An international consortium of asset managers is working to bring 401k plans, mutual funds and pension funds to the blockchain.
After rolling out a smart transfer agent proof of concept (PoC) in December, Fundchain, a group led by Luxembourg-based startup Scorechain, aims to have a distributed ledger-based product ready to bring to market next year.
Participating in the consortium are BNP Paribas, HSBC, ING Luxembourg, RBC Investor & Treasury Services, Société Générale, PwC Luxembourg, European Fund Administration and the University of Luxembourg, among others.
Smart transfer agent aside, the group is now exploring how blockchain tech could simplify know-your-customer (KYC) and anti-money laundering (AML) compliance to improve business processes and integrate digital assets into a new share class.
"Sometimes you have to wait two to three days for a transaction to clear. If you want to transfer shares to investors, it could take as long as two to three weeks," said Pierre Gerard, chief executive of Scorechain.
Gerard further pointed to extensive use of intermediaries in the industry - including investors, servicers, asset managers, auditors and regulators - as evidence for the potential benefits of moving services to a blockchain.
"There are pain points in data management and in the exchange of information that maybe could be solved with blockchain."
Fundchain is now examining four potential use cases it has identified, and it aims to select one in the coming months with the goal of putting forth a minimum viable product by the end of 2017.
Whether it's a true "blockchain" or a distributed ledger service, Gerard said is still unclear, though an initial version is built on the ethereum platform.
No 'big bang'
With the news, Fundchain has also published a white paper that details the group's broader vision for how blockchains can be incorporated into the fund-distribution value chain.
Notably, Gerard said that Fundchain's goal is not to unleash a "big bang" on the managed funds industry, but rather to identify incremental instances where blockchain can bring value.
"Fundchain won't solve all of asset management's problems with the blockchain, but we'll try to be our brick in the wall," he said. "We want to focus on something that is doable."
After launching an analytics platform designed to assist in managing digital assets, Gerard and Scorechain sought to make further inroads into asset management by courting Luxembourg's industry giants in 2016.
Luxembourg has established itself as the second-largest hub for investment funds in the world behind the US through its favorable tax and regulatory environment and heavy concentration of human capital in asset management.
Roughly 80% of all funds sold in Europe are issued in Luxembourg.
In the new white paper provided exclusively to CoinDesk, Fundchain identifies four ongoing trends in the industry, seeing changes in demographics, technology, environment and social values.
The document identifies areas of focus and potential disruption within the industry, such as decentralized identification; the use of single fund or multi-asset wallets to simplify account management; decentralized digital settlement; and real-time reporting and reconciliation.
The paper notes:
"In the new business model based on blockchain, the investor has access to the fund through their respective blockchain. Once furnished with a digital identity, they are able to subscribe without the need for an intermediary, simply by using the associated smart contract and blockchain."
Reimagining fund management
Another key component of blockchain's value proposition is the ability to greatly reduce settlement risk.
However, because asset management is a highly-regulated industry that spans multiple jurisdictions, governments and self-regulatory bodies, the white paper emphasizes that these agencies must be kept informed throughout the building process.
"An approach adopted in parallel to showcase the efficiency of the use of blockchain will probably be a necessary step to convince the regulator and the different players about the necessary changes, reliability and cost efficiency of the solution for the various players," it argues.
In interview, Gerard positioned the solution in context with other concerns that might make implementing blockchain in fund management more complicated than in other sectors.
"As long as assets are not really on the blockchain, it would be quite complicated to [entirely] manage a fund with the blockchain," he said. "And we are dealing with many fiat currencies - it's quite complicated."
Notwithstanding, he lauded the democratizing effect that blockchain could bring to the sector, and said:
"If we can reduce or simplify the processes so people can invest smaller amounts and in new types of assets, in this case it would be a true revolution on both sides - allowing you to invest in new types of assets and reach new investor."
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