In a world first, fund shares were sold over a blockchain-based fund distribution system. Olivier Portenseigne, managing director and chief commercial officer, Fundsquare, asks: What is the potential of this Luxembourg-based initiative?
For the first time, fund shares and cash have changed hands on the recently developed FundsDLT, a blockchain-powered fund distribution system. FundsDLT is being developed by Fundsquare (the user-owned, user-run, Luxembourg-based investment fund order routing and information services specialist), InTech (an ICT solutions firm) and the consultants KPMG Luxembourg.
This transaction is just a first step, but it points the way towards how fund administration could be streamlined, automated and enriched. This is a step towards the digital transformation of fund distribution, a change which promises major cost and operational benefits.
On July 5, shares in Natixis funds were exchanged for cash on this blockchain-powered private distribution system. The initial client order was made and transmitted to FundsDLT using a mobile app. Instantaneously, this information was available to all participants in the chain of distribution.
The asset manager was informed, while at the same moment the transfer agent Caceis was able to approve or decline the purchase applications, then triggering the clearing and settlement process. An online payments solution subsequently handled the cash and payment processes.
DLT stands for ‘distributed ledger technology’, an online peer-to-peer information-sharing system. It is the blockchain-based technology which powers cryptocurrencies. The likes of Bitcoin function because users can see, and thus trust, all transactions taking place. In the same way, fund distribution data can be shared publicly or in privacy.
This technology also enables so-called ‘smart contracts’, which can add to functionality and efficiency gains. These are programs that sit on the blockchain and react to movements on the digital ledger. When certain conditions are met, specified operations are enacted automatically, without the need for human intervention. The FundsDLT team has developed three of these smart contracts to automate and streamline various functions along the fund distribution supply chain.
The system could feature a host of other sophisticated, value-adding services. As a data repository, it would enable analytics. Standardised data and interfaces would also provide opportunities to fintech firms to create new, client-friendly tools and applications. Thus there is clear potential for easing the burden of regulatory reporting, as well as streamlining know-your-client and due diligence checks.
A range of major asset management and fund distribution players are giving their input during the ongoing test phase. A market ready-product is expected to be delivered during 2018.
Luxembourg has won the trust of asset managers to become the leading fund distribution hub. FundsDLT is one example of how service providers in the Grand Duchy are working on solutions to better serve global clients by cutting costs and boosting functionality.
More than this, it has the potential to revolutionise the way asset managers distribute their products, by appealing to ever-more demanding investors.
Funds Global Asia, September 2017