How blockchain, digital assets are changing wealth management

We’re talking to a US-based investment firm that focuses on areas heavily affected by regulation – blockchain and digital assets fall into that category.

The world of distributed ledger technology, also known as blockchain, continues to attract wealth managers’ attention due to its ability to handle data more efficiently and securely. Not necessarily the most “glamorous” side of modern finance, it is nonetheless one of the most important. In the United States, for example, the market size is expected to grow from $1.6 billion in 2021 to $2.2 billion by 2026, at a compound annual growth rate of 7.1 percent. By the end of 2021, there were 1,128 blockchain companies in Switzerland and the neighboring principality of Liechtenstein.

This news service recently spoke with Michael Cherepnin, a partner at EJF Ventures, a US-based organization that invests in highly regulated sectors. The firm, which had $3.9 billion under management at the end of 2022, was founded in Washington DC in 2005.

Asset Briefing: Blockchain technology has a number of uses that go far beyond its association with cryptocurrencies. In your view, what are the areas it is best suited for in the wealth and banking area, and why?
Cherepnin: At its core, blockchain technology can provide the ability for anyone to transfer value anywhere in the world, similar to the way the Internet allows the transfer of information. Therefore, we see that one of the most natural and immediate applications of blockchain in the real world lies in financial services, capital markets and banking. In a nutshell, blockchain can eloquently solve several long-standing problems plaguing the industry by making financial transactions faster, cheaper and more secure. These functions are enabled by all participants in each transaction who manage, share and synchronize data across a decentralized network that can only be changed by consensus.

In our opinion, one of the most interesting use cases of blockchain in the wealth management space is tokenization, i.e. the process of creating a digital representation (i.e. token) of real-world assets – such as loans, real estate or art – on a database. Once widely adopted, we believe tokenization has the potential to democratize certain investments by reducing investment sizes, diversifying investment opportunities, and allowing investors to gain exposure to previously inaccessible investments.

In the banking space, blockchain can improve the efficiency and reduce the costs of traditional trading and other capital market transactions. For example, securities, foreign exchange and loan transactions today take up to three days to clear and settle in most financial markets. With the use of blockchain, transactions can be settled during the day, leading to lower execution costs and less counterparty risk, resulting in efficiency gains for banks.

Another notable use case for blockchain is payments, where this technology can not only solve speed and cost issues, but also provide a better way to prevent fraud and money laundering. Blockchain-enabled solutions vary in nature, but two notable examples are stablecoins (ie digital assets designed to maintain a stable value relative to fiat currency and issued by a private company) and central bank digital currencies (issued by governments).

What kind of wealth management challenges do you think blockchain technology is most likely to help solve?
With the generational shift, Gen Y and Millennials are expected to hold 50 percent of wealth globally by 2030. Importantly, this population is technologically savvy and expects digital simplicity and convenience in managing their investments. Therefore, technology in a broad sense is important for the sector. In terms of blockchain specifically, it can help wealth managers onboard and KYC clients faster, move funds with immediate access, and provide access to previously inaccessible asset classes.

Wealth management is a client-centric sector and client onboarding can often be a challenging task, with KYC and AML procedures requiring a lot of time and effort. Through blockchain, the entire process can be streamlined with smart contract functionality, allowing asset managers to focus on delivering best-in-class services to clients.

A faster and cheaper payment settlement option can reduce counterparty risk and risk management costs, as well as allow 24/7 system availability. With the increasing competitive pressure from new fintech entrants, these benefits of blockchain technology could prove to be important differentiators for wealth managers.

Finally, asset tokenization can provide many new opportunities for alternative investments that were previously unavailable to some wealth management clients.