Asset management is about to be disrupted by an Armageddon-level event...
Many will not survive, as the fundamentals of the sector change through the introduction of Blockchain technologies.
There is also a race for the first sovereign nation state to issue the first Bond (Government Treasury Note) on the Blockchain as central banks and capital cities vie as they see Blockchain as an opportunity to tip the balance in their favour, away from traditional stronghold hubs of London and New York. It is very much game on!
The introduction and deployment of Blockchain will allow new sovereign states and cities, and my money is on the Emirates (middle east), who will play their way into the game with a strong hand and create new trading exchanges (hubs) and with it a new generation of tradable instruments via the introduction of entirely new asset classes.
Whilst the libertarians that came from the cyberpunk movement will celebrate the arrival of Blockchain because of its underlying qualities to democratize capital markets, the real impact is that Blockchain will allow everyone (individual) to trade rather than this be the exclusive bastion of corporate institutions that currently (on purpose) excludes individuals.
It will be brutal…
Whilst the majority of Asset Managers continue to make money in ignorant bliss, the smart money is beavering away on stuff, on Blockchain stuff, Crypto-currency stuff, and creating a strategy to deal with Blockchain impacts as both opportunity and threat.
How could a trillion dollar fund possibly be under threat? Impossible. Our business makes so much money and biggest is best right, is safe, is the way it has always been. I can hear their thoughts... 'too big to fail', 'we know best', 'what is Blockchain', 'it will so go away'…
It is this malaise that opens the door where we will see a changing of the guard and it will be quick. It will be brutal and the winners will be unexpected.
Blockbuster was dis-intermediated in a few years, Nokia missed the smartphone window by a whisker along with RIM (Blackberry) misreading the market and just doing what they always did. SONY and Kodak and many others also ignored the signs, and those that did see the light left their roles frustrated and disillusioned to start disruptors. But this time it will be different, the demise will be fast and brutal, much worse than 2008 when Sub Prime got found out, and within 48 hours everything changed.
The biggest threat to Asset Managers is to stay relevant as Capital Markets are distorted because of Blockchain. It will democratize and open up Capital Markets in ways and create ‘super liquidity’ events people don’t yet understand. Along with IoT that will nametag each physical asset Blockchain, will be the Ledger of a programmable world. The definitive First Addition. The new Bible.
The new world of Asset Management will focus on trading value and not things and invented commercial paper and instruments designed by bankers will get squeezed as commerce trades value and where everything is not measured in cash terms.
The core tenants of a new age in Asset Management
- Visibility of all assets, ownership, and trading history, what I call Know and See All as all assets are digitized
- Risk – insight to understand positions and exposure up to the minute to reveal the nature of value created and destroyed, with the return of trust
- Syndication – with a detailed view of everything syndication becomes easier, where limitations of traditional currencies are removed
- M2M with the introduction of Smart Contracts trade volumes will increase tenfold, along with the Ledger of Things, which will see global commerce add another $11trillion (Source: McKinsey)
- The New – creating new asset classes will be easier and issuing them is immediate and trade will happen Peer-2-Peer
- Everyone has access to trade and own/see Value Exchanged through Digital Wallets directly linked to virtual Exchanges and P2P
- Micro Fees - will replace management and transaction charges and consensus rules will reward those that deliver and penalize (net off) those that do not. There will be no payment if there is no result.
- Imagine creating a Bond that everyone can invest in…for free or for £0.0000001p Where groups, communities and hubs can aggregate spend.
I have long been skeptical of so-called Robo Advice given the average size of ‘stake’ held in account remains small and people/corporations remain cautious of relying on software to make automated decisions on big amounts/decisions. Far better to be steered and for each owner of the Asset to have the final say, setting the parameters and rules where the owner can trade the value on their terms, not those of an intermediary. Delivered by Blockchain.
But then Smart Contracts as autonomous agents with Augmented Reality Inputs will deliver far better outcomes than any Robo Advisor platform, without the friction cost.
The traditional lifecycle of Asset Management is going to change as what is there today has historically been defined by the lack of computing power and integration, the need to maintain corporate opaqueness (god forbid customers find out what really goes on) and the workflow created by compliance so they can have a job and control things.
The traditional flow from Portfolio Design & Build, Order Management, IBOR, Reporting (compliance), Risk Management and Performance will fall away, replaced by one of two stages (collapsing the centre) and will be fully transparent.
It makes me laugh on the Blackrock Aladdin website when they talk about their platform 20 years in the making and having 25 million lines of code. Apparently collective intelligence…
OMG I thought dinosaurs were extinct but I guess some still walk the earth…
Do Blackrock really think 20-year-old systems and millions of lines of code is a good thing? And yet Blackrock will probably defend its legacy to its death.
Introducing Blockchain will release a huge swath of capital tied up in this laborious inefficient, protectionist process largely based on ‘legacy’ thinking and systems, with all the counterparties struggling with many versions of the truth and no single definitive answer. Requiring large middle and back offices to come up with a position, a view, and a story to protect themselves when things go wrong, when an investor loses, or when a trade backfires.
All of these costs (and time) will fall away and with it the extortionate fees and charges for systems like Aladdin and many others (Dimension, Hiportfolio and Portia) along with Custodian and counterparty fees (by those who add friction and not value), they all fall away.
Blockchain is the redefinition of the rules of engagement for Asset Management. It creates a new Asset Management ecosystem that I call Value Management as the end to end process is managed by Smart Contracts and a new Value Based User Interface to support the new world of Prosumers. A world where transparency and risk is known and managed ahead of time; where all trades on any asset is known and seen by all, and where decision making is immediate, based on a full understanding of who (at each end of the transaction). Everything changes to become Value Markets that are unrelated to Capital Markets, a redefinition based on Trust and not someone else’s version of it.
Build it and they will come…
It is considered a high-risk strategy given most businesses fail because they build products and create services nobody wants to buy. But given the cost benefits of Asset Management wrapped in Blockchain will deliver a 50% to 70% immediate reduction in cost, speed up execution time to milliseconds and where everything is transparent, removing the need to check time and again, reconcile different versions of the Truth, and hours trying to piece together the story of (and behind) each trade as Blockchain delivers the killer blow – The Golden Source.
I am very pleased many Asset Managers are ignoring Blockchain from their comfortable offices because this behaviour gives others the opportunity to change the playing field in their favour, because as we all know and they forget, being too big to fail will be seen in the classrooms of Business Schools as a bit of a joke because portly middle aged, grey haired men think they know best and it won't happen to them.
Asset Management will disappear to be replaced by Value Management, a capital as a measure will be squeezed as new assessments and tokens for value become the new norm.
From a single flea from a Black Rat, more than half the population in some of the boroughs of the city of London were wiped out in a matter of months… It only takes one…