Is Asset Management the Killer App for Distributed Ledger Technology?
And should you still call it 'crypto'?
Every day, more research reports are written by and about the impact of DLT (Distributed Ledger Technology) in large financial institutions. In fact, so much is being written about the potential impact of DLT and Crypto that it is impossible to keep up.
Even a casual reader of these reports will come to a conclusion on their own, but after reading them it's hard to escape one simple conclusion. Asset Management is the killer use case and application for this game-changing technology.
Distributed Ledger Technology (DLT) is poised to transform asset management in large financial institutions, offering unprecedented levels of efficiency, transparency, and security. By leveraging the immutable and decentralized nature of DLT, asset managers can streamline operations, reduce costs, and unlock new opportunities for growth and innovation, enabling financial institutions to issue and manage their own RWA (Real World Asset) offerings.
As a founder and builder with 7 years of experience in providing Tokenization and DLT-enhanced Transfer Agency technology, I have long believed that the killer app of DLT is not ‘tokenization’ by itself, but rather the use of tokenization technology to upgrade and enhance the asset management function.
The potential of DLT is so transformative that perhaps the acronym should be unwrapped as 'Displacing Legacy Technology' instead. What is so special about DLT to support that assertion?
Enhanced Transparency and Auditability Lowers Costs
One of the most significant advantages of DLT in asset management is the creation of a shared, immutable ledger of asset data. This transparent and trustful record can provide a single source of truth for all stakeholders, eliminating discrepancies and reducing the need for time-consuming and costly reconciliations. This last point alone can create dramatic potential reductions in institutional costs, while also avoiding errors in the recording of transactions and the calculation of dividends, a cornerstone of asset management.
As an illustration of dramatic cost reductions, Franklin-Templeton recently revealed that the legacy cost of clearing 50,000 transactions is around $50,000. Through the application of DLT, that same cost drops to about a buck fifty-two ($1.52). This is an improvement of around 30,000 times. (link)
The append-only nature of DLT enables lower costs, but also ensures a permanent, auditable history of ownership and all changes since issuance and all subsequent transactions. In addition, DLT’s cost savings benefits also greatly simplify compliance with securities and by-laws as well as regulatory reporting requirements.
Streamlined Operations through Smart Contracts
Smart contracts, a key feature of DLT platforms, introduce programmability to asset management processes in a way that is simply impossible with central databases and spreadsheets. These self-executing contracts can automate various aspects of asset management, including:
• Payments and disbursements
• Trading and settlement
• Purchase and redemption of assets
• Shareholder voting
• Corporate actions
By automating certain routine processes, asset managers can potentially reduce operational costs, minimize human error and improve the investor User Experience.
WhileSmart Contract Autonomy may be premature at this stage of the adoption cycle, the potential for smart contracts and DLT that manages them is obvious once the primacy of the ledger is recognized.
Improved Liquidity and Efficiency
DLT has the potential to transform traditionally opaque markets, such as private equity and venture capital, by providing a permissioned, shared, verifiable and immutable history of transactions. This increased transparency can lead to improved liquidity in these markets, as investors gain more confidence in the underlying assets and their valuation.
In debt markets, DLT can enhance and ultimately simplify bond issuance, trading, and oversight. DLT’s transparency benefits potentially resulting in more accurate pricing, lower operational expenses, and increased liquidity within debt trading ecosystems.
Expanded Asset Classes and Tokenization
DLT extends beyond traditional financial assets to include non-financial assets like real estate, manufacturing equipment, carbon credits, art, and collectibles. Through tokenization, these high-value assets become more accessible to a broader range of investors, potentially opening up new revenue streams for asset managers.
Enhanced Risk Management and Compliance
The transparent nature of DLT can significantly improve risk assessment and management. Real-time trade surveillance becomes more feasible on a DLT platform, helping to identify and prevent market manipulation, insider trading, and other types of fraud. This enhanced oversight can lead to more accurate pricing and potentially lower risk premiums, reducing the overall cost of borrowing.
Operational Liquidity Optimization
DLT-based solutions can help financial institutions optimize their liquidity management. For example, intraday repos and real-time collateral and FX swaps enabled by DLT can provide access to liquidity with near-instantaneous settlement. This allows institutions to decrease their reliance on intraday liquidity buffers and credit lines, minimizing funding costs.
Global Liquidity Management
For global institutions, DLT can potentially reduce the need to hold liquidity in multiple entities and geographic regions. Some global banks have already implemented tokenized cash and centralized intercompany liquidity pools, allowing for instantaneous liquidity transfers around the clock.
Challenges and Considerations
While the potential benefits of DLT in asset management are significant, there are challenges to overcome. These include regulatory uncertainties, the need for standardized data and record-keeping practices, and the requirement for interoperability between different DLT platforms as well as the existing legacy solutions and technologies which create the problems that DLT platforms seek to address.
In recent decades, we have seen the incredible impact that the introduction of electronic trading and settlement had on the growth of the financial services industry. DLT appears to hold a similar promise. As the financial industry continues to evolve, embracing DLT will be crucial for asset managers looking to stay competitive while reducing risk and baked-in costs. By leveraging this technology, large financial institutions can not only improve their operational efficiency and risk management but also unlock new opportunities for innovation and growth in the asset management space.
Learn more about the applications of DLT in Asset Management via the sources below:
EY: https://www.ey.com/en_us/insights/financial-services/what-digital-assets-and-dlt-offer-treasury
JPMorgan (2): https://media-publications.bcg.com/The-Future-of-Distributed-Ledger-Technology-in-Capital-Markets.pdf
Deutsche Bank:
https://flow.db.com/more/technology/transforming-banking-with-dlt
Aptos and Invesco:
Vertalo:
https://chainenabled.substack.com/p/distributed-ledger-technology-use