regulation

There is widespread consensus that blockchain technology underpinning crypto digital currencies could eventually revolutionise the wealth management industry.

A report co-authored in April 2017 by Jakov Agbaba, a risk analyst at Rathbones, and the investment manager’s chief investment officer, Julian Chillingworth, explained how the technology could disrupt global custody by automating the tasks performed by custodians.

Agbaba and Chillingworth note custodian roles could be processed automatically through blockchain by being written into what is known as a smart contract – an automated and self-executing agreement in the form of computer code or programme.

The platform could also automate mandatory processes, which will result in operational cost savings and reduce operational risk, while increasing efficiency.

 A shared blockchain platform could be a secure, decentralised and efficient method for banks to collect, validate, store, share and refresh trusted customer information.

This leads to consolidated standardised customer data sets and enables interoperability and communication between banks and fintechs.

BNP Paribas Asset Management successfully completed a full end-to-end fund transaction last year by leveraging BNP Paribas Securities Services’ blockchain programme, Fund Link and FundsDLT, a blockchain-based decentralised platform for fund transaction processing.

The test demonstrated that Fund Link is able to connect with other blockchains, opening the door to a new model of interoperability.

Data from Goldman Sachs referenced in the Rathbones report suggests that using blockchain for customer onboarding and transaction monitoring could reduce banks’ operational costs by up to 25%.

Through tokenisation, a pool of asset classes which are not easily accessible could be included in the portfolios and offer more diversification.

Communication between devices could be made more effective and efficient due to a standardised protocol.

From an investment perspective, while blockchain technology can be accessed by anybody, it stands to reason that increasing regulatory scrutiny can be expected – especially about the use of Bitcoin as a mean of payment, let alone as a speculative investment.

In January 2018, New York-based investment advisory firm Beam Capital Management had introduced a separately managed account strategy which invests in publicly traded securities of firms leveraging blockchain technology.

Blockchain implementation faces three major problems: scalability, interoperability (between blockchains) and sustainability.

As a result of acquisitions and restructuring, banks and wealth managers have acquired, changed and modified systems over the years and in many cases are lagging in terms of technology.

Advances in technology will significantly change the financial services sector and competition between firms within it and businesses that leverage artificial intelligence and machine learning to create better financial service solutions are becoming increasingly popular.

Digital solutions such as blockchain will help improve the value proposition in wealth management and banks are now faced with the choice to either adapt to the digital revolution or lose market share, he says.

One of the most interesting applications of blockchain technology in a wealth management context is under development in Asia. Gregory Van den Bergh is CEO of MiCai, which is developing a platform, which he says will be the main blockchain/artificial intelligence based wealth management platform in the region.

The MiCai protocol is an open source API (application programming interface, a set of subroutine definitions, protocols and tools for building application software) built on a blockchain developed by the Singapore-based NEM Foundation.

MiCai Apollo is the operating system that will be used to access the protocol and features of this operating system are already in use at several private wealth management firms in China.

With MiCai’s blockchain technology, clients use their key to give firms access to their information and smart contracts automatically update the latest data needed so they are compliant by default.

Van den Bergh accepts that for artificial intelligence to work effectively in wealth management there has to be uniform data and that this is currently not the case.

Blockchain can solve this and enable firms on the value chain to share data in a more secure way without showing sensitive data about their clients.”

The next application is the purchase of digital application tokens. “Many family offices are looking to buy application tokens since Bitcoin, Ethereum and others are not correlated with most other asset classes, which lead to diversification benefits,” he says.

However, the application of blockchain that MiCai expects to have the greatest impact is the purchase of security tokens – tokens that have an underlying asset, such as gold or real estate.

“A series of smart contracts can arrange the sale and handling of the asset, which is much easier than using traditional stock/bond/title deed forms,” says Van den Bergh. “We believe that within a decade, wealth management will be all about security token management.”

Outsourcing solutions provider SEI will be trialling blockchain technology again this year in the SEI Wealth Platform’s end-to-end processing.

This comes after the company undertook an internal blockchain pilot test, for a period of six weeks, last year.

The next trial will also last around six weeks, and will take place in 2018.