TechnologyFeb 20 2023

Will blockchain end investment platforms as we know them?

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Will blockchain end investment platforms as we know them?
'It’s terminal for the platform community. They don’t see it coming.' [cottonbro/Pexels]

Investment platforms are “sleepwalking into oblivion” because they have either ignored or failed to get a handle on blockchain technology.

That’s according to Ian McKenna, founder of F&TRC, who said blockchain was “the end of platforms as we know them” at his ‘Empowering Advice Through Technology’ event in Kings Cross last month.

“It’s terminal for the platform community. They don’t see it coming,” he said.

McKenna reckons the bulk of platform operators, some 95 per cent of them to be exact, overcharge today and that the real value is created through advice.

“Most of the industry is overpaying for its platform service,” he said, arguing that once asset managers start to put their fund registers on blockchain, fees will become far more transparent and prompt the question - ‘why pay for a platform?’

There was a drive five or six years ago around funds and blockchain, but it never took off.Ben Hammond, Altus

“Platform fees will be sub-1 basis point within the next seven to 10 years or sooner. There will be no margin left. The smart ones, like Fidelity, have partnered,” said McKenna.

“We can’t keep acting like turkeys. We’ve had 25 years [when platforms were first invented] to prepare for this. Frankly as an industry, we’ve sat on our hands.”

Almost a year ago, Fidelity chief executive Dame Anne Richards said her company was exploring how it could make intangible assets - such as non-fungible tokens (NFTs) - more tangible and build portfolios around them.

An NFT is a digital artwork that uses blockchain technology to prove ownership.

What does the industry think?

Asset managers moving their fund registers to blockchain will not happen overnight, according to experts, but it is possible in theory.

Investments director at Altus, Ben Hammond, told FTAdviser blockchain would work for asset management, improving processes such as trading and custody.

Firms such as Calastone and Euroclear are already doing this in the background.

“There was a drive five or six years ago around funds and blockchain, but it never took off. The technology underneath funds is still relatively archaic,” Hammond explained.

FNZ has previously appointed a ‘head of blockchain’, and True Potential was investigating the building blocks of a blockchain investment platform.

“We need to fix the technology underneath first,” said Hammond.

How do we migrate? We all know how difficult these big technology migration projects are and how closely the regulator looks at this.Mike Barrett, the Lang Cat

“Once they’re on a centralised system and using distributed ledger technology [the technology blockchains are created from], then you can move up to managing products.

“We’ve seen this in the insurance industry. We’ve done work with insurtech firms where contracts have been written on the blockchain.”

An Isa, Hammond said, could be managed in the same way. However, customer information and data privacy could present a stumbling block.

The UK government began work on a digital ID some years ago.

A digital ID could overcome this stumbling block, according to the Altus director.

“A lot of work still needs to be done, and it would have to be cross industry,” he explained.

“Fund managers need to be able to plug in. We need common platforms and data feeds, that’s difficult to do. This wouldn’t be possible for a long time.”

‘Unpicking core tech is messy’

Some in the industry said regardless of whether asset managers’ fund registers end up on blockchain, there will always be a need for the customer layer.

Director at the Lang Cat, Mike Barrett, said if you trace back to when investment platforms were first invented - in the late 1990s - it was about getting investors away from having investments in several fund houses which forced them to post in applications to each one and retrieve separate valuations.

“There was no way of aggregating those. Platforms grew out of people needing access to all these different houses, and houses needing to improve their distribution.

“They offered a full range of funds in one place across multiple wrappers.”

Platforms are critical because their value is not solely in their ability to be a register or a reconciliator of underlying assets and money.Alex Cowan-Sanluis, Platform One

Barrett said there is still a need for that benefit. “The core system for how assets are held and registered, yes that could evolve and transform the industry by driving down costs, but we will still need the customer layer.”

The reality of business change which comes with such a technology change also bears thinking about, according to Barrett. 

“If clients and the regulator aren’t sure about this move, it won’t happen,” he said.

“How do we migrate? We all know how difficult these big technology migration projects are and how closely the regulator looks at this.

“Unpicking core technology will get messy very quickly.”

With the consumer duty deadlines in April and July this year fast approaching, Barrett said the focus on avoiding foreseeable customer harm will be greater than ever.

“Any provider will be trying to avoid this. They don’t want to fall foul of the consumer duty.”

Moving to blockchain technology could be an inhibitor even if there are benefits, leading to a general nervousness to make the leap, he concluded.

Blockchain will make platform more useful, not less

Chief executive of Platform One, a customised platform operator, said blockchain will make platforms even more critical and useful.

Alex Cowan-Sanluis said it is other parts of the sector which could face stiffer competition, rather than platforms.

He used the example of re-registering tokenised funds between multiple private blockchain networks.

“So to take an example, Abrdn has a network, Platform One has a network - we can re-register tokenised funds via a node between each other on behalf of the fund manager, like a Vanguard or a Blackrock without the need to go through the traditional in-specie route,” he explained.

“So if anything, platforms are critical because their value is not solely in their ability to be a register or a reconciliator of underlying assets and money.

Imagine if you’re the first platform able to do instant settlement because you have the relationships with the tokenised fund managers, you’ve got a blockchain network. You’ll get ahead.Alex Cowan-Sanluis, Platform One

“It’s value is all the rest, the wrapper types, the access to multiple products, the frontend tools, the more holistic overall view of your investment pool, the user interface.”

As well as improving transfer times, Cowan-Sanluis reckons blockchain could also help improve settlement times until they are instant.

“Underlying product providers are going to face stiffer competition because the barriers to switching will almost be negligible. Switching barriers in every industry have always been the biggest hurdle to consumers,” he explained.

Cowan-Sanluis said the whole industry will, as a result of developments in blockchain, be held to a much higher standard of delivery as well as pricing.

“The stickiness of the platform industry will reduce massively. Platforms will be forced to focus on value-adds elsewhere.

“Imagine if you’re the first platform able to do instant settlement because you have the relationships with the tokenised fund managers, you’ve got a blockchain network. You’ll get ahead.”

ruby.hinchliffe@ft.com