When it comes to blockchain, everyone immediately thinks about cryptocurrencies like Bitcoin. Cryptocurrencies are the first example of blockchain’s practical use but its potential is much wider as it can be used in other industries, including wealth management.
The wealth management industry relies on business processes and technologies that are many decades old. This makes data management much more complex and expensive. Using outdated systems can create data privacy and leakage issues that reduce security and customer confidence. Many of these older financial data systems have been hacked in recent years, costing tens of billions of dollars in damages. In turn, outdated systems significantly limit the implementation of new ideas like blockchain tech and the embracing of cryptocurrencies.
However, the blockchain can change the way data, documents and assets are collected, shared or stored. That is why it may become a game-changer for the top wealth management consultant professionals in the very near future.
KYC And Client On-Boarding On The Blockchain
Client onboarding is a complex and time-consuming process, as it involves going through and following a strict KYC procedure. Most cryptocurrency exchanges implement verification procedures. No one excludes that during the collecting required information one of the parties may make a human mistake which will lead to a delay. Delay may cause expenses for both the customer and the company. It also may force the customer to quit and go to a competitor.
Blockchain allows you to simplify the client verification process through smart contracts. Smart contracts can help automate the process and check whether the provided information meets the requirements.
Besides, storing personal information on the blockchain will significantly increase data security and confidentiality. A private blockchain is more resistant to leaks since it does not have a single point of failure and all information is encrypted. Blockchain facilitates the information exchange between market participants themselves.
Portfolio Management With Smart Contracts
Blockchain can also help streamline some of the processes associated with asset management. For example, it is possible to automate customer portfolio management by using smart contacts. If there is a rapid change in the asset price and its share in the portfolio reaches a threshold, then the smart contract can send a notification about it to the asset manager or the client himself. Smart contact provides an opportunity to rebalance assets in the portfolio automatically in order to keep portfolio diversification at the same level and find the most appropriate assets to add.
Blockchain and smart contracts are already used in wealth management to improve the process of collecting information for making investment decisions. For example, Vanguard tested a blockchain for collecting index data, which was previously collected by managers manually. Tests have shown that data collection is not only faster but also more robust and fault-tolerant, as it reduces the impact of human error.
Blockchain also allows you to speed up wealth transfers since all information about an asset is stored in digital form. Blockchain offers to move wealth at the speed of the internet — wherever the recipient is located. This is likely to develop further over time, but it is already possible.
Asset Tokenization
But optimizing existing business processes is only a drop of what blockchain is capable of. With asset tokenization, blockchain may revolutionize wealth management and drastically change the industry. When it comes to “tokenizing” an asset, it means using a digital token as proof of ownership of an asset in the real world. If you transfer a token to someone else, you transfer ownership of the asset. Ownership of the token (and therefore the asset it represents) is recorded on the corresponding blockchain.
One of the main innovations that asset tokenization can bring is the “fractionalization” of asset ownership. Imagine you own an antique vase. Such an asset is not divisible at scale. But if you tokenize it, then it is possible to become the owner of some small part of the vase and benefit from its resale in accordance with your share. Thus, tokenization makes assets that were too expensive for many people more accessible to keep their wealth in them.
At the same time, the tokenized asset can be transferred to another owner easier and faster. For instance, if you tokenize your house, you can transfer ownership of it as quickly as doing a cryptocurrency transaction.
Why Is Blockchain Still Not Widely Used In Wealth Management?
One of the main challenges for using blockchain and asset tokenization in wealth management is legislation and regulations. It should be legally established that owning a digital token is tantamount to owning the asset itself in the real world.
Regulating blockchain is difficult as it can be used no matter where the client is located. Therefore, local legislation may not be sufficient to ensure full regulation.
At the moment, blockchain regulation is in its early stages because regulators and central banks are only studying the possibilities and impact of blockchain. All participants — the regulator, the asset management company, the client — must agree to use the blockchain in wealth management.
Building Better Business Blockchain
Probably, we’ll not see a revolution in the wealth management industry for a long time since for many participants asset tokenization is an absolute game-changer and a lot of parties are not ready for it. However, experiments with blockchain in existing business processes continue and blockchain fintech has already shown that it can be an important optimization element in wealth management.
The time is now for wealth management companies to get on board and embrace the new game-changing technology of blockchain and crypto.
