Blockchain and asset management: towards a new golden age

The blockchain is a technology that allows you to make, schematically said, notarial work. All the transactions are recorded on the chain, in a forgery-proof way and forever. The use of the blockchain makes it possible to reduce the number of people involved, to speed up the processing of transactions, to transfer and store documents and thus to reduce costs.

This technology will become essential for the asset management industry, which is highly intermediated. For example, in order to process a fund unit subscription transaction, many players come into play: the investor, the bank where his securities account is opened, the distributor/marketer, the centralising agent who receives the subscription order, the custodian who carries out settlement/delivery and keeps the register, the management company, the fund's custodian. And because of the large number of intermediaries, the AM has no knowledge of its clients, which is no longer acceptable in the era of the "customer experience" promoted by the GAFA and which makes them very fragile in a very competitive industry.

The traceability and reliability provided by this technology also meets the needs of both AMs and regulators.

The Blockchain, on which the players are connected, often develops in a consortium, and this is where its complexity lies. It is the capacity of the participants to connect their information systems to the blockchain in order to enable its production. Once the pipes are open, it is simple and very quick to use. The connection requires the intervention of the CIOs, and the complexity does not lie in the IT development, but in the resources in man-days that the CIOs can allocate to this project and with what timetable. In the example of the subscription of fund units, in order to have an efficient blockchain, most of the fund custodians, the centralizers and main custodians must be connected, which lengthens the time required to put a blockchain into production.

In September, the Cambridge Center for Alternative Finance published its second report on the use of the Blockchain in companies.[1]. Blockchain projects are highly concentrated in the financial sector, accounting for 43% of all projects, all industries combined, far ahead of all other sectors. These projects require 2 years to go from the POC (Proof Of Concept) phase to the development phase, for the reasons explained above. And by carrying out such projects, companies aim to reduce their costs and also to generate additional turnover.

In the distribution of funds, the possibility of addressing the end customer directly opens up important development opportunities. It also opens the door to GAFA's who have a huge customer base, whose behaviours they know and for whom customer experience is part of their DNA. But what are they going to distribute: AM products they have partnered with or their own products through an AM they own?

Blockchain technology allows the "tokenization" of any asset. Tokenizing an asset means giving a digital representation of it, a token (or token in French) in order to record, transmit or store it on a blockchain. French legislation allows the recognition of the transfer of ownership of an asset on the blockchain. Thus, for the asset management industry, the opportunity opens up to manage a new class of assets, the underlying of which could be a financial instrument, in which case the token will be called a securitytoken, a physical asset such as a building or a work of art, a right of use... The list of underlyings is as infinite as human creativity.

We are entering the era of digital asset management.

The issuance of tokens is a new form of capital raising. In April 2019, Société Générale SFH issued €100m of secured bonds in the form of security tokens directly created on the Ethereum blockchain, fully subscribed by the bank. These tokens, called OFH Tokens (Obligations de Financement de l'Habitat Token) were rated Aaa/AAA by Moody's and Fitch.

The secondary market exists and is developing rapidly. Token trading platforms do trading and can also provide custody. The main platforms are Kraken (US), Binance (HK), Bitgo (All)... For the moment the most traded tokens are Bitcoin and Ether, but already hundreds of tokens are listed on these platforms, albeit with very little volume.

There are also funds invested in tokens for a professional clientele. At the end of 2017, the French management company Tobam launched its Bitcoin fund, whose net asset value is in € and can be consulted on classic databases such as Bloomberg. In Switzerland, Protos is a hedge fund managing a portfolio of tokens including related derivatives. The management company has tokenized the units of its fund, which are listed on the main exchange platforms.

Thus, the entire ecosystem of asset management is recreated around tokens, including of course the main and most liquid ones, Bitcoin and Ether. The whole ecosystem? Almost everything, because an important player, the fund's custodian bank, is still resisting. For the moment, in Europe, or even in the world, no traditional bank accepts the deposit of a token fund. But the situation should gradually unblock in the coming months. The Pacte law, by creating the status of Service Provider of Digital Assets (PSAN), provides a legislative framework and regulatory obligations, particularly in terms of the fight against money laundering, which will reassure banks. I am convinced that the bank that launches the first will win the market, according to the "winnertakesitall" principle and will attract many serious players.

Regulators consider that the Blockchain technology, even if it is not yet mature, is a technology that is going to become key for asset management and that, with the generation of tokens, leads to think about the adaptation of regulations when the trading, custody and distribution infrastructure is based on this technology. IOSCO, the International Organization of Securities Commissions, launched a consultation on this subject in the spring and its recommendations will be known this fall.[2]. The work being carried out by the world's leading regulators will enable the growth of security token, and the institutionalization of this new market, both among corporate and professional investors.

The asset management industry, which is facing slower growth in flows and margin pressure, will find in the implementation of Blockchain-based infrastructures the means to reduce its costs, generate additional revenues and by the opportunities offered by tokens and especially security tokens to innovate and have new sources of growth. With Blockchain technology and the growth of digital assets, the asset management industry could enter a new golden age.

Muriel FAURE, Head of Innovation Mission, AFG



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