Blockchain is making tomorrow brighter for wealth and asset management operations at banks. The distributed ledger based nature of the blockchain helps in managing identity, control fraud, deliver services and regulate automation. Blockchain is providing a better way forward to manage high quality data labelling, security concerns and intellectual property rights. Advanced encryption in blockchain helps to keep track of transactions, which boosts the confidence to buyers and sellers. Blockchain can be used for storing customer profiles which consist of profile data, net worth, preferences, account information and social media profiles. Clearing house systems are using blockchain to manage the clearing and settlement of equity and other instrument based transactions. Client on-boarding, management of model portfolios, clearing and settlement of trade, compliance (KYC and AML) are the blockchain use cases in wealth management for banks. Blockchain helps in communicating portfolio changes to all clients subscribed to the model and provide individual account performance, drift outside of tolerances and cash flows. The key hurdles for block chain adoption are identity verification issues and unknowns related to regulatory and legal hurdles. Biometric identity solutions and quantum computing might have high disruptive impact on blockchain adoption in banking and financial services.
Financial Technology : Blockchain
Blockchain technology can help banks cut costs by up to $12bn annually in back-office processes such as settlement, regulatory and cross-border payment costs. Established players in financial technology space are acknowledging the possibility and importance of the blockchain for asset management, crypto investment, and tokenization. Consortiums of large banks, central banks, regulators as well as FinTechs, are engaged in the development of blockchain technology to leverage the distributed ledger technology.
Financial services firms are embracing blockchain to produce trading platforms that help investors in managing digital assets. These platforms are streamlining traditional asset management opportunities by embracing cryptocurrency and other digital assets. Real time settlement models, smart contracts, single point of truth and automated investment vehicles can realistically be applied in Wealth Management. Blockchain helps in tracing securities lending, repo & margin financing and monitoring systemic risk. It can be the answer to interoperability, trust and transparency issues in fragmented market systems. The technology can be used in clearing & settlement and securely automating the post-trade process. Automation helps in replacing paperwork of trade and legal ownership transfer of the security. The platform offers a solution to the post-trade events processing to maintain a single source of truth owned by all participants in the system.
Stock market participants like traders, brokers, regulators and stock exchanges go through a cumbersome process which takes 3+ days to complete transactions. This is due to the role of intermediaries, operational trade clearance and regulatory processes. A blockchain platform helps with the removal of an intermediary which affects the ability to charge fees and fares well for client retention. The platform allows for near-instantaneous transfers of assets with authenticated provenance of tracked changes and can make stock exchanges optimal through automation and decentralisation. These platforms reduce huge costs levied on customers in terms of commission while speeding up the process for fast transaction settlements. Blockchain can reduce frictions and expand banks’ payments and transfer network more easily with more flexibility than current systems bypassing a centralised third party.
The Blockchain Platform
Blockchain platforms can be classified as public, private and federated. To distinguish the type is to check for permissioned (public or private), permissionless and restricted permissions. The blockchain platform consists of a smart contract model with roles like Contract Owner, Team Member, Advisor, Holder and interfaces to Asset Proxies, Exchanges, BMC Token and Asset Tokens. The contract has the deposit wallets’ logic based on Asset Proxies. An Asset Proxy is an ECR20-compatible contract. It implements an interface between the platform Wallet with income, and external addresses such as exchanges. Tokens are implemented as token-as-a-currency instruments and receive proceeds from continuous contributors. The tokens are connected to the platform via the platform asset and proxy asset interfaces. The smart contract for asset token is made up of specific contracts which consists of the investment vehicle structure, fees, and assets. It is implemented as a token-as-a-currency instrument and receives distributions from the corresponding fund’s capital appreciation. Each contract connects and interacts with the platform via the asset interface.
Blockchain creates possibilities for a shared, protected data solution for wealth management firms and their clients. From basic information to risk profiles and historical returns, the platform can help financial professionals create a seamless transition for clients. The platform would also facilitate faster client on-boarding and provider switching and thus reduce client loyalty and barriers to change wealth management service providers. It provides the ability to gather clients’ and prospects’ data about their personal finances. When clients update their life circumstances, the blockchain stores all relevant data. New machine-learning technologies have the capability to send to the clients the content relevant to their situations. The client’s input is irreversible and the block chain helps the manager to track clients’ life changes and adjust their financial plans. Managers can use this client-generated evidence to protect themselves against client disputes. For example, when a client updates their profile to include a new baby, this action triggers a campaign setting up a college savings plan. The digital platform will send relevant content from leading providers in the college savings space to educate the client. Blockchain will help in providing better customer experience to the consumer world from wealth managers.
Real-time settlement models transform the execution of financial transactions with positive impacts on transaction costs, counter-party risk and capital availability. Blockchain threatens transaction fees as one of the main sources of income in traditional Wealth Management. Superannuation administrators can track financial movements, record assets, record member details, settle accounts through a single platform of distributed ledgers. Digitization, tokenization, accountability, and regulation are essential aspects of asset management which are maximized by the blockchain.
Data privacy protection, risk and financial history, know your client (KYC) and investment profile propositions will become less costly and simpler with smart contracts and an encrypted single point of truth. This allows for increasing efficiency in terms of exchanging information and more reliable client interactions. Margining management and payment of margin can be done instantly. The frequency of valuation of securities deposited as capital can be daily compared with the weekly process prevalent now and therefore minimises risk. It is attractive to regulators due to increased transaction security and reduced risk of manipulation.This new technology is giving rise to difficult legal and regulatory challenges that regulators are grappling to understand.
The Australian Securities Exchange (ASX) trades will be settled by participants confirming transactions through the peer to peer network. ASX has alliances with R3CEV, the Post-Trade Distributed Ledger Group (PTDL) and Dubai’s Global Blockchain Council (GBC) and organisations like Manulife/John Hancock. The French government has adopted new rules that will enable banks and fintech firms to establish blockchain platforms for unlisted securities trading. This allows the trading of the assets without relying on middlemen and theoretically at near-instant speeds. Japan’s Financial Services Agency allowed the Tokyo Stock Exchange to use blockchain as its core trading infrastructure. In 2015, Nasdaq unveiled the Linq blockchain ledger technology to record private securities transactions. UBS is experimenting with a distributed ledger technology based trade finance system for rationalising import-export transactions at a global level. A consortium comprising SIX, Swisscom, Zurich Cantonal Bank and others is attempting to redesign the process for settling over-the-counter equities using Blockchain.
Digital investment portfolios based on baskets of cryptocurrencies will be a new service offering which addresses the importance of asset allocation. New autonomous financial instruments and automated investment vehicles built on smart contracts will replace traditional Wealth Management functions like Portfolio Management and Client Advisory. The wealth management firms will benefit because of leaner and more efficient processes. Blockchain has the potential to disrupt the financial services in automating market surveillance events processing and post-trade events processing.