Blockchain in Wealth: Does it really live up to the hype?

Written by Chris Lamb, Wealth Consultant at Simplify Consulting

The industry disruptor, the future, the next everything. Blockchain has been hyped ever since it was introduced into the mainstream in the early 2010s.

But today there are real opportunities for wealth management companies to use blockchain to achieve real benefits for clients.

What started as a concept born in the 90s, as a way to time stamp digital documents, has evolved into what we know today as a blockchain: a distributed database shared between the nodes of a computer network.

In other words, like a database, a blockchain stores information electronically in a digital format that cannot be changed or manipulated.

We have been looking at Blockchain in Financial Services for several years – and back in 2018 we outlined the use cases.

It has since become something the likes of HSBC, Calastone, Santander – the latter to support an international money transfer service – and many other leading financial brands have made good use of. In fact, banking and financial services now account for 29.7% of the total net spend on blockchain1.

Disturbing, yes. But it is also transformative.

Cost savings for customers?

With the regulator’s attention to companies from a consumer duty perspective, there are also untapped opportunities to provide better results for consumers. Distributed ledger technology (DLT) allows wealth companies to reduce overall transaction times and costs across every part of the value chain, but there will be an expectation that some of these savings will be passed on to the customer.

The pace of development is fast. So much so that it seems more a matter of when rather than if wealth companies will adopt blockchain technology. Worldwide spending on blockchain solutions is estimated to reach $17.9 billion by 2024 and will grow at a compound annual growth rate of 46.4% according to IDC 2020 forecasts.

Wealth firms will struggle to serve modern clients effectively without a digitized operating model, so a transition from legacy models should be a priority.

Here are five areas where blockchain can make a significant, positive difference to companies in the sector:

1. Corporate Actions – Faster processing of dividends and rights issues.

2. Privacy and GDPR – Smart contracts and encrypted single point of truth (SPOT) will reduce costs.

3. Managed portfolios – Investors will be able to more easily access alternative investments and potentially crypto-assets.

4. KYC & AML – Using blockchain to aggregate information into one cryptographically secure database without third party verification.

5. Settlement – ​​Faster and potentially real-time settlement periods.

While these areas lean towards back office processing, there is a clear need and demand for blockchain technology throughout the customer journey. For example, a recent research report found that asset managers spend up to 70% of their time performing non-advisory tasks such as administrative, regulatory and compliance tasks.

With blockchain-backed centralized data repositories, integrated AI capabilities and process instructions, advisors can spend more time achieving the right results for clients.

FCA and regulation

Any new technology requires appropriate regulation to protect both businesses and customers. It is a recognition that blockchain has the potential to deliver significant benefits, as long as the risks are managed.

Overall, the Financial Conduct Authority has supported the introduction of blockchain, within regulated parameters – it is believed that this could also create more high-skilled jobs across the UK, increase trade and extend the UK’s competitive advantage over other leading fintech hubs.

It has not all been ordinary

Many blockchain projects have been referred to as “experiments” and for good reason, because many have failed and failed hard.

Globally, one of the biggest failures resulted in the Australian Securities Exchange withdrawing a project to upgrade the clearing and settlement of shares to a Blockchain-based platform – over six years after initiation and at a cost of over $165 million.

Blockchain projects typically rely on existing legacy systems rather than replacing them. This is especially the case with distributed ledgers that allow a select group of firms/services such as banks or public houses to share information about an immutable record. This means that improvements can be timely and expensive to build.

Other factors can also hinder the growth of blockchain in wealth. In fact:

· Lack of awareness of the technology and how it works. Not understanding its capabilities has a direct impact on investment and exploration of ideas.

· The wealth management sector has centralized control over manual processes, reliance on third parties and reliance on legacy systems. Blockchain places trust and authority in a decentralized network instead of people, teams and firms working together. This loss of control and overview will be a major concern for many.

· Many potential uses for blockchain require smart transactions and contracts to be indisputably linked to known identities. This raises important questions about privacy, and the security and availability of stored data.

· Introducing Blockchain requires industry expertise, time and the right resource to help realize the benefits of adoption. With shrinking budgets, short delivery expectations and the risk of not getting it done, companies are more reluctant to include them in their mandate.

Blockchain can bring an endless array of benefits to the wealth management sector.

But it is not yet clear whether the industry is ready for these changes or whether blockchain is considered the right solution. Blockchain will take businesses into a new era of technology, a place that puts the customer first, a place that can take automation to the next level. For many, this will be uncharted territory, especially those still heavily reliant on legacy technology stacks from long periods of underinvestment.