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DLT – Is There Really a Use Case in Asset Management?

Once again, the Fintech Times found themselves lucky enough to be eight floors up, down the road from Moorgate, and enjoying the fantastic views of the city from the Alphabeta building. Our most recent visit was for an event hosted by Codify, SEI’s RegTech incubator, to discuss all things asset management and DLT. A panel of experts explored the various use cases that artificial intelligence could provide to the asset and wealth management industry. AI, blockchain, IoT – all these things tend to go hand in hand at the moment, and now everyone wants to know what blockchain and DLT mean for the asset management industry.

Rising number of companies getting involved

It was interesting to see a variety of figures from different sectors of the financial services industry in attendance at this event. DLT and blockchain were on the tip of everyone’s tongue, and everyone wants to know what the latest developments will mean for them – whether in their role as a traditional asset manager, or in a slightly different field.

This is represented across the wider industry too, with many large firms starting to realise DLT’s potential in assisting their own solution development. For instance, BNP Paribas’ asset management division recently completed a full, end-to-end fund transaction test using blockchain technology. They are one of the first to take part in this type of blockchain testing – evidently trying to establish themselves as a company who are at the forefront of technological innovation.

Coinbase, the well-known cryptocurrency exchange operator, has also followed suit with its recent launch of ‘Coinbase Custody’, which is a custody service that will provide secure storage for institutional investors looking to trade cryptocurrencies. According to CEO Brian Armstrong, “Over 100 hedge funds have been created in the past year exclusively to trade digital currency. By some estimates, there is $10b of institutional money waiting on the sidelines to invest in digital currency today.”

Why are they getting involved?

According to a report published by the technology company Calastone, blockchain could save asset managers $2.7b by utilising the online ledger technology, instead of relying on manual methods of buying and selling funds. It all comes down to efficiency, according to Thorsten Peisl from RISE, one of the panelists at SEI’s event: “People have to go through intermediaries, whose purpose is to manage the accounts for asset managers through various different infrastructures. An asset manager wants to focus on investment positions, and the service provider wants to provide access with low risk. When we see DLT and blockchain technologies being used now, I see them as an alternative infrastructure that allows incumbents to come together to better manage data and more efficiently process transactions and the like.” Peisl illustrated that the benefits were clear-cut when running their operational tests and cost-benefit analysis on the settlement of U.S. Equity: “Asset managers on the buyside can see savings of 25 to 45 percent without having to change all of these other environments, and that is great if you are thinking that market is very cheap and efficient already.” With these kinds of efficiencies promised, many can see business models within this industry rapidly changing.

Control is another interesting facet behind asset managers’ motivation to get involved with DLT, particularly on this side of the pond. Jonny Fry, CEO of TeamBlockchain Ltd., explained, “you can draw parallels on the split between the American and European (and in particular, the U.K.) systems. The U.S. is focused on the constitution and having a code of conduct, whereas the U.K. looks to more of the spirit of the regulations and how things are being conducted. The Americans (Facebook, Google etc.) control the data, whereas the EU has GDPR coming into force, putting people back in control of their own data.” Combined with these regulatory developments, DLT and blockchain technology offer many interesting possibilities in terms of building trusted identity solutions. This is important because KYC and AML currently result in huge costs being incurred throughout the asset management business. That’s where Fry sees the main benefit of DLT coming into play: “At this time, I would say we fully understand the whole technology behind this or perhaps the full ramifications of what it will all mean, but I think it will massively change both the buy and the sell side of things – a radical change. This is the big opportunity in KYC and AML – with DLT acting as a solution to the problem of all these huge costs.”

South Korea’s largest telecommunications operator, SK Telecom, has also recently announced that they will be launching a blockchain-based asset management and payment service, which will “allow users to manage all bank accounts, credit cards, mileage points and other non-financial assets, including cryptocurrencies, in one basket, and enable transactions of the assets based on trust,” according to Oh Sehyeon, Executive Vice President. The key part of their offering is that “subscriptions and verification processes for services will be managed by a blockchain-based, digital, real-name authentication program.” This seems to be just the start of larger companies turning to DLT for their KYC and AML processes, and these developments will also benefit asset managers.

Products such as ‘Coinbase Custody’ reflect the increased number of tools that are being made available to asset managers dealing with cryptocurrencies. In the past, custody services have been lacking for firms engaged within the cryptocurrency sector, which may have even presented a barrier to entry into this market.

So why aren’t we there yet – what’s holding us back?

The main problem, according to panelist George Morris from Simmons and Simmons, is that “it’s not just a question of ‘are there DLT use cases within the asset management industry?’ It is more about asking if there are actual ways of utilising the technology in these use cases. Really that comes down to the development of the product. I think there is still a long way to go in terms of the solutions out there on the market.” Marcus Wilde, Applied Blockchain, concurred: “I think it is too early. The technology isn’t really there to support the use case yet, so whilst it is nice to dream of all these cost and savings, we have to ask ourselves if the technology will ever really be ready.” This is a view acknowledging that the industry, as a whole, clearly does have some hurdles that it will need to overcome before it is able to fully embrace DLT solutions.

One of the most prominent issues is regulation. Back in April, the FCA announced that they were going to conduct a consultation on the regulation of blockchain technology, causing great excitement within the industry and among the panelists and audience at SEI’s event. It was December (essentially a lifetime in the fintech world) when the FCA actually came out with a statement and clarification that they don’t concern themselves with regulating technology itself, but rather the outcomes of said technology. And they viewed the uses of DLT (aside from cryptocurrency) in this way, so for now, they weren’t getting involved unless there was tangible output from such technology. This provided clarity, but the Treasury Select Committee’s involvement could potentially muddy the waters. According to Morris, “One recent conversation was extremely down on crypto, bringing the whole discussion down, and blockchain ended up being portrayed in a negative light. It’s worrying if the government’s position is anti- blockchain. We want the U.K. and London to be the best place for blockchain technology in the world – a business hub – because it has so many use cases in asset management and beyond.” This is a definite issue within the industry, as DLT use cases for asset management are being ‘lumped in’ with discussions about cryptocurrency’s pros and cons. In many cases, they couldn’t be more different.

Finally, there exists concern over how things will work in the collective space. How do you get everyone to agree on solutions and move forward with various developments? This is a particular problem specific to blockchain – a globally used technology that often lacks a central leader due to its very nature. Morris agreed this was a concern: “One of the other issues is that blockchains are designed to involve many different participants who operate in the same market (with a general lack of trust). That creates a big problem in terms of getting things off the ground. How do you go about getting all these people speaking to each other?”

Despite these concerns, all of the panelists were, to varying degrees, excited about blockchain’s potential. Peisl weighed in on this issue, bringing us back around to a more positive frame of mind: “I disagree about the technology’s timeframe. Existing technologies, such as HyperLedger, are not built for the post-trade industry and what we need to do within this industry. Lawyers would like to see things like timestamps – accurate points of time for settlement and changing of ownership. This doesn’t exist as a concept in the blockchain world. I fully agree that the generic toolboxes out there are not very useful, and we don’t want to use them. It is all about these proprietary solutions, separate of the existing infrastructures – this is what we do. So, you pick the business problem that you are trying to solve and then see how to customise your tech to fit this – not the other way around.” So the solutions, even if they aren’t there quite yet, will come. Perhaps it’s just a matter of DLT being adapted for the specific use cases within the asset management space.

The future for DLT and asset management: cautiously optimistic?

A common theme among the many technologies within this space is apparent. DLT won’t necessarily make other things obsolete, but it’s going to improve processes for a lot of businesses and make them rethink how they conduct overall business. Peisl added, “asset management will not change business models; direct application will not happen; but asset management will benefit from how this is all changing, even if it is indirectly. Risk and cost reduction is the benefit, and asset managers are the ultimate beneficiaries.”

Once again, one of the event’s important takeaways, reflecting the general industry trends, is that blockchain’s use in asset management is separate from its use in cryptocurrency, and the two should never be lumped together. New asset classes, for example, may be revolutionary, but the asset management industry is looking for evolution. And the signs are there – DLT may be the technology to empower this evolution.

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