Wealth and Asset Management on Blockchain

[This is another part in our “Blockchain Practitioner” series – see more on blockchain use cases and emerging vendors here.] The market size of the global asset management industry has been growing significantly over the past few years, with projections constantly underestimating the actual growth. Current projections from PwC’s Global Market Research Centre forecast that assets under management (AuM) will exceed US$111 trillion by 2020. With a rise in high net worth investors and investable assets over the last couple of years in emerging markets like South America and Africa, there is an increased demand for pension funds, insurance companies and other asset management services. While the industry is growing, pressure for greater transparency by regulators such as the UK’s Retail Distribution Review, as well as an industry shift towards outcome-based solutions has resulted in smaller profit margins. In order to meet the demands of the changing landscape, these firms must invest in transformational information systems both internally and within their immediate stakeholder network. These technologies are applied to increase efficiency through automation while also providing the transparency and security demanded by regulatory bodies.

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Secure but transparent

How do we implement a secure and efficient system while maintaining ultimate transparency for taxing, client on-boarding and management purposes? The tech industry’s recent hype around distributed ledgers (DLT) and emerging blockchain protocols has presented the opportunity to streamline the management of model portfolios, increase operational efficiency by removing friction during the client on-boarding process, speed up the clearing and settlement of trades, and ease compliance burdens associated with anti-money laundering (AML) & know your customer (KYC). All aspects involved with client interaction must be considered to successfully manage client assets. This information can be difficult to attain, requiring data to be blended from a number of disparate data sources. Within the information management systems of this industry, the goal has been to gather asset information such as financial configuration, client priorities, industry trends, etc. This information is gathered from a number of independently operated sources which must be combined and manipulated effectively to draw relevant insights. The proper massaging of this information will lead to more manageable production and investment targets, cost control, and meeting high-level organizational goals. Blockchain data structures will be used to reconcile information across silos in the current systems, and enable new infrastructure for emerging markets and products.

Impact of trust on efficiency

For client on-boarding, profile information can be stored on a DLT where only trusted parties will be granted all or part access based on cryptography-enabled data governance models. Relationships would be initiated by the profile owner (customer), granting access to the relevant parties. This system is inherently built to enable a simplified audit trail to track changes in the process, which will lead to a higher level of trust from customers, increased operational capacity for management, and reduce the cost of audits by regulatory bodies. Additionally, the technology enables near-instantaneous transfers of assets between financial institutions who have authenticated the provenance of tracked changes. Providing documentation such as proof of ID, residency, sources of wealth, business interests and political ties during the onboarding process can take weeks. Using a private, permissioned blockchain reduces the timing by improving the efficiency and security of critical information. As a result, fact-checking processes (AML, KYC) will become extremely simple and can be automated to further reduce the variable costs associated with the on-boarding process. Storing verified client information with a blockchain protocol would allow critical data points to be shared as needed, improving communication between participants and reduce the need for some intermediaries responsible for settling and executing trades.

Challenges

Although blockchains provide clear use-cases which will eventually deliver immense value, there are still some challenges facing industry-wide adoption. Besides the system integration and change management which will have to be carefully sorted out, many wealth and asset management practitioners are not familiar with how blockchains actually work or what the benefits might be. This requires executive training seminars to hone in on specific use cases which can be seen as quick wins in the road to adoption. In the current technological landscape, scalability is a major issue with any industry-wide adoption where large volumes of data and network resilience are key requirements. To this point, blockchain development communities around the world have been working on solutions which should be ready to deploy within the next year (read more here). In terms of regulatory and legal authorities, there are still a great number of unknowns, for example when it comes to custodial requirements when assets are held on a blockchain network. Besides the organizational, technical and legal barriers to widespread adoption, there are also hurdles that need to be cleared in data privacy, immense costs associated with replacing legacy systems, and the critical requirement for a standardized protocol that can be used across the industry.

Conclusion

Firms looking to gain an edge against competitors or who are leaders in the market should be looking at blockchain and distributed ledger technologies to lead the charge into the future of asset management operations. The first step to adoption should always be a deep dive into the available technologies and potential use cases, which can be learned through executive training seminars and strategic workshops. This will then lead to establishing an effective framework to identify real business value, choosing the use cases which can be developed quickly and immediately deliver value to drive results. The chosen use cases should be quick wins delivering tangible value, but pose the least amount of risk, and using the established framework to properly allocate time and resources. Examples of immediate use cases will likely exist where operational overhead and data management issues exist, or where potential revenue-generating opportunities can be driven by transparency, inter-connectivity, and simplified user-interactions. Cyrus Montazemi, Consulting Manager at MLG Global Visit MLG’s Blockchain for Business Comparison here …

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Cyrus Montazemi

Cyrus Montazemi is a process implementation engineer with a passion for data management practices and disruptive technologies. Having worked as a data analyst and process implementation consultant, Cyrus has spent that past few years studying the impact of data governance and management practices on the operational success of multinational enterprises. Within the blockchain space, he is actively working with Academia, Enterprises, Lawyers and Government Organizations in order to drive adoption and understanding on how this transformative technology can impact and address their need.