Blockchain Disruption in Finance: Asset Management
The blockchain is taking the world by storm. There are not many industries that are currently not undergoing disruption by this innovative new technology that was pioneered by the digital currency bitcoin.
In this article series, titled ‘Blockchain Disruption in Finance’, you will discover how blockchain technology is reshaping the financial services industry. In this second installment of the series, you will discover how blockchain technology is changing the status quo in the asset management industry.
Model Portfolio Management and Direct Client Communication
Within the asset management sector, there are several areas where blockchain implementation can lead to increased efficiency, reduced costs, more transparency, and the disintermediation of third parties. One area that is primed for blockchain disruption is model portfolio management.
In a report titled ‘Blockchain in Wealth and Asset Management’, global consulting firm Ernst & Young highlighted the blockchain’s potential for model portfolio management as well as direct client communication as one of the best use cases for the technology in the fund management industry.
E&Y believes that through the implementation of blockchain technology, the creation and communication of model investment portfolios for fund management clients could be greatly facilitated. Presently, wealth managers utilize a range of different platforms to build and maintain investment portfolios and the majority of these platforms do not enable fund managers to communicate with the client directly.
Through the development and implementation of a blockchain-based solution, wealth managers could build and manage investment portfolios that are specifically tailored to clients’ stored investment constraints and risk profiles and could communicate directly with clients about any change in their portfolios. This could make the entire wealth management process more efficient and relationships with customers could be deepened through direct fund manager to investor communication. Moreover, smart contracts could be used to manage fee payments everytime a model portfolio is purchased by a customer.
Blockchain in the Fund Distribution Using the Blockchain
Another area where the blockchain could have a substantial impact on the wealth management industry is in the fund distribution area.
In a report titled ‘Blockchain and the impact on fund distribution’, Deloitte suggests that the blockchain has the potential to entirely replace the existing model for mutual fund distribution. More specifically, the whitepaper states: “By automating processes and removing the need for intermediaries to distribute funds and process transactions, blockchain technology is an opportunity for investment funds to improve distribution process speed and efficiency as well as reduce costs.”
As it turns out, Deloitte’s prediction was correct as the first mutual fund transaction on the blockchain occurred only a few months later in July 2017, when investors purchased shares in a Natixis Asset Management mutual fund using a blockchain-powered platform for asset managers, called FundsDLT.
The FundsDLT blockchain platform, which was developed by KPMG Luxembourg, Luxembourg Stock Exchange subsidiary Fundsquare, and technology company InTech, enables fund managers to sell funds directly to investors, thereby reducing both the cost of administration and transaction times. Orders are placed with the FundsDLT smart contract platform, at which point all information related to the transaction is transmitted to all involved stakeholders. Additionally, FundsDLT streamlines the compliance process as customers will not have to be verified by each involved party.
Eamonn Maguire, US lead for Blockchain and DLT at KPMG, said: “We believe these are the first fund sales using a blockchain-based platform, which were carried out in the world’s second-largest market for net assets under management. It is a major breakthrough in validating blockchain as a technology to enable funds trading and has the potential to reshape the investment industry, bringing important commercial benefits to industry participants.”
Chia Tek Yew, Head of Financial Services Advisory, KPMG in Singapore, added: “It is no longer a question of if fund transactions can be completely executed on the blockchain, but a reality that bourses need to grapple with. The role of the Exchange as a clearing and settlement player, as well as a custodian for funds bought and sold in their market, will change.”
According to research conducted by technology company Calastone, the blockchain could potentially save the asset management industry $2.7 billion a year should the distribute ledger technology replace existing fund distribution practices.
The Tokenization of Assets
While the blockchain can be implemented in various areas within the asset management sector, probably the most impactful application of blockchain technology in this space is the tokenization of assets.
The boom in initial coin offerings (ICO), which we experienced in 2017, not only showed us that existing startup funding models are being disrupted, it also acted as an indicator of what the future of financial trading can look like in a “tokenized” world.
Tokenization refers to the digitization of assets by converting the rights to an asset into a blockchain-based digital token. An excellent use case of the tokenization of real-world assets would be trading gold on the blockchain. For example, the Royal Mint Gold (RMG) blockchain project enables investors to purchase one gram of gold in the Royal Mint’s vault in the form of the digital RMG token, which incurs no storage fees.
Having said that, the tokenization of assets can go beyond solely digitizing physical commodities to creating whole new digital asset class that involves the tokenization of all types of assets and securities, such as stocks, bonds, and real estate.
Tokenization can also introduce fractional ownership to asset classes where that was previously not a possibility as well as add liquidity to traditionally illiquid asset classes such as real estate. Moreover, the tokenization of assets would allow anyone in the world with an Internet connection to participate in the global financial markets in the same way as they presently can in the cryptocurrency markets.
Experts agree that blockchain technology has several potential use cases in the asset management industry, such as the three mentioned in this article. With its ability to reduce operational costs, increase transparency, improve regulatory control, create more efficiency and remove intermediaries, the blockchain is poised the overhaul this sub-sector of the global financial industry.
Get ready for the third installment in this 5-article series: Blockchain Disruption in Finance: Securities Lending. I will publish it on Thursday, May 10.
