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Blockchain: Reshaping the Future of Investing

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Fund structures, distribution methods and the global regulation of investments, as we know them today, will change dramatically over the coming years as a result of blockchain adoption, said a panel of investment industry experts that included State Street Digital’s Luke Brereton.

July 2023

The panel, titled “How Blockchain is Transforming the Distribution Landscape,” explored the strengths and challenges of the technology in investing. The panelists told delegates, who attended this year’s IMpower FundForum in Monaco,
to expect a rapidly changing distribution landscape in the decade ahead as trust and adoption in blockchain solutions grows, and asset owners harness the technology to achieve their goals.

“It is about accessing the clients, in the right way, through the right channels, with the right products,” Brereton explained. “That may not be what we have today.”

Brereton was joined on stage by Remi Cuinat, managing director at Generali; Daniel Andemeskel, CEO and founder of UI Enlyte at Universal Investment; and Christophe Lepitre, CEO of IZNES.

The group of investment industry experts warned that market participants are struggling to understand the regulatory, risk and implementation challenges from the new technology, and urged the world’s largest financial institutions to support their clients during the forthcoming transition.

“It is important we understand how this tech is going to impact our clients and help them achieve their objectives,” added Brereton.

Below are the key points and highlights from the panel’s in-depth discussion.

Traditional distribution will be replaced
As fund providers look to improve margins and fund buyers look for simplicity, speed and value, blockchain will facilitate an examination of the current role of the intermediary. The current distribution chain adds cost, time delays and opacity to the process.

“Compared to the traditional channels of distribution, new channels have a huge captive market of the demographic that is looking to begin accumulating wealth,” said Brereton, referencing social media giants and other global platforms. “Accessing clients in the right way becomes really important. The idea that you need to do step through multiple intermediaries is just not going to scale.”

According to the panelists, blockchain will condense the distribution chain, saving costs and adding transparency to the buying process. There was agreement among them that it will soon be recognized as the best way to improve efficiency and build reliable links between the asset managers and the asset owners. Traditional channels of distribution will also likely come under review.

Blockchain trust is building
Transitioning to a blockchain-first model of operation will take time, however. This can be attributed partly to a lack of understanding and to regulatory considerations.

While disrupting the highly regulated financial services industry will not be simple, it is important that businesses have a solid regulatory risk framework if they are to issue regulated funds directly onto the blockchain. For those companies already doing so, this is helping to accelerate trust levels with their organizations.
 

Traditional funds face challenges
The concept of a traditional fund – as we know it today – could become less common in the future digital world. Increasingly, investors are looking for portfolios that are driven by themes and objectives rather than funds, said Brereton, referring to the various financial and non-financial outcomes that may result from investing. Blockchain makes this concept much easier to execute.
 

Impact investing will be the norm
As evidenced in recent years, there is growing interest in investment products that offer some kind of impact in addition to financial return. Brereton explained how a whole cohort of people beginning to invest in their future, potentially for the first time, will take that concept even further by expecting providers to match their investments to their personal beliefs and aspirations.

Blockchain will allow investors to make a return, based on their risk profile, with the added ability to strip out some aspects of underlying investments based on their own unique considerations and experiences.
 

Custodians are key to building blockchain trust
While the distribution, product and regulatory landscape may change, there will continue to be a need for global organizations that can explain emerging behaviors and new technologies. Global custodians have already moved to build the relevant fund administration services to serve clients operating in this area.

As a regulated entity, custodians will play a pivotal role in upholding trust in blockchain adoption within capital markets. And, with the regulatory agenda shifting at pace in Europe, the US and Asia, custodians are perfectly positioned for this role.

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