There may be disagreement over when blockchain technologies will be widely adopted by capital markets and the rest of the financial services industry – and even over which applications offer the most alluring use cases – but almost no-one disputes the value of the prize on offer. Since a 2015 Santander report put the potential infrastructure savings to global banks from blockchain at $20bn a year, other estimates have come in even higher. Enormous sums are at stake as firms work out how an electronic, networked and independent system of transaction verification and record-keeping might disintermediate many of today’s market participants.
Why, then, are asset managers not more engaged in the effort to drive blockchain adoption forward? Not only should they be keen to secure their share of the value on offer, but also, asset managers need to be battling to ensure their interests are reflected in negotiations and discussions over how the technology might be introduced.
Research published recently by Roubini ThoughtLab, the consultancy founded by economist Nouriel Roubini, makes interesting reading. Roubini was christened “Dr Doom” by the media for his gloomy pronouncements in the aftermath of the financial crisis and his firm’s warnings for those asset managers missing the blockchain boat are pretty stark. “Technology is a tsunami that will radically change the face of financial services,” Professor Roubini told the Financial Times. “The losers will be those companies that are not nimble enough to adopt the new technology — and a lot of them may disappear.”
In which case, many asset companies are under threat. Roubini ThoughtLab’s survey of 500 asset managers around the world found fewer than half had implemented the technology so far. That chimes with complaints from the consultants and technology specialists at the sharp end of developing structures and standards for the wholesale adoption of blockchain technologies; they say asset managers aren’t doing their share of the work, preferring to leave it to the large global investment banks to make the running.
There are a number of potential explanations for this. The most honest may be that asset managers simply do not feel under the same pressure as investment banks to strip cost out of their business – the latter have seen regulatory reform strip their margins to the bone, and have no retail customer base to pass costs on to, whereas asset managers enjoy a little more fat. Another issue may be a perception that most blockchain applications will sit in areas such as settlement, which asset managers have outsourced to third parties. It may even be that asset managers consider the banks’ efforts an attempt to stitch up the operating environment in their own interests.
Whatever the reasons, however, asset managers may be making an expensive mistake by not participating more fully in blockchain development and adoption. Even leaving aside the Roubini argument that blockchain has the potential to transform the landscape so dramatically that recalcitrants could be destroyed, there are compelling arguments for engagement. Not the least of these is the concept of regret spend – asset managers, like other financial services firms, constantly spend large sums on IT renewal, but any project that does not now countenance the possibility of blockchain solutions emerging may deliver solutions that very quickly turn out to be irrelevant.
How long do asset managers have? Well, the jury is out on that one. The World Economic Forum predicts that within 10 years or so, the value of assets held on some sort of blockchain-enabled distributed ledger will be the equivalent of 10 per cent of global GDP. With the technical barriers to blockchain adoption now being addressed at pace, the tipping point may come within the next five years. And while adoption will begin gradually – potentially in a niche asset class or trading environment – its acceleration is likely to be exponential.
For asset managers yet to consider how blockchain technologies might impact on their businesses, time is therefore running out. Some may assess the marketplace and decide that engagement is not yet the right strategy for them – that at least would be a considered view that could be reassessed periodically. But those who simply decide to ignore blockchain altogether will be making a dangerous mistake.
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