Financial institutions investigate Blockchain in leading investment fund country

Scorechain is a Luxembourg-based bitcoin and blockchain solutions startup that entered the market with the release of the mobile bitcoin wallet, Yallet, last year. The company has since pivoted towards blockchain analytics, raising US$570,000 along the way. “We want our solutions to meet Bitcoin users’ actual needs and anticipate financial regulators constraints,” the company CEO, Pierre Gérard, explains. “We address Bitcoin activities while continuing to promote Research & Development on other blockchains providing smart-contracts implementation.”

The company recently launched a new Blockchain research initiative called FUNDCHAIN. The project examines how Blockchain technology could improve efficiencies, and create new business opportunities, within the investment fund industry. Ten of the world’s largest banks and financial services firms are founding members; BIL, BNP Paribas, CACEIS, European Fund Administration, HSBC, ING Luxembourg, Pictet, RBC Investor & Treasury Services, Société Générale Bank & Trust, and PwC Luxembourg.

“We believe this technology can help transform the way asset managers distribute their funds, reduce costs and speed up the investment process. It is great to see the industry coming together to seize these opportunities.”
— – Alexandre Pirlet, BNP Paribas Securities Services

Luxembourg is one of the world’s smallest countries, with only 576,000 inhabitants and US$57.8 billion in GDP for 2015. However, it’s become the leading global center for investment funds. The country’s first fund was established in 1959. By May 2016, there were almost 3900, with net assets of approximately €3.5 trillion (US$3.9 trillion).

A recent report from Monterey Insight, an independent fund industry research company, shows that State Street is the largest Fund in the country, with total net assets of US$624 billion. The local J.P. Morgan division manages US$520 billion, while BNP Paribas looks after US$284 billion, and BNY Mellon US$278 billion.

The growing financial center was awarded the honor of Best Centre for Fund Administration at the Investment Week Fund Services Awards, held in London on October 4. The Awards celebrate cutting edge services and solutions in the fund management industry.

According to the Association of the Luxembourg Fund Industry, the official nonprofit representative body for the Luxembourg investment fund industry, the country has a unique concentration of investment fund experts specialised in all aspects of product development, administration and distribution.

Melinda Roylett, PayPal Senior Director and Head of EMEA Small and Medium Business, states that, “Many different international companies are headquartered here; that’s quite powerful.”

“The government is very proactive and interested in new technologies, such as the blockchain or alternative payments; and finally, the speed at which the financial centre moves is impressive.”
— – Melinda Roylett, PayPal Senior Director and Head of EMEA Small and Medium Business

With blockchain technology reverberating around finance markets this year, it was only a matter of time until the technology took center stage in Luxembourg. “Blockchain technology has the potential to wipe Luxembourg off the map of the fund distribution and administration market,” Deloitte stated in a report published last June.

Deloitte estimated that Luxembourg’s fund distribution processing costs were €1.2 billion in 2014. In addition, 23 percent of the fund order process is handled manually, by fax, keeping the cost of distribution high and processing time low.

By automating processes and removing the need for intermediaries to distribute funds and process transactions, the firm believes that blockchain technology can help investment funds improve speed and efficiency, while reducing  costs. Deloitte states that the technology will “particularly impact” financial service intermediaries, including transfer agents, fund registries, and fund administrators.

“The fund industry employs 14,000 people, many of them in areas that might be completely disrupted and partly or largely automated by the blockchain,” Deloitte warns. Failing to do so could see existing actors replaced by new entrants, “The country would lose is predominant position in the global fund industry.”

“Considering that the fund sector represents more than 50% of its economy, the Blockchain has the power of an earth quake that would shake to the ground the whole Luxembourg place.”
— – Deloitte

However, further growth in Luxembourg’s finance industry is widely anticipated following Britain’s decision to leave the European Union. The CEO of Create Research, Amin Rajan, told the Financial Times that the companies will shift to Dublin and Luxembourg for retail funds, and Frankfurt and Paris for institutional funds.

New York City blockchain consultant, Rik Willard, told KPMG that Luxembourg has many advantages, and much in common with New York “in terms of creating a vibrant FinTech infrastructure.”

Willards’ company, Agentic Group, was selected by TIR Consulting Group LLC to provide blockchain guidance for “the Digital Luxembourg project.” TIR Consulting Group is working with Luxembourg to conceptualize and build new infrastructure to transform its economy. The Group’s President Jeremy Rifkin said, “The Grand Duchy could become the ideal laboratory to test these innovative and clever ideas on a national scale.”

“In my mind, Luxembourg stands at the starting gate of major fundamental shifts that have the ability to create amazing financial innovations, develop a set of global standards for the industry, and unlock trillions of Euros in value — thus positioning itself for increased financial leadership in the 21st century.”
— – Rik Willard, Agentic Group Founder & Managing Director

Luxembourg also happens to have a short but impressive history of bitcoin adoption. Bitstamp recently moved their European headquarters there, after exiting from Slovenia in 2015. The five-year-old Bitcoin exchange made headlines in April, when it became the first nationally licensed exchange.

Japan’s largest bitcoin exchange, Bitflyer, has an office in Luxembourg, as does SnapSwap, a recent startup known for its Gloneta payments-through chat app, and PayCash, which has been offering Europe a way to make everyday mobile payments since 2012, and added bitcoin to their platform in 2014.