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. 

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.