Distributed ledger technology has the potential to change the way asset managers do business, and “sitting on the sidelines” is no longer an option, says JP Morgan.
In a joint report with consulting firm Oliver Wyman titled Unlocking Economic Advantage with Blockchain: A guide for asset managers, JP Morgan argues that blockchain will bring about a “radical shift” to the asset management sector.
“The blockchain journey is likely to be long and the outcome is uncertain, but a consensus is forming that it is the real deal. Disregarding it is a risk,” said the report.
It is up to asset managers to take the initiative to understand and embrace blockchain given the “broad consensus” emerging that it represents a real innovation to financial services and banking, it said.
“Our view of the credibility of blockchain technology is informed by candid discussions with clients, banks, exchanges, central securities depositories and existing market service providers,” said the report.
“There has been an influx of attention and initiatives from market participants, including start-ups and newly formed industry consortia focused on driving technical standards and fostering collaboration.”
Investment in blockchain start-ups has released US$300 million to date, said the report – with US$125 invested throughout 2015 and that figure “already surpassed” in the first half of 2016.
Blockchain will not be limited to the back office of the asset management industry and other behind-the-scenes processes, according to the report.
“Our view is that blockchain’s impact may eventually reshape market structure, product capabilities and the client experience, ultimately having a lasting influence on the global economic system,” it said.
The development of blockchain is anticipated to come in four ‘waves’ over the next few decades.
During the first wave, between 2016 and 2019, simple applications focused on more robust and consistent data sharing will continue to emerge.
The second wave (2017-25) will see distributed ledger technology and smart contracts used in combination to store and share core transaction data.
This could make up-to-the-minute performance analytics available to clients, rendering back and middle office data infrastructure redundant.
The third wave (2020-30) could see the adoption of blockchain technology in major pieces of capital market infrastructure.
“Once assets are held as tokens on the blockchain, the clearing and settlement of trades across multiple asset classes can move to distributed ledger-based infrastructure, as opposed to the hybrid or dual systems that we project through the first two waves,” said the report.
The ASX engaged US firm Digital Asset to create a solution for the clearing and settlement of trades in Australia in January 2016.
The report suggests a fourth wave could see a “truly decentralised infrastructure of the sort envisaged by some pioneers”.
“Just as it was impossible to predict the impact the internet would have on financial services, it is impossible to know with certainty how markets will look or operate when distributed ledgers and cryptographically secured digital assets are the norm,” said the report.
“However, recognizing the impact that fintech innovation continues to have on the industry, it is pragmatic to be well-informed and organized to unlock economic advantage in an increasingly digital world.”
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