What does blockchain technology mean for wealth management? This article - the first in a series - delves into some of the detail.

Blockchain is a word 99 per cent of you will have heard in recent months, but is it something you fully understand? 

Due to its common association with the controversial crypto-currency Bitcoin, many of you may have images of the Internet's underbelly flooding your brains; drugs, guns, counterfeit money, hitmen - all of which are, in fact, available to buy on the so-called 'dark web', thanks to blockchain technology.

With this being said, blockchain has valuable uses inside the complex world of financial services. However, problems usually begin to arise when people try to wrap their heads around what the technology actually is, as lines often become blurred by jargon and terminology that is alien to some.

This point was illustrated at a recent conference organised by this news service in New York when an audience member asked panelists: “What the hell is blockchain?” It turned out that this individual was in a senior position at a financial institution, so chances are if he was unfamiliar with blockchain, then so are many others lower down in the financial food chain.

Blockchain is best described as a public digital ledger. Unlike a book of dealings that might be hidden away, it records publicly-visible transactions across a network of computers rendered tamper-proof by advanced cryptography. Think of the blocks as packets containing money, goods or property and the chain as the indelible and transparent record that the block has been passed on to someone else. What is perhaps ironic is that so many associate blockchain with anonymity, but in reality, any transaction carried out using the technology is recorded and distributed on a public ledger for anyone to see.

In recent months, there has been a flurry of financial institutions - particularly banking behemoths, such as ABN AMRO and OCBC - investing in blockchain as they want to work out the most efficient way to use the technology. Consortiums comprised of key players have been established and financial watchdogs have even climbed onboard the blockchain bandwagon to help iron out the regulatory creases. And at this stage of development, it is pure guesswork how many billions or trillions of dollars - to use one metric - might be transacted via blockchain in, say, five or ten years' time.

Although banks' intentions of how they plan to use blockchain is relatively clear, a fog begins to descend when we examine the ways in which the technology could impact the wealth management industry. In order to shed some light on the potential applications of blockchain, this news service spoke to Kendra Thompson, who leads Accenture's North American wealth management team.

Universal Investor Record

Interestingly, Thompson likened the potential use of blockchain to that of a medical record – no matter how many illnesses you come down with, how many different doctors you see, and what drugs you are prescribed, all of this vital information is stored inside a single record that can be digitally transferred whenever you visit a different hospital or practice. 

“Creating a single source of truth about who you are financially, who you are affiliated with, who your intermediaries are, what your preferences are, and having the ability to unlock that and share it - with control - is so compelling for the wealth management industry,” said Thompson, adding: “Imagine you meet someone you want to do business with - you could simply unlock parts of your profile that you want them to see and they would know everything they need to know about you without all the paperwork.”

This concept of what she calls a “universal investor record” would be particularly useful in countries where there are universal banking systems - such as Switzerland – she says, illustrating how blockchain could also be used to share information internally and between firms.

“Say you're working within a large universal bank which has multiple different platforms and business lines – you could use blockchain to safely share information about a client between those different arms. It would be like a more sophisticated internal data transfer system,” said Thompson, although she admits this isn't the sexiest solution the technology has to offer. 

What is perhaps more attractive from investors' perspectives is the idea of aggregation and being able to access a single source of reliable information. 

“These days, investors want aggregation, they want a single place to look,” she said. “As an industry, we have spent lots of money building on aggregation but everyone has, in fact, built their own aggregators. If you're an investor, and you have two or three relationships, you're aggregating two or three times so it is not really an efficient process. What is currently in place is mostly self-serving so institutions can generate their own exposure, but the industry needs to start putting investors' interests first,” Thompson continued.

Blockchain technology will work best in jurisdictions that already have a culture of financial institutions sharing information, she said, citing Australia as a prime example, before highlighting the US' potential downfalls. “I think the US will be one of the last to go because of the complexity of the market and the different types of players there. It doesn't have a culture of data sharing,” she said. 

Using blockchain as a single source of truth when it comes to vetting a client would undoubtedly cause controversy. Although it could save a serious amount of time, money and effort by eliminating the need for repeated know-your-customer and anti-money laundering checks, who is then to blame once the proverbial mess hits the fan? According to Thompson, this is where lines become blurred and those sitting high up in the pecking order begin to feel intimidated by the technology. 

“The dialogue is that many executives find it intimidating. The wealth management industry is full of 'technophobes' - those who claim to be comfortable with technology when in reality they aren't. They either don't understand [blockchain] and are afraid to ask; don't want to understand it and don't have the appetite; or simply think they don't have time because their business is undergoing so many other changes,” she said.

At this point in time, what the wealth management industry is seeing is only the tip of the iceberg. Thompson said it will be at least five years before blockchain becomes “business as usual” and is widely adopted by the industry. 

With this being said, she warned: “Nobody should be comfortable with blockchain technology yet. We are in an area of building and experimentation and first instance. Even those of us on the front line are learning every day and the sand is constantly shifting.”

The industry is in its relative infancy but even so, Thompson urged wealth managers to put themselves at the forefront of the revolution. “It's not ready for prime time but that should not stop firms from participating. Industry leaders who understand the risk and benefits should participate in shaping the future of the technology – don't wait for the outsiders to tell us how to use blockchain to benefit our businesses.”