Blockchain Technology in the Asset Management Industry
Blockchain technology has been driving force of change in the Fintech space for the past decade. It has affected almost every line of business in the space of Finance. The most popular and tangible use of blockchain has been in the form of cryptocurrency for payments. But the concept of blockchain has found applications in other areas as well and has offered a huge promise for the digitization of the Finance Industry. This article explores one such important space that Blockchain offers huge potential in — Asset Management.
What is Blockchain?
Blockchain is a system to keep a permanent and tamper-proof record of transactional data. It relies on a Digital Ledger Technology (DLT), which distributes the data of the transaction to multiple validators. This ensures that the information is accurate and cannot be overwritten, since the time and sequence of validation is maintained in the ledger. This is primarily because no one validator can alter the transaction without every other validator knowing about it, since the ledger is open for all to view.
Blockchain Across the Asset Management Value Chain
Blockchain can have a potential impact on the entire value chain of the Asset Management — right from the client interaction to the tracking and reporting, to ensure compliance. Let us explore how.
Client Onboarding
Client onboarding is often a very tedious task of the customer chain. An important part of the onboarding process is the KYC (Know your customer) — ensuring your customer is who they say they are. Currently many AMCs have a centralized system for this — the data is collected, and a single validation office validates the data. Since the main idea behind Blockchain is decentralization with security, it drastically reduces the manpower and effort requirement for the KYC.
Smart Contracts and Trade Settlement
Once the client is free to start trading, blockchain can be used to ensure validity of contracts between the parties that execute the trade. Once the blockchain receives an execution order, it can trigger a smart contract — which is essentially a programmable code that contains all the terms and conditions of the transaction in question and automates the approval and clearing process. Blockchain can do this in minutes, rather than an asset manager spending his/her time on this.
Operational Efficiency and Regulatory Compliance
With algorithms and machines drastically increasing the speed of trades that take place, data transmission is an important factor in the Asset Management Industry. While there is a reduction in the time it takes to assess and process orders, another key aspect is the time it takes to transmit news and data that could influence the trades and decisions of the asset managers. This will also reduce drastically with a faster transmission of authentic data, that the managers can rely upon to execute trades.
Regulatory compliance follows on the lines of how blockchain helps with the KYC. In this case, blockchain will be able to compile transparent and authentic data, which can easily be viewed and be trusted for investor communication, management reporting and regulatory compliance. Using this technology can reduce the cost of employing people to ensure compliance.
Cryptocurrency and Tokenization — New age assets
Asset management companies have had a set of traditional assets that they manage — real estate, equity, debt, etc. But, with the advancements in blockchain technology, two new assets are gaining momentum — cryptocurrency and tokens (NFTs)
Cryptocurrency is a digital currency that essentially has no underlying asset governing its value, but rather derives its value from its use cases. While in the case of fiat currency, the central bank of the respective countries acts as the guarantor of the value of the currency, in the case of crypto it is the validators who validate the transactions, and thus act as guarantors of the currency. Much like regular fiat currency, the price of crypto also fluctuates, which opens up trading opportunities. Crypto is increasingly being recognized as an asset worldwide, due to its the potential to replace fiat currency for many use cases.
Asset tokenization refers to securitization of high — value goods like art, intellectual property, etc. These usually exist as Non-Fungible Tokens or NFTs in digital ledgers. Existence of the NFT in the ledger is an indication of its authenticity — validated by the network of the blockchain. It therefore represents an asset of value. A holder of an NFT can claim ownership of the asset, without having actual possession of the same. This drastically increases the trading speeds and allows investors to invest in assets worldwide.
Conclusion
Blockchain carries a lot of potential to drastically streamline the asset management industry. It has an influence across the value chain of the industry, and it is changing the landscape of the Asset Management industry, much like it is influencing the rest of the BFSI sectors. Many international banks like Citibank, BNP Paribas and HSBC have hence recognized its potential, and have adopted blockchain technologies for their AMC line of business.
References
BLOCKCHAIN: FORGING THE FUTURE OF ASSET MANAGEMENT, https://www.bdo.com/insights/industries/financial-services/blockchain-forging-the-future-of-asset-management
How is Blockchain Changing the Face of Asset Management?, https://www.dataversity.net/how-is-blockchain-changing-the-face-of-asset-management/#
Blockchain Opportunities for the Wealth and Asset Management Industry, https://www.chappuishalder.com/wp-content/uploads/2019/01/1.-ARTICLE-05-Blockchain-2.pdf
Blockchain technology for investment management firms, https://www2.deloitte.com/us/en/pages/financial-services/articles/im-firms-getting-started-blockchain.html
