Sunday, October 24 , 2021

Can Blockchain Help the Asset Management Industry?

Asset management has a rich history of helping individuals manage and grow their wealth. Many ultra rich of today have utilized some form of asset management to build wealth. But change is inevitable, and the old business models of asset managers are becoming outdated. Access to the markets and financial products is increasing rapidly. And blockchain is helping in bringing this change.

Why Asset Managers need Blockchain

Today, the retail investors are not happy paying the 2%-4% fee to the fund managers, which used to be the norm. On top of that, the fee was fixed regardless of the manager’s performance. The competition among financial firms is increasing. Investors can easily switch from one broker/asset-manager to the next. 

The ease of trading has introduced an army of do-it-yourself investors. They directly trade with the source and do not depend on financial advisors. The entry barriers are dissappearing. The market is filling up with low fee index funds such as ETFs. 

To cope with the changing demands of the market, asset managers need to integrate technology such as blockchain.

How should asset managers market their services?

Blockchain is a decentralized (open) ledger that records transactions. Due to its nature, it streamlines managing large amounts of transactions. Plus, the transparency of the system is unpredented. This is valuable for the asset management industry. 

Most asset managers use 3rd party tools to record the ownership of LPs and stocks. To manage this data, they have to invest in other resources. Blockchain-based asset management records ownership statuses more efficiently.

Blockchain is not the only facet with this much power. Machine learning and artificial intelligence are also helpful for asset managers. They helps in evaluating marketing data and regulatory compliance. By using third party tools their customers can achieve KYC compliance with online identity verification.

Maintaining records aside, the structuring of assets in the open ledger provides more options. As a result, asset managers can devise more tailored investment solutions for their clients.

Smart Contracts

A smart contract is another tool that goes hand in hand with blockchain. Simply put, it is a block of code or algorithm that triggers a certain event. It is readily introduced as the future of the insurance industry. But it can perform similar functions for asset managers.

Asset managers can put smart contract for their clients in their portfolio. For example, according to this contract, the portfolio would sell the stock of a company if its CEO resigns.

The Budding Token Economy   

We have seen a number of use cases of blockchain in asset management. The token economy lifted off during in 2017-18. Although we were unable to capitalize on it, it did demonstrate vast possibilities. The ‘token economy’ can make funds and assets accessible to more people.

Let’s oversimplify to understand this; 

If the whole (a fund) costs a large sum to enter, it can be ‘broken’ into chunks through tokens. A token represents a small ownership in that fund (much like company stocks). Trading these is relatively affordable and is an attraction for small investors. 

Blockchain in asset management will bring more investment products, cheaper entry to assets, transparency. It will also remove several intermediary roles, which means fewer commissions and faster money management. There are, however, a few challenges. 

Financial regulation of blockchain is a bit controversial. Since the technology is new, the regulators need to fully comprehend its dynamics. How the governments and regulatory boards will treat it needs to be seen. Which is why many asset managers are currently reluctant towards integrating it.

Regardless, blockchain is a disruptive technology and is here to stay. Once the fund managers figure out a comprehensive compliance policy, there will be extensive changes in asset management.

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