TECHNOLOGY SOLUTIONS TO SUPPORT WEB3 TOKENIZATION IN ASSET MANAGEMENT

Traditional asset management is technology-challenged

Traditional asset management investments and opportunities rely on traditional technology solutions to support them – but the asset management industry has to move forward, evolution to meet changing investor expectations and needs is an imperative. There are now increasing opportunities to adopt new technology to solve for many inherent traditional challenges:

• Inefficient processes: Traditional asset management involves manual, time-consuming processes such as paperwork or regulatory compliance
• Limited transparency: Asset ownership, performance, and valuation is often opaque.
• Restricted transferability: Traditional assets can be subject to restrictions on transferability.
• Limited access to larger investor pools: Investor pools are often limited to high-net-worth individuals.
• Illiquidity: these types of Traditional types of assets are owned by smaller pools of investors and are often difficult to turn into liquid assets.

New standards in technology and the adoption of modern technology solutions can support improved efficiency, increase transparency, streamline the transfer process, and increase the pool of investors in asset management.

Tokenization solutions support the evolution of asset management

Advancements in technology and growing demand for more accessible, transparent, and efficient investment solutions is driving the evolution of asset management. The digitization of assets through tokenization is a key factor driving this transformation and enables even more new opportunities for investments. To support this transformation, several technological solutions have emerged, including blockchain and smart contracts. These technologies work together with the application infrastructure to create an integrated ecosystem.

Key considerations for technology behind tokenization

The move to web3 technologies to support digital asset management involves many of the typical considerations already present in modern, cloud-based, and regulated environments; some new elements are important, too. Consider the following:

• Security: Ensuring the security and integrity of digital assets and transactions is a top priority in tokenization.
• Scalability: As tokenization gains traction, the volume of digital assets and transactions will grow, and technology solutions should be able to scale seamlessly without compromising performance or security.
• Interoperability and Integration: The ability to interact with different systems, platforms, and protocols is essential to adopt tokenized asset management. Technology solutions should support interoperability, enabling cross-platform communication and data exchange.
• Compliance: Compliance with laws and regulations is critical when implementing tokenization technologies. Solutions should enable automation of compliance processes and provide features that facilitate adherence to regulatory requirements.
• Confidential compute: For these workloads, it is important to adopt compute infrastructure which can be trusted to maintain security throughout the execution of the workload’s functionality.

These requirements should be evaluated and incorporated in the definition of the tokenization architecture to ensure successful implementation and adoption.

Critical elements for successful tokenization solutions

Given critical architectural considerations, what key components should be adopted to achieve optimal tokenization outcomes?

Blockchain

Blockchain provides advantages over traditional solutions for ledgers and the tokenization of assets: it can reduce the need for traditional custodial services, promote greater transparency and trust, streamline operations of investment funds, and reduce commission and intermediary costs. Two major benefits of utilizing blockchain as a core technology for tokenization are the possibility of decentralized consensus mechanisms and cryptographic hashing:

• By decentralizing consensus mechanisms, transparency and trust is increased because the transactions are recorded in the ledger, and multiple parties are involved in the settlement of transactions.
• Cryptographic hashing is valuable in this digitization process because it provides a tamper-proof digital representation of the asset, enabling fractional ownership, liquidity, and interoperability.

Smart contracts

Smart contracts are a valuable component of a tokenization solution because they can be used to execute intelligent automation within a blockchain transaction for the assets that have been tokenized. Such automation can support multiple capabilities and may include dividend payments, interest calculations, compliance, reporting, and other operational functions.

These smart contracts can improve operational inefficiency by automating workflows, standardizing information sharing, streamlining asset servicing, and reducing or eliminating the need for dealer intermediaries.

Leverage Microsoft technologies to support tokenization solutions

Microsoft technology solutions support the transition to tokenization within asset management. We provide a full range of world-class infrastructure solutions – from identity and access management to security to trusted compute. Several of these capabilities are summarized below.

Microsoft Entra Verified ID

Microsoft Entra Verified ID is a managed verifiable credentials service. It is an extension of open standards for identity verification, enabling privacy-protected interactions between organizations and users. Because tokenization solutions require interoperability and reusability, these identities are an excellent technology selection. Identities that are onboarded to Microsoft Entra Verified ID are digitally verified to ensure trustworthy self-service and faster onboarding

Azure Confidential Ledger

Azure Confidential Ledger utilizes the Azure Confidential Computing platform, coupled with the Confidential Consortium Framework, to provide a high integrity solution that is tamper protected. It runs on hardware-backed secure enclaves, which is a heavily monitored and isolated runtime environment.

Security tools

Security services are crucial to any successful infrastructure and software solution. From application configuration secrets to encryption to cyber protection to security monitoring, there are numerous services that can help enable cybersecurity health.

• Azure Key Vault is a cloud service for securely storing and managing cryptographic keys, secrets, and certificates. It helps to safeguard private information used in the software solutions that are produced to service tokenization.
• Azure Confidential Computing enables data protection through the use of hardware-based trusted execution environments. Software that is executed on Azure Confidential Computing resources is performed in a secure and isolated environment, which prevents unauthorized access to the data while it is being processed.
• Azure Security Center is a comprehensive security management and threat protection service enabling security posture evaluation and strengthening. Additionally, security assessments, advanced threat detection, and security alerts can be configured for Azure resources.

Reference architecture

Cloud service providers have revolutionized the management, utilization, and operation of infrastructure on demand. Companies across the financial services industry have made major strides in adopting this technology to improve the scalability, security, resiliency, high availability, and predictability of technology solutions. Microsoft has several service offerings that support the implementation of next-generation tokenization of assets.

Figure 1. Conceptual diagram representing infrastructure utilizing Azure services

A solution built on Microsoft Azure infrastructure is able to support multi-party implementation for node operators. It can incorporate numerous critical aspects needed to meet the demands of a modern digital asset management solution; these include global presence and availability; a secure hub; a scalable, reliable, and resilient core; and a flexible supporting cast of services for connectivity, security, interoperability, and storage of data.

• In this reference architecture, infrastructure is deployed to Azure to support the software operations. The global entry point for the infrastructure is using Azure Front Door which is a highly available, low latency, scalable, and secure solution as a secure perimeter across the globe. Web Application Firewall policies can be applied to secure OWASP vulnerabilities.
• Once the traffic has reached the private network, it is further filtered via secure hub leveraging Azure Firewall. Azure Firewall provides Layer 3 to Layer 7 traffic filtering and threat intelligence feeds from Microsoft Cyber Security.
• The reference architecture also has a core infrastructure tailored to the tokenization solution leveraging Azure Kubernetes Service (AKS); this is a managed solution that can be deployed within Azure to reduce complexity and operational overhead of self-managed clusters. AKS is Cloud Native Computing Foundation (CNCF) certified and Service Organization Control (SOC), International Organization for Standardization (ISO), and Payment Card Industry Data Security Standard (PCI DSS) compliant.
• In addition to AKS, additional services can be flexibly integrated into the reference architecture. For tokenization, a valuable service to incorporate is Azure Storage for Blobs and utilizing Write Once, Read Many (WORM). Another service that is crucial for security is Azure Key Vault, for the storing keys, secrets, and certificates.

The architecture can serve as a foundation for building advanced tokenization solutions leveraging secure, scalable, compliant, interoperable solutions on blockchain using smart contracts.

It’s time for next-gen tokenization in asset management

The use of new technologies is essential to the development of a complete and successful strategy for digital asset management: blockchain, smart contracts, and other web3 technologies accelerate the adoption of digital asset management solutions, including tokenization. Microsoft Azure can help accelerate innovative use cases across the asset management industry: now is the time to explore what makes best sense for your organization.