Building an effective ecosystem around blockchain technology will take time, but Luxembourg is the best place to start, says Maxime Aerts of Fundsquare.

Maxime Aerts, Chief Operating Officer, Fundsquare

Maxime Aerts

Chief Operating Officer, Fundsquare

Realising blockchain’s potential for the cross-border asset management industry will require wide-ranging cooperation. Luxembourg’s formula for success is its unrivalled ecosystem of expertise and public-private cooperation. Thus, a distributed ledger technology project based in the Grand Duchy is well placed to unlock the full range of benefits.

Digital transformation in the asset management industry could lead to enormous efficiency gains. This will be a long-term project, with the first step being the creation of systems that attract and win the trust of fund businesses, regulators and service providers.

Once this is accomplished, there will likely be broader willingness to invest time and resources into perfecting these processes.

Leveraging the Luxembourg ecosystem

Luxembourg’s unique ecosystem of experienced professionals are the reason it has become the world’s number one cross-border fund domicile. As well as having first-class specialist service providers, consultants, IT companies and lawyers, the Luxembourg fund industry is supported by a proactive public sector.

The work of the government, civil service and the regulators is central to the country’s success.

This collaborative approach is at the heart of the Luxembourgbased FundsDLT project being led by fund industry services firm Fundsquare, KPMG Luxembourg and InTech.

This effort has the support of multiple local players from a variety of business areas. They are helping to define a roadmap, observe progress, make suggestions and assist with testing.

Buy-in and progress

At Fundsquare, we have learned from the experience of other blockchain projects of the need for an agile approach and a clear development plan. Too many efforts to explore this technology have become bogged down as relatively minor differences of view, and have blocked progress. This is why FundsDLT is not a consortium, but a focused working group with broad industry support.

A team of experts has been using this support network over the past 18 months to get to grips with unlocking the potential of distributed ledger technology (DLT). DLT is the blockchain-based technology that powers crypto-currencies. A project roadmap and early prototypes are now in place, with the working group balancing speed with the need to maintain a unified effort. Luxembourg is the ideal place to form a minimum viable innovation ecosystem from which an efficient, widely-used solution can emerge.

The most complicated task is ensuring the support of players across the ecosystem, bringing users together to agree on standards

Maxime Aerts

Chief Operating Officer, Fundsquare

Potential savings

Blockchain promises to unlock many cost savings while opening new opportunities. Each fund business conducting its own—often duplicate—know-your-client and anti-money laundering checks is the key inefficiency of the pre-trade phase. FundsDLT will enable digital identities to be integrated, with background checks performed more quickly, more cheaply and with greater accuracy. When it comes to streamlining trading, asset ‘tokenisation’ on a distributed ledger will automate processes. Cash, securities and other instruments can be mimicked on the blockchain, with incontrovertible proof of ownership.

The post-trade environment is particularly ripe for reform. Whether it is ownership listing and transactions or keeping track of cash and liquidity, costs are inflated by counterparty risk, a lack of standardisation and too much manual processing. The same goes for maintaining reference databases. This is the type of information that can be recorded on FundsDLT, a single source of accurate, efficiently processed data that can facilitate clearing and settlement. The use of smart contracts would automate existing processes while reducing associated risks in these areas, as well as with resource-intensive asset servicing tasks.

The ecosystem at work 

In all these areas, it is not so much the technology that is the challenge. The most complicated task is ensuring the support of players across the ecosystem, bringing users together to agree on standards, as well as receiving buy-in from national and international regulators.

Luxembourg insists on strong regulatory and governance standards. Within that constraint, however, public actors work to help companies do business whenever possible. It is this approach that saw the country adopt, and become an expert in, regulations such as UCITS and the Alternative Investment Fund Managers Directive. Another example is how the Luxembourg regulator was one of the first to recognise the use of virtual currencies. Thus, the work of FundsDLT is being encouraged by the whole community. There is also the technical expertise to support this work, as the Luxembourg workforce boasts a high concentration of blockchain specialists.

Most business revolutions take time. About a decade elapsed before the Model T Ford became a true mass-market product. It took a similar period before social media had a profound effect on our societies. Blockchain has the potential to bring consistent benefits to the fund administration industry. This will be a long-term revolution if the right governance approach is chosen and followed from the beginning. Luxembourg is set to make an important contribution, because nowhere has a better support network.

Asset Servicing Times, issue 166

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