Blockchain technology for investment management firms

Blockchain technology is transforming asset management, and the firms that are developing it or have already incorporated it are definitely positioning for the future and starting to see big payoffs. Have you implemented it yet? You might be asking yourself why you should consider it. There are two main reasons. First, blockchain technology can do wonders for your value chain. Second, it is a new technology and is in rapid development, and that is always a good time to jump in on the ground floor.

So what is blockchain anyway?

Blockchain was originally invented for digital currency like Bitcoin, and allows digital information to be distributed without copying it. Essentially, blockchain is a decentralized record keeping system that uses cryptography to verify transactions.

Blockchain technology is most often associated with digital currencies, but there are vast applications of the technology that can be applied to managing valuable information. The big asset management companies realize this.

Many startup companies have been started to meet the demand for blockchain technology applications in both the public and private sectors. Blockchain technology is now being applied for various uses. Banks and other asset management firms are calling it a game-changer because it can greatly simplify the way transactions are processed. The technology has a great potential to streamline operations and drastically cut costs. The technology has been around less than ten years, since its creation in 2009. Since then, companies have invested over $1 billion in the technology.

The simple way to think of blockchain is to think of it as a spreadsheet or ledger.

The spreadsheet can accept various inputs, but can only be permanently updated when a group of people — like banks, custodians and asset managers — approve the change. Each participant in the ledger is a node, such as a bank. All nodes must be in consensus to approve any particular change to the ledger. Blockchain uses cryptography puzzles to securely verify transactions. The technology shows promise in greatly simplifying transactions involving intermediary service companies, and it is a very secure method that eliminates the need for a centralized approving authority. Buy-side firms are taking notice.

The financial industry approaches transactions in a very siloed fashion, but blockchain allows sharing of information across the silos in a secure way. Blockchain is more timely. It reduces delays while providing more accurate data. Another feature is the ability to execute a smart contract when a blockchain transaction takes place. Companies are using it in applications like fund validation and securities settlements.

Asset managers are exploring blockchain for a variety of business applications like fund valuations. The technology provides better record keeping, and time-stamped pricing data.

JPMorgan has publicly gone on record that it is testing various blockchain applications. Deloitte is working on blockchain technology for the identity verification process niche. But other market leaders like Fidelity and BlackRock have been relatively silent. Surely Blackrock is developing blockchain. After all, they are a known market disruptor. A few years ago, the company launched the very disruptive Aladdin Trading Platform, comprised of a central database that connected bond buyers and sellers under one marketplace umbrella.

How are these companies using blockchain in a fee-based industry?

For those asset managers that have gone on record, how are they adopting the technology? First, they’re starting with simple app development that helps facilitate communication among parties who need to share data. After that, experts agree that these companies will start to develop more sophisticated applications that store core data used in transactions. Finally, the industry will evolve to see major parts of the financial industry infrastructure supplemented by or replaced with blockchain applications. Success in the early development stages will give rise to these more sophisticated business solutions. Developers are certainly keyed on revenue growth, but there are major branding opportunities at stake as well.

In the perfect blockchain world, assets are tokens on the blockchain and all trades are done in the distributed ledger discussed earlier. Companies that adopt the technology early and develop it further could expand market share in a major way.

Firms will be able to very easily track chain of custody on asset transactions and easily allow verification of ownership of those assets that are moving. There is tremendous potential for companies like Blackrock because they are the originator of many of the assets; using blockchain with it means that Blackrock gets to write the rules for transactions and complicated contracts. Each piece of the chain could mean a different fee, all in Blackrock’s favor.

If you’re in asset management, wake up and smell the coffee. Pay attention to blockchain and the development being done by the major players. Don’t sit by on the sidelines and ignore this new technology. Other firms are in the game and are adopting these new strategies very rapidly.

Are you considering using a decentralized asset management platform to manage your assets? TwoGap is a blockchain-based asset management platform that is a major player in the blockchain technology movement. They ensure their users receive high-level security, cost savings, and faster transaction times. To learn more about TwoGap, or reach out with questions, visit their website, blog, forum or join their community.