Blockchain: a huge opportunity – and a threat – to asset managers

New technologies such as blockchain are playing a vital role in the evolution of the asset-management industry by helping to digitise processes, reduce complexity and allow any kind of asset to be traded with greater liquidity, higher speed and lower cost. The blockchain is also allowing asset managers to interact directly with investors, and is encouraging asset managers to offer tokenised investment services.

Blockchain explained

Blockchain is an ever-growing digital database or ledger of data that can be distributed among peers. It’s perhaps best known for enabling the development of cryptocurrencies by maintaining a secure and decentralised record of transactions. Since information is organised differently from traditional databases, blockchain creates records of transactions that can’t be altered, deleted or destroyed.

The advantages of blockchain to asset managers include security, faster transactions and cost savings. These are tasks requiring the storage and exchange of data between parties, which previously involved intensive manual labour, and can be left to the trusted, transparent nature of blockchain. Blockchain helps to solve the problems of dispute resolution and improves the time it takes to resolve discrepancies in data. Overall, it helps asset managers share information quickly among a range of parties, and it provides companies with the potential to streamline the way they treat their data.

Blockchain allows asset managers to experiment with tokenised investment offerings as investor appetite for digital assets continues to grow. BNP Paribas, for example, says that in 2022 it worked with one of the largest energy companies in Europe to develop and tokenise a digital bond to refinance a solar energy project – the first renewable-energy bond tokenisation on the project-financing market. Together with other French banks and the Banque de France, it’s also experimenting with wholesale central-bank digital currencies and how they might be applied to blockchain.

Opening up illiquid markets to small investors

Blockchain also offers asset managers an opportunity to tokenise existing funds and allow small investors to purchase bite-sized units, or tokens. The large, traditional asset manager abrdn hopes to launch a tokenised fund this year, according to a source familiar with the matter, and rival Schroders is also investing in the sector. Blockchain ensures that the tokens, or fund fractions, are securely managed, and it can help small investors to buy assets such as private equity, which tend to offer higher returns but can be relatively illiquid. ¹

Reuters quoted Magnus Burkl, principal at consultants Oliver Wyman, as saying:

‘Every asset manager who has the ambition to offer private markets to their clients and be a leader in that space will look into blockchain technology.’

Due to the liquidity constraints, many funds investing in private markets are only open to professional investors, requiring minimum investments of $10 million. By using blockchain technology, however, fund managers can offer fractions of these assets for a small proportion of the initial outlay.

Moreover, the authorities in several markets are eager to encourage the development of tokenised products by asset managers, not least because they allow secondary markets to develop more liquidity. The London Stock Exchange and other exchanges around the world are working on the technology to underpin the development of the market.

Schroders has summed up the potential of blockchain to revolutionise the asset-management industry, saying:

‘We may have already passed ‘peak fund’; in the decades ahead new types of bespoke investment products could become more common than the unit trusts and open-ended investment companies (OEICs) that dominate today.’ ²

¹ https://www.reuters.com/technology/asset-managers-offer-fund-tokens-despite-crypto-turmoil-2022-08-26/
² https://www.schroders.com/en/insights/economics/blockchain-means-weve-already-passed-peak-fund/