Technology
Blockchain Technology To "Revolutionise" Onboarding; Regulatory Uncertainty Stymying Adoption - EY

EY recently published a report examining the potential of blockchain technology within the wealth and asset management industries, and the findings are eye-opening.
Big Four firm EY has said
“significant unknowns” about the regulation of blockchain
technology is one of the main hurdles hindering its adoption by
wealth and asset managers.
Exploration of blockchain and its potential uses by financial
services firms is still in its infancy, and many wealth and asset
management practitioners do not fully understand the intricacies
or benefits of the emerging technology, EY says in its new report
Blockchain innovation in wealth and asset
management.
The professional services giant says that wealth and asset
managers' lack of knowledge about the regulatory and legal issues
surrounding blockchain technology, such as the custodial
requirements if assets are held on a blockchain network, is
hindering mainstream adoption.
Other obstacles, according to EY, include data privacy and the
high cost of replacing legacy infrastructures.
Despite these challenges, EY says it believes that blockchain
technology can help meet business needs of wealth and asset
management firms' middle-and back-office internal
processes.
Notably, EY claims that the nascent technology “presents the
possibility of revolutionising” client onboarding for wealth
managers.
“In today's world, potential clients must provide proof of
identification, residency, marital status, sources of wealth,
occupation, business interests and political ties,” EY said.
“Going through this process can take days or weeks to collect and
verify the data.”
And this is where blockchain could step in, says EY.
Distributed ledger technology, or blockchain technology, is a
virtual distributed ledger of transactions shared peer-to-peer
that can record ownership across a public network of computers
rendered tamper-proof by advanced cryptography. It is already
known as the platform underpinning the controversial digital
currency bitcoin. The technology is seen as having uses that go
far beyond financial transactions to areas including transfer of
legal agreements, for example.
The technology is causing a stir within the financial services
sector as its supporters believe it could reduce hidden expenses
in the financial system by ousting inefficiencies across areas
such as payments, syndicated loans and equity clearing.
Benefits Of Blockchain
EY claims that blockchain could streamline the onboarding process
by enabling clients' profiles to be stored on a distributed
ledger, and every time a change is made, the system would
inherently process an audit trail.
As a result, anti-money laundering processes and
know-your-customer checks would be simplified, EY says.
These data-storing blockchains could also be integrated into
automated clearing house and automated customer account transfer
systems, EY suggests.
Another area of wealth and asset management that EY sees
potential for blockchain to have an impact is model management
and trade order generation.
“The proliferation of open architecture investment offerings and
the availability of third-party investment models in separately
managed accounts have presented a number of operational
challenges for wealth managers,” EY said.
Blockchain technology would enable portfolio managers to
instantly communicate changes to all clients who are “subscribed”
to a particular model, while facilitating real-time oversight of
individual account performances, risk tolerance adjustments and
cash flows, EY says.
What's Hindering Adoption?
Still, some are sceptical of blockchain's ability to handle large volumes of transactions.
“To date, blockchain has seen limited depolyment in situations requiring large volumes of data, and the linear nature of the technology calls into question its ability to handle such a volume,” EY said.
“This comes as no surprise when current institutions are able to handle billions of transactions with a high degree of reliability and security. Bitcoin blockchains, for example, can only achieve seven transactions per second compared to Visa's VisaNet, which currently achieves 50,000+ transactions per second,” EY added.
To kick-start widespread adoption of blockchain within the wealth and asset management industries, EY says the next logical step is to focus on developing solutions – firstly on a small scale internally, with an end goal of building large, client-facing equivalents.
And this innovation does not have to occur organically, or in-house.
“There are currently dozens of blockchain technology providers, and more are launching on a regular basis,” EY said.
“Once the concepts have been detailed during the innovation phase, the next step involves aligning the solution to your technology strategy and competencies,” EY advised.
The firm goes on to explain how even some of the largest players in the wealth and asset management space are collaborating to create blockchain solutions.
“The largest consortiums in the space today [such as R3 and The Enterprise Ethereum Alliance] include many firms that would normally build solutions in-house on their own,” EY said.