment vehicle or (ii) the debt instrument itself.

The tokenization of vehicles holding debt portfolios

The alternative investment industry is increasing its focus on tokenizing units and shares of investment vehicles. In September 2022, KKR & Co. partnered with Securitize LLC, a leading digital asset securities firm, to tokenize an interest in KKR’s Health Care Strategic Growth Fund II on the Avalanche public blockchain.[ii] While in Luxembourg, Natixis Asset Management announced a testing phase of FundsDLT’s fund distribution platform in 2021,[iii] paving the way for the tokenization of investment fund and vehicle units.

Beyond the typical advantages of tokenization, which include speed, convenience and accessibility, using blockchain technology to distribute investment vehicles has two main benefits:

  • Disintermediation: smart contracts enable programmable actions that can automate processes, such as maintaining the shareholder registry. They can also replace expensive functions like clearing and settlement and the use of transfer agents and intermediaries, such as distributors and placement agents. Removing these go-betweens can allow a (quasi) direct relationship with mass affluent investors, reducing costs and creating big economies of scale as a result.
  • Instant settlement time: tokens can be traded 24 hours a day and 7 days a week, with records updated within minutes or hours (depending on the underlying blockchain) simultaneously with valuations, compared to traditional T+3 and T+4 settlement times

Tokenization of private debt portfolios

Despite private debt’s recent popularity and significant opportunities, it still faces many challenges common to other asset types, including complex deal origination and low liquidity.

Tokenizing a private debt portfolio[iv] could deliver the following advantages:

  • Reduction of loan origination, due diligence and monitoring costs: private debt may be less transparent than public debt, as borrowers’ P&L and balance sheets tend not to be circulated by data companies. Blockchain’s transparency and trustworthiness can help issuers and investors reduce the costs of burdensome loan origination and due diligence processes, including sourcing, deal history and company analysis, as well as the continuous research of borrowers. This time and cost savings result in margin increases that can be leveraged to increase yields. For borrowers, the possibility to circulate their P&L and balance sheet data may help them access a wider investor base and reduce their financing costs.
  • Increase of liquidity: liquidity is a debt portfolio’s ability to be readily converted into cash without affecting its market price. Tokenization slightly increases this liquidity and allows investors to quickly sell the token on the secondary market.  
  • Reduction of barriers to entry: blockchain technologies powered by smart contracts can operate as transparent and honest market makers and connect small-to-medium-sized enterprises (SMEs) to lenders worldwide without using intermediaries. Borrowers could request loans from lending platforms instead of banks, giving them access to a greater portion of investors at better rates. 

Regulatory considerations for investing in digital assets

Entity type Digital asset service regulation and requirements
Securitization vehicles Allowed to invest directly or indirectly in virtual assets when dealing with nonprofessional customers and pension funds.
UCITS and UCIs Not allowed to invest directly or indirectly in virtual assets when dealing with nonprofessional customers and pension funds.
AIFs May invest directly (and indirectly) in virtual assets if their units are marketed only to professional investors.
Initiator The initiator of an AIF must present each new project to the CSSF beforehand.
  • If an AIFM manages an AIF that invests in virtual assets, the AIFM must obtain an authorization extension from the CSSF for this new investment strategy, called other-other fund virtual assets.
  • It must amend its investment policy and control functions, for example to cover volatility, liquidity and technical risk.
  • The investment fund manager (IFM) must be involved in the control of and access to cryptographic keys.
  • The IFM needs to register as a virtual asset service provider (VASP) if providing any other services related to virtual assets.1
Fund depositaries The IFM must select an eligible depositary and custodian for the virtual assets.


Currently, private debt investment involves multiple intermediaries, high costs and poor liquidity. Tokenization tackles these challenges by allowing economies of scale with disintermediation and increasing liquidity. In this respect, tokenization provides a technological advantage to asset managers, helping them become more versatile and competitive. 

This article was originally published in AgeFi Luxembourg.