Egypt’s first digital money management fund platform, Granite, is about to run an experiment that could redefine a key job in Egypt’s fund industry. The asset manager and its technology partner, Tarmiiz, have been admitted to the Financial Regulatory Authority (FRA)’s regulatory sandbox, they said in a statement (pdf), where they will create a distributed ledger to maintain the ownership records for a live money market fund. The centralized system on which the fund runs today will continue to operate in parallel.

The FRA will get its own window through which to watch it all happen in real time — a “node,” in tech-speak — and if it likes what it sees, rules that today require a licensed fund administrator to hold that data will have to be rewritten. “So if blockchain is going to come into play, it will have to somehow replace the administrator.” Granite founder and CEO Hisham Akram tells us. “This is the first redundancy, the first casualty of using blockchain.”

WHY IT MATTERS- What Granite is doing is trying to help Egypt catch up to a technology that’s now being widely used in Western finance industries. Moving the ledger to the blockchain opens the door to what’s called tokenization (more on that in a moment) and, with it, lays the groundwork for a new universe of financial products in Egypt.

(If you, like us, are not blockchain nerds, read on: What Granite is testing is whether a fund’s book of record — the register of who owns how many units of a given fund, along with who bought or redeemed how many units when, and at what price — can live on a shared ledger rather than in a single administrator’s database. That ledger is the “blockchain” you hear so much about. What makes it different from the central database that Granite — and EFG Hermes, Beltone, and everyone else — maintains today is that three are multiple synchronized copies. Instead, copies exist simultaneously with everybody who needs access, including the fund manager, the FRA, the administrator, the custodian, you name it. Each gets their own copy instead using an API to go into the central copy maintained by Granite’s administrator or — in our more low-tech world — making the fund manager file Excel sheets or reports on a regular schedule.) “It is a very powerful thing, because you cannot tamper with data,” Akram tells us. “And once the transaction is made, you cannot unmake it — you have to reverse it.”

The experiment is unusually ‘concrete’ (for lack of a better word) for a sandbox project: Granite isn’t spinning up a simulation. Instead, it plans to keep operating its money market fund exactly as it does now while also writing every transaction to the ledger simultaneously — “two paths,” as Akram puts it — and reconciling the two daily. Nodes will sit with Granite, the FRA, as well as the fund’s custodian and its administrator.

Akram tells us he expects the technical proof to take “a couple of months” of clean daily reconciliation, after which the question will no longer be about software engineering, but actual implementation and/or regulatory change.

A successful trial will likely mean that today’s rulebook has to change. The rules now require a fund’s data to sit with a licensed administrator, who maintains the register and charges for the service. If the ledger becomes the record, that function won’t survive in the same form. Fund administrators also create daily net asset value reports and keep track of redemptions and subscriptions, among other things. All of it is stuff that could just as easily run on a blockchain.

Today’s fund administrators can see that as a threat — or as an opportunity. Moving the ownership register onto a distributed ledger wouldn’t eliminate every part of the administrator’s job: somebody would still have to calculate and verify NAV, reconcile cash and assets, handle exceptions, report to the regulator and remain legally accountable for the accuracy of the fund’s records. But it could automate or displace much of the registry and reconciliation work for which administrators are paid today — and things like calculating and verifying NAV are already done in software.

If the trial works, the result could also be a new technology role: Someone has to operate and secure the network, manage its participants and cryptographic keys, maintain the smart contracts and decide what happens when a transaction is disputed or a record needs to be corrected. That doesn’t have to be the same outfit that is legally designated as the fund administrator. The FRA could require an existing licensed administrator to retain responsibility while allowing a specialist technology provider to operate the infrastructure underneath it.

The open question is less whether Egypt’s administrators can learn to “run a blockchain” than whether they can adapt their businesses around one. They could become the regulated operators and overseers of the new system, or surrender the technology layer to specialists and retain a narrower control and reporting role. Tarmiiz, founded by financial-infrastructure veteran Amr Soliman, appears to be positioning itself as one of those specialists.

What’s in it for the FRA? More control — and in real time, to boot. Each fund manager has to report to the FRA weekly on all of its clients’ transactions. On a shared ledger, the FRA sees everything as it happens through an API. “It gives the regulator a live view for KYC and anti-money-laundering purposes, including the ability to block a barred or politically exposed person before a transaction, rather than after, as well as a live view of all fund transactions that happen instantly,” Akram says.

This isn’t entirely new magic: BlackRock and Franklin Templeton have tokenized money market products that have attracted bns of USD worth of AUM. Sure, those are finished products, and what Granite is building right now is plumbing — but it’s a step in the right direction. “Big asset managers are moving their record-keeping onto block chain distributed ledgers on nodes, storing client data and transactions, even if they’re not going to do the tokenization,” Akram notes.

Uhm, Enterprise? What’s tokenization? Tokenization turns a unit of ownership — a share of a fund, a slice of a building, or a gram of gold — into a digital record on a shared ledger, divisible into pieces as small as you like. Because the record is the ownership, it can pass straight from one holder to another instead of being sold back to the issuer and reissued.

It doesn’t stop at funds: Akram sees the blockchain creating a wide set of opportunities for the fund management industry as the technology forces change across government and quasi-governmental agencies, from MCSD (the depository and clearance house), the national real estate registry (shahr el akary), and the notary public system, among others. “Tokenization and the blockchain could be a game-changer for the REIT industry, in particular,” Akram points out.

Property funds are where the friction is worst: “The bid-offer spread is wide, and it takes time to settle this thing. This is going to be instant. So it’s going to be much more useful in real estate funds, when you’re tokenizing an apartment that is, you know, EGP 2 mn.” That said, the money market pilot is the smaller half of the prize: “Our fund is EGP 1, so it’s fractionalized already,” he says.

What does the finished version look like? Once units are tokenized — in a money market fund or in a real estate investment trust — they can move directly between holders without a redemption round-trip. Squint the right way, and that turns a fund unit from a place you park money into something closer to a means of payment. As Akram sees it: “Two people who both hold tokenized fund units could settle between them on a Friday night, outside banking hours, by transferring ownership of the units themselves.” Extend the idea, he says, “and you get a card, or a wallet, linked to a money market fund — just imagine having the money market fund on Apple Pay.”

And that’s just on the retail side — there are even more applications for corporates. For example, a corporate treasurer could put some of her working capital in a fund and encode a standing rule that liquidates exactly enough on the 25th of each month to cover payroll, without anyone placing a redemption order.

What happens next: Think of the sandbox not as the launch of a product, but the start of a conversation between Granite and the FRA. They’ll inevitably run into the limits of the existing rulebook — and debate throughout the process about what the rulebook should really say. The whole point is for Granite and the FRA to get on the same page about the regulatory change that be necessary to bring blockchain into production for the wider industry — a process likely to run a lot longer than the two months of clean reconciliation that Akram thinks gets it started.

WHAT TO WATCH- A fund unit that both earns a return and that can also settle a payment is — for all intents and purposes — interest-bearing money. The FRA regulates non-bank financial services, but the Central Bank of Egypt is in charge of money and payments, setting hard limits on issuing or trading digital assets without its say-so. Whichever way the technical trial goes, a tokenized medium of exchange would draw the interest of the CBE — a regulator that’s conservative by nature and that hasn’t publicly said anything about it, let alone created the tokenized EGP you’d need to settle against.

‍