Why should I sell my funds through a blockchain?
Blockchain understanding in the asset management industry has been a key barrier to the adoption of the technology. Most people just aren’t comfortable with how it works and this means it’s hard to quantify the appropriateness and tangible benefit.
So, in this short post i’m going to try and distil the real basics, from a commercial perspective. Focusing on the 3 core benefits I believe every asset manager should be thrilled to have, and can only have, using distributed technology.
- No More Reconciliations
A blockchain is fundamentally just a network of people sharing a database. The simplest network you could imagine might be just two players. You, the asset manager, and the guy that sells your fund, the distributor.
You each have your own “database”, but the nature of distributed technology ensures that these are kept in sync, so you’re effectively sharing one golden source of data. Either a transaction happens completely for both of you, or not at all.
Why is this powerful? Fundamentally, it means no more reconciliations.
You (or your transfer agent) might have sophisticated protocols for reconciling data, which are managed by a large operational workforce. Or, if you’re lucky, you might use some “smart” reconciliation software. Ultimately, these only patch the problem and don’t scale well. With a blockchain this problem doesn’t even exist to start with. Deloitte estimates this “reconciliation” cost in Luxembourg funds alone to be around £300m annually[1].
2. No more dormant accounts and KYD (knowing your distributor)
You’re collecting orders from many different places across the country as well as through your own sales team. In that time some of your investor data has become corrupted, outdated or lost all together. Even more likely is that you don’t have this data to start with as your transfer agent collects it on your behalf.
Wouldn’t it be great if you had an audit trail that spans across the whole distribution process? You could track investor data and access it no matter where it came from? You couldn’t lose data and if it changed you could always check where and why it was altered?
In distributed technology we call this “data provenance” and it comes as standard. Never again will you have dormant accounts, where someone buys a portion of your fund, but you don’t know who that ultimate beneficial owner is. That’s pretty good if the regulator comes knocking.
This property also gives you transparency over your distributors. The immutable chain of data flow means you can track every order in real time. Cryptographic signing ensures accountability over each step so you can track and analyse your distributors and ultimately understand who’s outperforming.
3. No more middle man
Who manages your distribution today? Probably a middle man called a transfer agent? Here’s the problem, you can’t just get rid of him. When you’re selling your fund to thousands of different investors you can’t just trust that everyone’s going to be good for their money. If someone fails, ultimately the fund takes the hit and the current investors suffer— that’s a big no no.
So if you’re going to get rid of this guy you need a mechanism in place that manages this risk.
This is where the “trust-less” nature of blockchain comes into play. On top of each shared database is an application. This application applies a series of checks on your investor when they place an order. Have they been KYC’d? Are they from an eligible jurisdiction? Do they have enough money? Has the fund cut-off time for orders been passed? Is this order large enough to require sign off from someone more senior? etc.
This can be done with a “smart contract”. A shared piece of code that sits within the distributed application. If any of these checks fail, the transaction reverts and none of the databases update, protecting the fund. This is how you get rid of the middle man and all his associated costs.
So, to summarise, when you have a problem you want to solve with distributed technology you should be asking yourself; What key features does blockchain have that other technology doesn’t?
If you need data provenance in a complex work flow and/or a trust-less mechanism for exchanging high value between counterparties, then an enterprise blockchain can definitely fit the bill.
At Tokenblocks, we’re building the software to allow this to happen. This article is only a high level overview but if you want to learn more about how we’re using distributed technology to create a 21st century transfer agency then you can message me at phil@tokenblocks.io or check out our website at https://www.tokenblocks.io and sign up for one of our webinars.
