The fund industry’s year of the blockchain will come if three factors for success are in place, says Olivier Portenseigne, managing director of Fundsquare.
Blockchain has the potential to radically transform the fund distribution landscape worldwide. It can, when used together with big data analytics and artificial intelligence, provide the fund industry with much-needed operational efficiency, cost savings and client-centric services.
However, this change will not happen overnight. Most fund industry players speak of a five to ten-year horizon. What is more, despite the clear benefits that distributed ledger technology can bring, it is not guaranteed that all them will be realised, particularly if three fundamental conditions are not met.
Coexistence of models
Firstly, and from a purely technical viewpoint, there is the important question of legacy IT systems run by incumbents. These are based on operating models that are up to 20 years old and can be very difficult and time-consuming to change.
There will be a, possibly long, period during which legacy systems and distributed ledger technology operate side by side or in which blockchain is partially integrated into or interfacing with the legacy IT. A simple switch is not realistic and such hybrid solutions are probably the only way forward. Modular and scalable steps to a next generation infrastructure allow for industry players to see what works but they must be prepared to start adapting now.
Managing Director & CCO (Fundsquare)
Industry-wide cooperation across the entire fund distribution chain is needed.
Collaboration is key
Fintechs can show the way, but fundamental change can only come when the larger fund companies start planning services and products leveraging for these new opportunities. Because of this, industry-wide cooperation across the entire fund distribution chain is needed. This includes asset managers, custodians, transfer agents, central counterparties and regulators. Asia is showing the way in this respect, with the various initiatives for regulatory sandboxes and its championing of fintech in general.
Fintechs and incumbents can work together in a spirit of creative competition for the development and growth of the industry as a whole. Ideally, they should be led by a strong existing player who is specialised in infrastructure.
The third factor for success is perhaps the most problematic: standardisation of data. Data needs to flow in many directions, easily and without the technical barriers that we see today. There are already several initiatives relating to standardisation but so far none has emerged as a market norm. Europe is ahead of Asia in this respect, due to its experience with Ucits and cross-border distribution, both drivers of standardisation.
In a blockchain-based distribution chain, data-sharing and information exchange will drive technical and product innovation. In order to avoid under-utilisation of data and continuing data fragmentation, it is important that the issue of standardisation is addressed.
In summary, these are the lessons that Fundsquare has drawn from its experience in developing FundsDLT, a blockchain-based infrastructure for investment fund distribution. This was the first such company to successfully complete a fund subscription and is supported, via an observer committee, by more than 20 large investment fund companies.
For the fund industry to take its long-anticipated to leap to the future, players need to work on resolving legacy IT issues, collaborate better and more and find solutions to standardisation bottlenecks.
Funds Global Asia, October 2018