PricewaterhouseCoppers (PwC) recently hosted a discussion for the Asset and Wealth Management (AWM) sector to specifically look at the application and potential of distributed ledger technology on their business. “From our work across the financial services sector, it is clear to us that Blockchain applications have the potential to transform the industry,” said Steve Webb, Partner at PwC & UK lead for Blockchain. “Blockchain is not just hype – there is real interest in this topic.”
The discussion panel included Dr. Lee Braine of Barclays Investment Bank CTO Office, Simon Taylor of 11:FS, Eris Industries’ Casey Kuhlman, and PwC’s Ajit Tripathi. “The panel largely agreed that mass adoption of Blockchain technologies, across a broad range of use cases, is becoming inevitable,” states Webb.
Dr. Lee Braine’s blockchain work at Barclays focuses on smart contracts and shared ledgers. He has experience in investment banking, clearing & settlement, stock exchanges, corporate banking, and wealth management.
Simon Taylor also worked at Barclays, helping blockchain startups through Barclays TechStars accelerator, before co-founding 11:FS. His company helps banking execs deliver organisational change and next generation products and services.
Prior to funding PwC’s Blockchain and Smart Contract practice, Ajit Tripathi served in global technology and innovation roles at Barclays, Goldman Sachs, GE and Bell Communications Research.
Casey Kuhlman is the co-founder and CEO of Eris Industries. The company was recently renamed Monax, and offers a blockchain platform that uses smart contracts as legal applications.
While many large financial institutions have been investigating the technology, firms that purchase securities and assets for their own needs, or the needs of their clients, have remained on the sidelines.
In Webb’s opinion they may be hesitant due to the perception that blockchain will benefit settlement. However, many asset managers have outsourced settlement to custodians and other third parties.
Webb also says that asset managers are less pressured to save on costs than banks. In addition, he said that some asset managers feel that banks are collaborating to further their own interests, “which may not be aligned to those of the investment community.”
The statement echoes a report published by HSBC in June. The report states that “few asset managers are currently contemplating blockchain investment.” Nonetheless, the bank says that blockchain could “revolutionize” asset managers’ business models and client services.
Blockchains could help asset managers in areas such as efficiency, compliance, data management and client reporting. “Industry-wide transformation is very possible, especially in developing markets such as Asia,” the HSBC report reads.
The question of mass blockchain adoption is “not if but when,” Webb states, adding that PwC discussion participants believe that blockchain adoption would be gradual but will accelerate over time. He noted that “Some participants believe deployment throughout mainstream capital markets could be in place within three to five years; others think a little longer.”
Roubini ThoughtLab published a report in September based on a survey of 2,000 investors and 500 investment providers across 10 major wealth markets. 45 percent of respondents are targeting blockchain technology for growth. 65 percent will be targeting this technology in the next five years. With current social, mobile, analytics and cloud technologies becoming increasingly common, the firm states that future wealth firms will target smart technologies that can provide greater differentiation.
A blockchain guide for asset managers, published by JPMorgan and Oliver Wyman in June, also says that many in the industry prefer to take a wait-and-see approach, but they’re eager to learn more and engage with the technology.
The firms urge asset and wealth managers to “get off the sidelines and take the initiative to understand and embrace blockchain,” adding that “a wait-and-see strategy is no longer tenable — preparing for the changes that distributed ledger technology will bring about will require a pragmatic, balanced approach and active early engagement across the organization.”
Webb suggests that the biggest challenge to overcome is the impact on interactions between parties. “Many of the early technical barriers to widespread adoption of Blockchain are now being broken down.” he explains. Issues such as scalability, confidentiality, and visibility issues have largely been addressed. Regulatory issues are also not insurmountable.
“Many regulators see Blockchain as a potential opportunity to deliver greater transparency at reduced cost, which will make the financial system easier to oversee,” Webb states. “They are also conscious of the desire of government to support innovation – Blockchain represents an opportunity for nation states to secure competitive advantage.”
The interaction between parties is also being addressed. A range of collaborations are now in place to explore blockchain solutions. More than 60 financial institutions have joined R3 CEV. Last week, three firms participated in a project, led by Credit Suisse, to explore the use of blockchain technology for syndicated lending business. Credit Suisse also led seven financial institutions in developing blockchain solutions for reference data. Five of the UK’s largest asset management firms started collaborating in February, and are now examining how the technology can reduce trading costs.
IBM is also in the market. The industry giant released two new reports last week on commercial blockchain solutions for banks and financial market institutions. They are based on surveys conducted by the IBM Institute for Business Value, with the support of the Economist Intelligence Unit. 200 global banks and financial market institutions in 16 countries were surveyed.
According to Webb, the “size of the prize” is the key factor driving blockchain adoption. The JPMorgan & Oliver Wyman report states that growth in revenues and assets under management (AUM) has slowed considerably, “asset managers face challenges and pressures on their traditional business model.”
According to Sviatoslav Rosov, an analyst in the capital markets policy group at CFA Institute asset management client onboarding is also extremely burdensome: “The motivation for adopting blockchain technology in financial services appears to have shifted from disruption and the creation of new business models towards simply making existing systems and business models more efficient, be it in terms of explicit costs or capital provision costs.”
Santander InnoVenture estimated that blockchain could reduce banks’ infrastructure costs of between $15-20 billion per annum by 2022. This highly cited figure from 2015 is comprised of cross-border payments, securities trading and regulatory compliance costs.
The overarching driver is a new generation of FinTech entrepreneurs and platforms from other industries. They could disrupt the asset and wealth management industry, Webb explained. “There is a real threat that P2P firms will use their distribution platforms to start providing a wider variety of investments.”
PwC’s 2016 Global FinTech Survey, published in September, ranked the asset and wealth management sector as the third most likely to be disrupted by FinTech startups. 60 percent of asset and wealth managers think that at least part of their business is at risk to FinTech, while 57 percent are unsure about or unlikely to respond to blockchain technology.
Webb concludes that it would be a mistake for asset and wealth managers not to consider a Blockchain strategy. He recommends that asset managers review their major technology investments with a one to three year timeline. “If this is not done then the technology delivered may not be appropriate for the environment it is delivered into,” he explains. A significant “regret spend” may then be needed for re-engineering. “Committing modest resources to understanding what is happening is much more affordable.”