Wayne Hughes, head of digital assets, Securities Services, at BNP Paribas, and Carole Michel, fund distribution senior global product manager, Securities Services, at BNP Paribas, explain how asset managers are using blockchain technology to deliver the next generation of assets.
Emerging technology is playing a vital role in the evolution of the funds industry, helping to reduce inefficiencies and operating costs and paving the way for new products and processes fit for the 21st century.
Distributed ledger technology – or blockchain – is challenging traditional fund distribution by digitising processes, ultimately reducing complexity and allowing asset managers to interact directly with investors. Blockchain also allows asset managers to experiment with tokenised investment offerings as the appetite for digital assets among investors continues to grow.
“We believe there is a lot of potential for efficiency gains in the fund distribution space with blockchain, especially in the near term, given the lack of efficiency,” says Wayne Hughes.
“And we do see a growing recognition among the different players out there that digital assets and blockchain are going to be among the important components of the future fund marketplace.”
A marketplace connecting everyone
For asset managers and investors, there could be considerable opportunities made possible through more widespread adoption of blockchain. “We believe in a marketplace where all participants – investors, distributors and asset managers – are connected,” says Carole Michel. “This technology should offer a cheaper and faster ecosystem and will have a considerable ‘network effect’ as more users join the blockchain.”
However, as a new technology for many asset managers, there is still some way to go before these nascent technologies can be broadly adopted.
As such, BNP Paribas’s Securities Services business has invested considerably in blockchain technology in recent years, working in particular with Allfunds Blockchain to develop an end-to-end solution for clients.
“There are various different blockchain models in the industry, and we often hear from our clients that they do not want the cost or stress of appointing yet another new provider,” says Michel.
As such, Securities Services offers a range of blockchain solutions across Europe.
Today, in Luxembourg, for instance, Securities Services offers a transfer agency service on orders captured from Financial Intermediaries using blockchain technology, we are indeed managing orders instructed via IZNES1 and FundsDLT technology1.
Also in France, where the same ISIN share is issued on the blockchain and also in Euroclear, we play the role of aggregator with our existing DLT integration service. In fact, we reflect in our legacy system, orders managed by IZNES in order to provide a consolidated view of shares issued traditionally or on blockchain.
Blockchain has also enabled the tokenisation of assets possible. Tokenisation is becoming an important market for fund managers as the appetite for and familiarity with digital assets among investors has increased. Indeed, Securities Services’ partnership with Allfunds Blockchain has allowed the bank to deliver proof of concept on tokenisation of a UCITS fund in February 2021, improving its understanding of issues around digital assets.
“At the beginning of 2023, the idea is to support, in Luxembourg, our custody clients on the buy-side to place orders and on the sell-side to enable our asset management clients to issue shares in a tokenised form, all on Allfunds blockchain platform,” says Michel. “Our inclusive blockchain model proposes a step-by-step approach, where at first we propose to represent both funds and custody clients in the blockchain, so they don’t have to be a direct participant if there are not ready,” she adds. “Clients can capitalise on our existing model without requiring too much initial investment or having too big an impact on their day-to-day operations.”
And through its tokenisation platform Asset Foundry, which covers all elements of the process from legal and compliance to technology and business processes, BNP Paribas’s Corporate and Institutional Banking division has been working with issuers to offer scalable digital assets solutions to investors.
More issuers and asset managers are waking up to the tokenisation opportunities made possible by blockchain, says Hughes.
“Last summer, together with our investment banking colleagues, we worked with one of the largest energy companies in Europe to develop and tokenise its first digital bond to refinance a solar energy project, the first renewable energy bond tokenisation on the project financing market,” he explains.
“As well as bonds, we are focused on growing our tokenisation services and working with distributed ledger technology to tokenise funds, shares, and other securities.”
Furthermore, Securities Services has been working with other French banks and the Banque de France in the experimentation of wholesale central bank digital currencies (CBDC) and how they might be applied to blockchain.
“Through our work with digital cash, we are working to move the whole fund process, including settlements and income distribution, onto blockchain through distributed ledger technology,” explains Hughes.
“Cash ‘on-chain’ is probably one of the things that might spark the scaling up of digital assets in the future, but we do believe this is going to take some time. More years than months.”
Securities Services is also working on extending its existing full range of custody, depository and fund administration services to cover digital assets.
Complementing not replacing
While blockchain technology facilitates a new era for fund managers, many challenges must be overcome if all fund industry participants are to be won over.
“Our intention going forward is to launch provable products across the markets that we cover, but we are taking a step-by-step approach considering the lack of maturity for these types of assets,” says Hughes. “There is a considerable lack of standards; many different initiatives and blockchain solutions are overlapping one another.
“For this to scale up, you really need critical mass, and that comes from people participating in these initiatives. The regulatory framework also continues to be a challenge, but it is advancing in a broadly positive way.”
One of our overriding focuses is to offer our clients a consolidated service across traditional and digital.
Ultimately, Securities Services will continue to offer a range of best-in-class services for digital-first and traditional asset managers, says Hughes, while continuing to invest in and expand its portfolio of digital solutions.
“Digital sales of fund shares will not replace traditional models completely,” says Michel. “We don’t expect to see asset managers forcing their investors to place all orders by blockchain. That’s why we want to continue supporting both traditional and digital models.”
“One of our overriding focuses is to offer our clients a consolidated service across traditional and digital. Even though we have clients interested in having these first experiences with digital assets, most aren’t ready to engage yet. But we will be ready for them when they are”.
1 IZNES and FundsDLT are investment platforms using blockchain.
This article was first published in Funds Europe.