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How will distributed ledger technology such as blockchain affect wealth management? Is it a “solution in search of a problem” or does it help solve real challenges and add value to the industry? We’re talking to the law and professional services firm Ince.
This news service examines the world of digital assets and the distributed ledger technology – aka blockchain – that underpins these assets. How does this technology affect the business of wealth managers? We look at how these technologies affect privacy, pricing, efficiency, regulation, and customer service.
Below, we spoke to Edward Chapman, Managing Partner, Corporate and Commercial at Ince, the law and professional services firm. Its mandate includes sectors such as technology, media and telecommunications, as well as fintech.
In the broadest sense, how do you see distributed ledger technology affecting wealth management today and in the years to come?
My view is that DLT is currently on the periphery of the wealth management world. There is growing interest in certain applications of DLT, especially with the investment opportunities associated with cryptocurrencies and non-fungible tokens (NFTs).
While these areas are high profile and newsworthy, I anticipate that DLT’s impact on wealth management will be rather more subtle. The nature of the technology makes it suitable for enhancing a number of back-end/operational processes. In particular, I expect this will involve the use of private/permissioned blockchains to achieve greater efficiency, while retaining more traditional concepts of information security and access rights control. .
In the end, DLT can end up looking like HTML code for a website. Crucial for things to work, but something that for most people (coders and tech enthusiasts aside) will be lurking in the background.
What potential does DLT have to enable data privacy protection – an obviously important area for private banks, family offices and wealth managers? Where do you see areas like know-your-customer verifications helped, if at all, by this technology? Can blockchain provide benefits to those trying to defeat hackers?
DLT provides “privacy by design” through the use of public and private keys. It is a form of cryptography where keys are generated randomly. Think of the public key as an email address and the private key as the account password. The public key can be shared with anyone you want, but without the password you cannot access the relevant information. However, while passwords are regularly predicted by hackers, it is not possible for a hacker to guess the private key by looking at the public key. Therefore, DLT can provide increased security over existing forms of authentication.
KYC checks are an essential part of any financial institution’s security and anti-money laundering procedures. As things stand, many inefficiencies remain, as questions are often still time-consuming and risk human error. In particular, there are many duplicates “integrated” into current processes. Each entity in the wealth management world has slightly different KYC requirements, leading to separate companies having incomplete data held in private centralized servers.
Using a KYC blockchain system can offer a “single source of truth”, which is immutable (unchangeable) and transparent. All institutions could refer to this blockchain to verify information securely and quickly.
Could blockchain technology help onboard customers faster, but paradoxically also make it easier for customers to switch companies and therefore lead to increased turnover, as Deloitte suggests in a report?
Yes, depending on how the DLT is deployed, it might be easier for customers to switch companies. By this I mean that if public/permissionless blockchains are used, it could lower barriers to entry and reduce friction. I would say there is a move towards increased turnover generally through the wider use of technology, for example open banking and current account transfer services.