Blockchain - The next wave of digitisation in asset management

02 December 2016
By Manjit Singh, Asset Management and Insurance Practice Leader, PwC Malaysia and Lum Kar Hoe, Manager, PwC Malaysia

In our earlier blogpost, we shared about how robo-advisors are transforming the asset management industry. In this blogpost we will share how blockchain can potentially lead the next wave of digitisation in asset management.

Blockchain refers to a distributed ledger technology which derived its concept from BitCoin, a cryptocurrency that has transformed the electronic payment landscape. Harmonisation of data across all players is a key benefit of Blockchain usage, as there is no central authority involved in data ownership.

Change will not happen overnight. Consider these findings from PwC Malaysia's recent FinTech survey in collaboration with the Asian Institute of Chartered Bankers (AICB). 41% of Malaysian banking respondents say they are at best slightly familiar with Blockchain. It is also concerning that 59% of respondents say that they are unsure of or unlikely to respond to Blockchain. Are these reservations to Blockchain indicative of a lack of trust for this new technology? For one, Blockchain is still in the proof-of-concept stage. Our advice to industry players is to step up their efforts in automating their processes internally as one of the ways to democratise information flow internally. This will help them to be ready to share and validate such information externally in an automated environment when Blockchain comes into full force.

Three areas within the industry that stand to benefit from real-time verified data are settlements, transfer agency and fund valuations (see visuals below).

By removing intermediaries and providing a trusted and shared view of permissioned data, blockchain could:

Reduce costs (e.g. fewer reconciliation errors)
Speed up settlement (e.g. faster validation)
Increase resilience (e.g. no single point of failure)
Improve transparency (e.g. easier to monitor)

In respect of transfer agency:

The increased transparency afforded by blockchain provides the opportunity to disintermediate and create direct linkage between fund managers and distribution platforms
The prevalence of intermediaries (fund platforms and brokers) operating at an omnibus level changes the role of transfer agents.

Blockchain could bring benefits to the valuations process as it:

Enhances the accuracy and timeliness of record keeping
A time-stamped, source of pricing data
Opportunity to share common view of data with service providers

Source: PwC UK: Blockchain in asset management

In our earlier blogpost, we touched on efficiency in transactions and reduction in costs as necessary conditions for robo-advisors to thrive. With Blockchain promising to do just that, we see it as a complement to robo-advisory solutions that will reshape the industry further.

Disruptive but an idea worth considering

At this juncture, Blockchain is in the proof-of-concept stage. We will begin to see the infrastructure emerging between 2017-2020. Changing how transactions are settled is possibly the most significant benefit of Blockchain.

The industry is currently using SWIFT heavily to execute most of its settlement transactions. The challenge of using distributed ledgers would perhaps involve doing away with SWIFT or enhancing existing SWIFT infrastructure. It would involve huge industry coordination to agree on Blockchain standards and protocols as well as to reengineer business processes across industry players.

Santander in its Fintech 2.0 report predicts that banks could save as much as $15 – 20 billion annually by eliminating central authorities and bypassing slow, expensive payment networks, which augurs well for Blockchain adoption.

RegTech – the answer to reduced compliance costs

A report by JP Morgan and Oliver Wyman¹ highlights that Blockchain can also be configured such that the ledger can be partitioned and access granted to regulators to allow them to self-serve their reporting needs. This fosters transparency and asset managers will no longer have to incur expensive costs in enhancing their systems to produce new reports to meet regulatory requirements.

The push for greater reduction in costs has also spurred a plethora of solutions like RegTech to meet increasing regulatory requirements. RegTech allows financial institutions to improve their internal governance controls and reduce their regulatory burdens. RegTech solutions can be implemented more easily by riding on harmonised data enabled by Blockchain.

Compliance has never been cheap. The implementation of the Foreign Account Tax Compliance Act (FATCA) alone, cost financial institutions globally more than $200 billion. With RegTech and Blockchain, it would be possible to kill two birds with one stone – achieve increased regulatory compliance without the linear increase in cost.

Transformation of audit

As transaction data is validated real-time with independent parties, this will also transform the audit of asset managers and unit trust funds. PwC has developed several data analytics tools to identify trends and understand patterns in transactions. With data analytics, anomalies can be detected, for further investigation. Auditing could move into a real-time process instead of waiting for the year end, much like how transactions are being validated in real-time. It will be interesting to see how audited financial statements of Unit Trust Funds could possibly be produced in advance of the 2 months’ after year-end timeframe stipulated by the Securities Commission Guidelines on Unit Trust Funds.

The way forward for Blockchain

Blockchain technology is expected to be developed in three broad phases, according to a Morgan Stanley report, “Global Insight: Blockchain in Banking: Disruptive Threat or Tool?”:

2016-2018: Banks and corporations will test use cases of blockchain. These proof-of-concept tests will be aimed at assessing if Blockchain can scale and effectively reduce costs.

2017-2020: Shared infrastructures begin to emerge, with proven assets being adopted well beyond the initial proof-of-concept stage.

2021-2025: More assets will move onto Blockchain as efficiencies prove out.

While Blockchain implementation will be mainly driven by international consortiums, we urge players to first do away with manual operations and then adopt a technology-focused strategy. This puts you in a better position to realise the full potential of Blockchain, be it back-office savings, increased transparency or increased efficiency in regulatory compliance processes.

Also consider setting up innovations centers and incubators internally to brainstorm on the technology, particularly among the younger tech-savvy employees.

Don’t let the lack of a proper Blockchain strategy be a stumbling block to embracing this technology and gaining a share of the FinTech pie.

(1) Joint report by JP Morgan and Oliver Wyman , “Unlocking economic advantage with blockchain: A guide for asset managers”, 2016