Block8's Chief Technology Officer25.01.2020. in Technology, Thought Leadership, Solutions, Product
Asset management is the recording and processing of digitised assets using technology. It is a very common use case and is central to industries such as Funds Management, Wealth and Superannuation.
We can define these by an investor placing money with a manager (trusted delegate) for the purpose of deploying that capital against an agreed strategy. While traditionally this has been to maximise returns, more recently investment strategies have also included an ethical dimension.
Funds management is characterised by an interaction with a range of different assets, including listed and unlisted shares, other yield-bearing securities, managed funds, property and cash (unlike securitisation or markets use cases which typically deal in a single asset).
Superannuation in Australia is worth $3 trillion, with Australians paying around $40 billion in fees annually, and in addition to Wealth Management in general, forms the majority of asset management activity in Australia.
There are fundamentally three things to agree between an Investor and their Manager:
And yet, agreement here is only possible by placing a high degree of trust with the manager, as legacy (centralised) systems fundamentally cannot provide the ability for the investor to directly view the underlying information - they can only ever provide a ‘view’ or a ‘report’ that has been developed from a remote and opaque source of truth.
The regulatory processes that are required to establish a minimum level of confidence within the industry are expensive. As a result, investors must pay for - through insurance premiums and expensive operational controls - their technical inability to view the source of truth for their underlying assets as well as the operations of intermediaries in the value chain.
This need to rely on these processes constitutes a service that up until today, has had no purely technological alternative.
Compliance obligations both to the investor and to the regulator are still achieved through burdensome manual operations, rather than by lightweight algorithmic means, and given the recent legal and regulatory activity in financial services (BEAR, Member Outcomes Assessments, Royal Commission, Productivity Commission, ATO scrutiny), these compliance costs are increasing on financial institutions, all the while attempting to improve societal reputation and member engagement.
All roads lead to a need for significant investment in advanced asset management technology.
Whilst the function of advice and discretionary investment actions form a large part of these industries, we focus purely on the transactional mechanisms between the key actors for the application of Distributed Ledger Technology (DLT); discretionary decision-making outside the boundaries of an agreed strategy is better suited to intelligence technologies. That being said, as asset management becomes increasingly digitised, the cost to the investor associated with simple decision-making over complex ones will diminish as these investment strategies become automatable. The industry effect of this technology shift will be both a reduction in cost for lower-quality advice, and an improved market competition and innovation landscape to provide investors for superior advice outcomes over time. DLT will aid in advice, but not replace it for more advanced investment strategies.
The current state of asset management for ‘Investment Managers’ is depicted below - assets under management, as seen by the Manager, are merely references to other sources of truth.
DLT offers unprecedented transparency for digital assets and new horizons of automated asset management in end-to-end financial value chains. Indeed, over the next few years, many of the functions of traditional financial services will simply be encapsulated in, and provided by, financial software.
The key to realising value in asset management technology transformation projects is to ultimately achieve a single version of truth between the investor, the manager, and the seller. If all of the actors in this digital value chain have exactly the same view of their assets, we eliminate any requirement to reconcile between them and provide absolute guarantees of data currency and veracity.
Using DLT in asset management operations also lowers costs associated with risk management and compliance given that the need to verify data provided by a counterparty completely evaporates: your company has the same database as your counterparty or intermediary. You can see what they see. There is a shared truth that relieves the requirement for business processes associated with confirmation, verification, reconciliation and audit. As illustrated below, the removal of these processes also means that the end-to-end time needed for businesses to transact with one another is greatly reduced.
As for Asset, Wealth or Fund Managers, DLT offers:
Note, while many feted blockchain solutions for this kind of application focus on the ability to automate portfolio functions based on the current state of assets, these use cases often ignore the requirement to have those assets represented on a distributed ledger in the first place - a much more challenging proposition.
Block8 works with a range of organisations to develop innovative solutions using distributed ledger technology. We are highly experienced with the time and budget constraints of the early stage tech startup, and we bring this lean pragmatism to deliver enterprise outcomes.
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About the Author:
Samuel G Brooks is Block8's Chief Technology Officer. He is an expert in developing decentralised software products and has designed numerous solutions for startups, enterprise, government and OpenTech since 2014.
Samuel regularly speaks at technology conferences, meetups and podcasts, and holds several advisory positions on technical industry boards and committees. He is a also a heavy contributor to blockchain and fintech-related public inquiry and writes about the nature and benefits of distributed ledger technology on our blog.
Samuel holds a degree in Electrical Engineering from UNSW, and has stayed close to both the code and the latest research ever since encountering Bitcoin in 2011.