JPMorgan Chase urges asset managers to adopt blockchain

JPMorgan Chase & Co, and an international management consulting firm, Oliver Wyman, recently released a guide encouraging blockchain technology adoption amongst asset managers: “The report is designed to serve as a guide to how the technology may evolve, the impact it may have on asset managers and the action they can take.”

“Unlocking Economic Advantage with Blockchain,” states that the risks of blockchain technology are being disregarded in light of the radical shift it will bring to how the financial industry thinks about assets.“In this joint report, we argue that asset managers need to get off the sidelines and take the initiative to understand and embrace blockchain.”

“The blockchain journey is likely to be long and the outcome is uncertain, but a consensus is forming that it is the real deal.”
— – Unlocking Economic Advantage with Blockchain

In the last two years many banks, including JPMorgan, Goldman Sachs, Credit Suisse and Deutsche Bank, have shifted their focus to asset management. This is in part due to the investment banking business being impacted by the Dodd–Frank Wall Street Reform and Consumer Protection Act, which resulted in stricter regulations and heavy fines.

JPMorgan is already one of the largest wealth managers in the world, with assets under management of US$2.424 trillion in 2016. Late last year, the multinational company added a further 1,240 additional staff to its asset management arm.

Oliver Wyman has also kept an eye on the asset management industry. In an earlier report, “The Path Ahead,” the company states that asset managers “must proactively prepare themselves for a paradigm shift in their operating environment.”

“In doing so, asset managers must review their entire operating model, challenging received wisdoms and questioning practices that may not be suitable for a fast-evolving environment,” Oliver Wyman stated at the time.

“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.”
— – Unlocking Economic Economic Advantage with Blockchain

JPMorgan and Oliver Wyman state that the collective tone of conversation has now shifted from, “Is this worth exploring?” to “How do we best engage?”

“Many asset managers have taken a wait-and-see approach, under the assumption that any eventual cost savings or opportunities will flow downstream. We believe this is a mistake,” states the recent report.

While the guide is not intended to be a Blockchain 101, it outlines the impacts of transitioning to a blockchain infrastructure, in what it calls an “approachable and tangible” manner. It clears up common myths and demonstrates how this technology has the potential to restructure financial markets and the overall client experience.

Blockchain can assist asset managers with a realm of complex challenges they face today: managing data; providing solutions, not just products; and providing continuing service value to clients in a changing competitive landscape.

The potential impact of blockchain on real world assets, represented by tokens or smart contracts, will enable settlement between owners at a speed of execution not yet achieved. This will create an innovation tipping point, the guide explains, which will enable new pricing models and service offerings.

Verifying assets held on ledger is another “truly unique innovation” referred to in the report. Centralized solutions have not yet been able to reduce risk in collateral management, which includes real-time calculation of the underlying asset risk. Decentralized solutions such as blockchain will be able to solve this problem, and provide more accurate pricing of asset based solutions.

“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.”
— – Unlocking Economic Economic Advantage with Blockchain

There is also a wide scope for cost efficiency. By their estimate, over half of a typical asset managers cost of operation could be impacted through the use of blockchain technology. The greatest savings will be realised in areas that require manual intervention in aggregation, amendments and the sharing of data, not to mention the additional savings made due to a decrease in mismanagement, and the need for resolution or remediation.

“Regulatory reporting could become easier and require less manual processing. These drivers are particularly applicable to operations and finance, which together make up 25% to 35% of a typical asset managers’ cost base,” the report states.

The report also points to the revenue opportunities that will grow out of the improved stat sources, greater liquidity and lower frictional costs which can all be fostered by blockchain technology. "Asset managers will be able to serve clients in new ways, for example, with real-time reporting or alternate trading strategies.”

The potential and opportunities made evident in the report constitute three key areas that asset managers can offer their expertise: Providing input to developers and regulators on major implementation choices; directing external efforts toward use cases of benefit to themselves; and identifying early deployments that are capable of creating competitive advantages.

The report states that until assets managers put their views in the forefront of developers on how they foresee the technology benefiting their industry, service providers may hesitate to commit investment dollars. This would delay “solving the most tenacious pain points or even creating new products that grow the value proposition for asset managers and end investors.”

“Some asset managers have already taken up the gauntlet. They are holding internal blockchain hackathons, building specialized technology teams and prioritizing distributed ledger R&D across their management team, from the front office to the back office.”
— – Unlocking Economic Economic Advantage with Blockchain

The guide offers a CxO playbook to assist upper management. The Chief Executive Officer (CEO), Chief Operations Officer (COO) and Chief Technology Officer (CTO) all have roles to play, and should be asking key questions to help establish their position prior to blockchain integration.

The CEO will need to outline the vision for how the organization engages with and adopts blockchain. As part of a broader FinTech agenda, the CTO will be required to lead understanding and development of blockchain capabilities. The COO’s understanding of blockchain applications and how to extract their benefits is also critical to success, as it makes up part of a coherent target operating model. For each role, the report outlines a series of actions to assist with the transition.

The anticipated deployment of blockchain which will follow will come in four waves. The first is occurring right now, and is expected to continue into 2019. It’s focused on information sharing, which will be used internally and between trusted external organizations. This will allow parties to reach a common data set when posting instructions and messages to a distributed ledger, reducing the chance of tampering, and will allow for more efficient documentation processing.

“Asset managers will be faced with a bewildering array of blockchain concepts and pilots for storing, processing and deploying their data in the coming years.”
— – Unlocking Economic Economic Advantage with Blockchain

The second wave is predicted to overlap the first, running from 2017 through 2025, and is described as developing in four stages. It is in this wave that distributed ledger technology and smart contracts will likely be used in unison, storing and sharing core transaction data. The real-time nature of data transmitted via blockchain will provide “up-to-the-minute risk and performance analytics.”

In this scenario, the report predicts a new means of self services for clients and investors, who will be able to access their own transactional data through direct ledger connectivity or via vendor-provided interfaces in real-time.

The third wave, from 2020 and 2030, will see the capital markets infrastructure influenced by blockchain adoption. As soon as assets are held on the blockchain as tokens, the clearing and settlement of trades across multiple asset classes will be able to move to a distributed ledger-based infrastructure. Processing cycles will be drastically cut and therefore unlock liquidity.

Such newly inspired processes could make way to new investment products and platforms. “For example; product wrappers that allow investment in shares of ETF-like baskets of underlying assets and deploy smart contracts to reduce administrative and trading-related overhead,” observes the report.

The fourth and final wave remains uncertain, as it is yet to be seen if the financial system will ever become exclusively blockchain operable.

“We foresee a long transitional period, where legacy infrastructure and distributed ledger-based models coexist before full-scale implementation. However, by plugging into the ecosystem early, grappling with the challenges of integrating the technology and understanding its strengths and gaps, cutting-edge asset managers can benefit.”
— – Unlocking Economic Economic Advantage with Blockchain

It is the belief of JPMorgan and Oliver Wyman that not only is distributed ledger technology credible, but as previously mentioned, will create opportunities for asset managers that are willing to stay up to date.

As it was impossible to predict the impact the internet would have on financial services, so is too the impact of blockchain technology in the years to come. “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,” the report concludes.