Blockchain is encouraging “coopetition” between Asset Managers


A lot of operating hurdles facing asset managers in the distribution of their funds could be removed. The initiative of Iznes, co-founded by six asset management companies, has already been favourably received by 25 contributing international players. In the financial industry, and more specifically the asset management universe, blockchain is no doubt a technological disruption capable of leading to such considerations.

A few decades ago, American airline companies (subsequently followed by their European peers), all competitors, made the most of the computerisation phenomenon to take a joint initiative and create a global distribution system (Sabre travel network), doing away with their technical intermediaries: travellers no longer had to obtain their plane tickets from a travel agency. The objective for these airlines was to take back control of the relationship with their customers and do without this purely technical service undertaken by distributors, the latter subsequently refocusing on higher value-added services such as providing advice and organising travel. Technological disruptions provide a sector’s players with an opportunity to review their business model and often look into coopetition (cooperation between players who are competitors). In the financial industry, and more specifically the asset management universe, blockchain is no doubt a technological disruption capable of leading to such considerations.

Traditionally, post-market activities are not a sector that has benefitted from substantial investments within major financial groups, and the asset management post-market segment is no exception to this. As a consequence, players suffer from operational difficulties, particularly regarding distribution, and especially cross-border distribution. Capital and goods move freely and easily within the European Union, but this is much less the case for UCITS despite Europe being an immense savings reservoir (Europeans have substantially less debt than Americans and a much higher savings rate). Why is the purchasing act so complicated when it is a paperless product standardised by common rules (at least for the UCITS market)? The single fund market, wanted by the European Commission, encouraged by successive UCITS directives, is making a few asset managers very successful, but it is incomplete: currently, of the 20,000 existing UCITS, only just over a third are registered in at least 3 countries and the figure is just 3% for alternative funds (AIFs)1. Fund consumption is therefore still mostly local.

A complicated subscription mechanism

The difficulties are fiscal, regulatory and technical in nature – some countries still have protectionist barriers in place. The subscription mechanism is thus complicated for many investors and differs from country to country. To subscribe to a French fund, a German or Italian investor must open an account with a Euroclear affiliate. Similarly, for an investor, having to send each individual asset management company a KYC form wastes a lot of time. Likewise, for asset managers, having to regularly send each specialised data provider an updated fund database and then reconciliating items to ensure the quality of the data transmitted to end investors is a very cumbersome task requiring resources that they would prefer to allocate to other things.

Improving your knowledge of your clients is another challenge. To return to the airline company example, when passengers were issued with paper tickets, the airlines didn’t know passengers’ identities and were thus unable to put customer loyalty programmes in place. Regarding mutual funds, unit holders are difficult to identify because orders are often aggregated by intermediaries before they are transmitted to asset management companies. Trying to identify subscribers by marking orders does not provide a comprehensive view. But not knowing the identity of some bearers of a fund’s liabilities makes matching asset /liability liquidity difficult. It is therefore sometimes still difficult to comply with the regulators’ injunctions in this respect, as they require drawing up repurchasing risk scenarios, given the profile of the subscribers.

Co-constructing a new infrastructure

Therefore, enabling asset managers and investors to access this information via blockchain was a crucial breakthrough for asset management companies. The possibility of working together to co-construct a robust new infrastructure liable to make their fund distribution processes smoother persuaded six of them to join forces to develop the Iznes project, which now has 25 international asset management companies onboard. French lawmakers have helped by rapidly adapting the law to this new context thanks to the decree of 24 December 2018 authorising the registration of non-listed securities on a blockchain: henceforth you do not need to open a bank account to acquire, hold or divest units of funds, as registration in a DEEP (Dispositif Electronique d’Enregistrement Partagé, or shared electronic registration system) is proof of ownership.

In the longer term, the issue of a central bank digital currency as a means of payment will arise. Today, given the counterparty risk on the issuer of tokens, Iznes uses the traditional banking system. But central bank digital currency projects are opening up new prospects. The security that it will offer will no doubt be an incentive to use it.

(1) European Commission press release (February 2019).