Blockchain

Executive summary

Distributed ledger technologies (DLTs or blockchains) were invented to fix many problems that financial service companies do not share to the same extent as other industries – namely around trust and central coordination. Still, asset managers should be optimistic.

Benefits could manifest themselves in three main ways: First, in how asset managers organise themselves. Second, in the structure of the market ecosystem. Third, in the underlying investments themselves – what an asset manager can buy for the benefit of its clients.

Improvements to business models include negating the need for parallel record keeping and reconciliations, as well as mitigating operational risks. For the asset management industry, certain information needs to be public, from regulatory reporting to trade pricing, and so-called public registers provide proofs that can be verified by others. Likewise many of the inputs used by analysts could run entirely on blockchains, from land registry data or company information. Or regulators may decide to manage a know-your-client register on a public blockchain.

Distribution is another area of focus where DLT could lead to better service for clients. The most radical approach would be a tokenisation of shares in investment vehicles, that is putting an entire fund on a blockchain. This would allow for efficient subscription and redemption mechanisms and facilitate the secondary trading of units. It could also lower costs by disintermediating distributors.

Meanwhile, everyday asset management processes such as onboarding, document management, trade execution and settlement, ownership transfer, voting, and receiving dividends could be done through so-called smart contracts. These allow even advanced pieces of business logic to be automated. In addition, activities such as regulatory reporting and investor relations could be made more efficient this way.

In terms of the market econsystem, DLT could have a profound influence on the way trading in underlying investments is organised. This could change important areas such as settlement speed, collateral management, trade reconciliation or asset life-cycle management.

Another rarely spoken about opportunity for asset managers is how blockchain can potentially open up and facilitate new business in frontier markets. Indeed, blockchain is most valuable in countries with radically different legal systems and local conventions.

Finally, exploring new blockchain-based solutions is an opportunity for asset managers to refresh old technologies with a newer code built on widely tested systems created by a large pool of external talent. The review process itself should lead to long-term improvements that benefit clients.