There has been significant speculation around what technology can bring to the wealth and advice landscape, and one of the most disruptive developments is definitely blockchain.
But it is not to be confused with cryptocurrency.
As the word suggests, crypto is a form of currency that can be used to buy goods and services.
Blockchain, on the other hand, is the technology that underpins the existence of cryptocurrencies, but has features that go above and beyond electronic money.
It has the ability to transform the way documents, assets and data are collected, stored or shared, as well as provide an indestructible backlog to track ownership and information.
But how would it actually be incorporated within the wealth industry?
Revolution v disruption
“It can be hard to separate the hype from the reality whenever the word blockchain comes up,” David Cooney, partner at law firm Charles Russell Speechlys, told International Adviser.
“While blockchain technology has the potential to revolutionise certain processes and their associated systems, it is not going to change absolutely everything.”
But it can transform the way the industry thinks of, and works with, assets today.
Blockchain has the ability to ‘fractionalise’ ownership of assets such as property, jewellery and fine art, Tim Coates, head of blockchain at fintech provider Synechron, told IA.
“Being able to tokenise assets opens up new alternative investment opportunities for asset managers and their clients. These large assets were previously not divisible at scale.
“Digital tokens’ ability to be infinitely fractionalised creates accessibility and, in turn, liquidity. This is a major development in the wealth management industry.”
Ahead of the curve
How would the implementation of blockchain work?
IA reached out to Vanguard, as it rolled out a data transmission process that very much resembles blockchain, earlier this year in the US.
A spokesperson for the firm told IA: “Over the past few years we’ve been carefully studying and analysing the benefits of blockchain technology in the financial services space.
“In February 2019, we launched a partnership with Center for Research in Security Prices (CRSP) and product provider Symbiont to see if we could automate the index data transmission process (the sending of data from the benchmark provider to the asset manager to enable tracking and benchmarking).
“Prior to this project, there was no traditional database available for securely sharing market data across multiple data subscribers. With the smart contract code running on the distributed ledger technology system, we are now able to automate and customise this process.
“In turn, this will increase transparency, further improve benchmark tracking, and potentially decrease the risk of disruptions associated with previously manual processes.
“Following a successful pilot phase, all Vanguard equity funds that track CRSP benchmarks now receive and upload CRSP data via the blockchain platform.”
The era of wealth transfer
Another area that could benefit from blockchain technology is wealth transfers.
“As we are expecting to see a mass transfer of wealth from baby boomers to generation-x, there is a need for wealth managers to have the infrastructure to transmit digital assets quickly and efficiently across generations,” Synechron’s Coates said.
And whether that is in the form of money, assets or property, Charles Russell Speechlys’ Cooney said transfers could happen within seconds.
“In a world of lightning-fast internet connections and a demand for things to move faster, two days [for a transfer] is too slow.
“Blockchain, however, offers the opportunity for money to move at the speed of the internet – wherever the recipient is located. This is likely to develop further over time, but it is already possible now.”
Above and beyond
Cooney added: “But, using blockchain technologies for the transfer of cash is only the beginning.
“As the ‘tokenisation’ of assets develops as a concept, other asset transfers can happen at the same speed. When we talk about ‘tokenising’ an asset, we mean using a digital token as evidence of ownership of an asset in the real world.
“If you transfer the token to someone else, you transfer ownership of the asset. Ownership of the token (and therefore of the asset that it represents) is documented on the relevant blockchain.
“So, for example, if you were able to ‘tokenise’ your home, you could transfer it to the buyer as simply as transferring the digital token to the buyer.
“The same applies to shares, bonds, cars, and any other asset that you can think of. Of course, before this concept can really catch on, legal and regulatory systems around the world will have a lot of catching up to do.”
Legal challenges
But, before firms jump at the chance of using blockchain, is current legislation ready and suitable for such a drastic change?
Many believe that regulation could make or break the implementation of blockchain in the wealth industry.
“Legal systems will have to recognise that the owner of a token representing a given house should have all the rights of an owner of that house,” Cooney said.
“So, whilst parties can approximate this arrangement already using carefully drafted contracts, in its current form it has its limitations.”
James Kaufmann, partner at law firm Howard Kennedy, told IA that creating the right regulation around blockchain is going to be challenging, since its reach cannot be stopped by a single jurisdiction or country.
“Blockchain is geographically agnostic, so national laws are meaningless when thinking about it.
“For all the opportunities and positives, there are a range of risks and concerns. Most of these come from the innovative and inherently disruptive nature of blockchain.”
Can regulation handle it?
“Blockchain has thus far been largely unregulated. This is changing, and whilst some feel that regulation is needed to bring order to chaos, others feel that regulation stifles innovation and change,” Kaufmann added.
“Add to that that those seeking to regulate the sector barely understand it, and we are faced with a potentially cross-generational struggle.
“Additionally, even if we accept blockchain does need to be brought into the regulatory perimeter, how does the current legal and regulatory system deal with it?
“Blockchain presents issues which current rules simply cannot handle.”
