There has been considerable speculation about the impact of this move on the wider crypto industry, with many seeing it as an important step forward in encouraging institutions into the space. However, little attention has been paid to what it could mean for Fidelity’s core business of fund management.
Nigel Green, Founder and Chief Executive of asset manager and financial advisory deVere Group with $10 billion of assets under management, and something of an outrider in his industry given his support for the nascent crypto, is all too aware of the disruptive potential of this new technology.
“Blockchain is revolutionary technology and is likely to impact almost every sector, including financial services,” he comments. “This could be through reducing potential costs and labour savings, speeding up financial transactions, increasing security and Know Your Customer processes.”
Asset management’s crypto pioneers
deVere Group is one of the few companies in its sector to have set up a crypto exchange and companion app. Also, its Digital Asset Funds, in partnership with hedge fund Dalma Capital, provides crypto solutions for sophisticated investors.
Fidelity, too, is something of a crypto pioneer. Chief Executive Abigail Johnson has been a keen advocate of cryptoassets and encouraged the firm to start mining Bitcoin back in 2015. Instead of waiting around for its industry to be disrupted from the outside, the creation of Fidelity Digital Assets should be seen as the fund management behemoth getting out in front of any newcomers.
A research paper from Deloitte, entitled Impacts of the blockchain on fund distribution, lays bare the possibilities. It focuses on the fund industry in Luxembourg, which is the largest centre in Europe for fund domiciles, with €3.5 trillion of assets. When it comes to cross-border fund distribution it is number one.
Fund management is a massive industry. In the third quarter of 2018 the European Fund and Asset Management Association (EFAMA) says worldwide regulated open-ended funds (mutual funds and exchange trade funds) were valued at €46.4 trillion, with ETFs accounting for €4.3 trillion of that amount.
The industry in the US was worth $17.7 trillion, excluding exchanged traded products, in the fourth quarter 2018, according to fund data provider Lipper. Deloitte estimates the global fund management industry could save at least $3.4 billion annually through adopting blockchain technology.
Who will be left behind?
Green thinks those asset managers slow to adopt distributed ledger technology could pay a heavy price: “I would imagine the firms that are not actively looking into how blockchain technology can improve their back office systems will be those that are likely to flounder in the near future.”
Deloitte’s reckons 23% of the fund order process is still conducted manually, with, for example, fax communications still in widespread use. For younger readers who don’t know what a fax machine does, it’s a machine connected to a fixed telephone line that scans a paper document and transmits a copy to another fax machine connected at the other end of the line.
Currently, when an investor buys a fund it will take a day to confirm the transaction and another three days for settlement. On the face of it that’s crazy in the digital age. But the reason it is so drawn out is the number of steps involved and the various third-parties in the process.
Enter the smart contract
Typically, an order is made and received by the transfer agent who is responsible for all the anti-money laundering (AML) and know-your-customer (KYC). Then the price (net asset value) has to be calculated and the trade confirmed. Three days later the payment is settled between the banks concerned.
All of the above could be handled by a smart contract, although it is likely that a hybrid system in which there would still be a role for intermediaries would initially need to persist. In its annual report in 2017 the EFAMA noted in a section on fintech and blockchain: “Although some applications remained still largely untested, legacy systems would gradually be replaced to support new product offerings and new means of service delivery to clients.”
Put that another way, change is not going to happen overnight but it is coming.
Nimble disruptors advance. Is a Fidelity coin next?
Caspian, which has built a full-stack platform targeting the needs of institutional and sophisticated investors looking to invest in cryptoassets “across the trade life-cycle”, cautions that DLT still has to move from drawing board to real world, and that will take time.
“Whilst recent electronic connectivity to OTC [over-the-counter] desks has automated trades that used to be done manually or via skype, there is still a long way to go before the technology behind DLT will replace the dynamic role of traders as the Deloitte report suggests,” comments Robert Dykes, Chief Executive and Co-founder.
Elsewhere, Calastone is putting its fund transaction network onto a blockchain in May. It has 1,700 fund companies on its books, among them JPMorgan Asset Management, whose parent company recently announced a permissioned cryptocurrency of sorts, the JPM Coin.
Fidelity clearly wants to be the go-to platform for institutions who have an eye on crypto, but it has an ulterior motive, which is to be the leading player in bringing innovative DLT solutions to the fund management industry.
So, JPMorgan is not the only financial giant getting closer to deploying blockchain in its core activities. It may not be the permissionless sovereign money of crypto dreams but it would surely represent a giant step forward in the blockchainisation of finance.
Will Fidelity be next to announce it has a coin in the works?
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.