The Existing Process
The wave of global Blockchain adoption is creating a new and evolving paradigm for fund managers and investors alike. In this shifting paradigm, it is important to consider transforming long-standing operating models that have dominated the investment markets.
In the market as it exists today, each stakeholder maintains its own centralized databases of information. When a transaction is executed, each stakeholder manually pulls information from its internal database, verifies authenticity, reconconciles incongruencies, and shares this information with the other transaction participants.
By way of example, if an investor tries to invest in a real estate private equity fund, under the current structure that investor would need to first initiate the transaction and send a subscription request. Assuming the investor meets the criteria the issuer or fund manager would manually conduct compliance checks such as KYC, AML, and Accreditation. The real estate private equity fund company would then compute the Net Asset Value (NAV) using Excel or some third party platform. Once the NAV is calculated and the compliance checks are approved, fund shares are created and payment instructions are sent to the investor. Finally, the investor would initiate the payment transaction externally with his or her bank and, upon the confirmation by the issuer, the fund shares would be transferred to the investor.
This process is manual, cumbersome, and inefficient. It also becomes increasingly cyclical as each participant works from a silo rather than a single point of collaboration while various intermediaries complicate the exchange and create transparency issues. The consequences include extremely long transaction & settlement periods, substantial human error due to manual processing and disjointed communication, high costs on all sides, and frequent frustration.
How could Blockchain Improve the Process For Fund Managers?
Blockchain technology holds the potential to automate many of the manual processes involved in a transaction such as compliance, suitability verifications, investor onboarding, and delivery versus payment of fund units.
With the readily available data from the shared Blockchain ledger, NAV alongside other key metrics can be calculated near instantaneously without the any manual input saving companies many man hours.,
Below are just a few ways digital technology such as Blockchain can make the current infrastructure of fund managers more robust:
Smart contracts are short blocks of code that help in automating certain tasks. For fund managers, these tasks can range from automatically triggering the sale or liquidation of a fund, based on predetermined rules set by the client, to fulfilling the execution of the contract between their team and an investor. These smart contracts can alleviate the 24/7 reliance on attorneys and admin personnel by codifying the contract and making execution formulaic and instantaneous.
The ability to immutably store and access data is Blockchain’s claim to fame and ensures data integrity and security. By distributing records across multiple nodes, the risk of a central database breach is effectively eliminated. Further, by eliminating reliance on paperwork and manual mechanisms for complex ownership structure monitoring and modification, fund managers can leverage the immutable record to manage ownership in real-time.
Because each change made to the ledger is reported simultaneously, the Blockchain offers exceptional speed. It provides real-time asset tracking, enabling fund managers to drastically reduce the time required to assemble complex statements or performance reports.
Blockchain systems are made up of nodes, which are simply other computers on the network being operated by different institutions party to the transaction or at least the system. Access to this sort of shared network enables the near instantaneous exchange of data between institutions. In practice, rather than communicating with each other directly, all of the parties continually update their own records while the Blockchain automatically updates the records on each and every other node in the system to match. This distributed structure helps to further expedite B2B transactions within the asset and fund management industry.
Seamless Client Onboarding
Because the asset management industry is so highly regulated, client onboarding is often very time-consuming. The process of verifying identification, asset ownership, financial sourcing, occupation, political affiliations, business interests, citizenship, etc. can take days or weeks.
While Blockchain in and of itself does not inherently speed up this process, it provides a structure which would complement and optimize the process. Fast and permissioned access to the required information via nodes belonging to the gatekeepers of said information becomes as commonplace as credit checks. Though this system only becomes possible when the industry accepts it as the new standard, once accepted the distributed network can facilitate the instantaneous sharing of information to expedite the onboarding process.
Instantaneous Clearing & Settlement
A single delay in the existing infrastructure can prolong the clearance and settlement of a trade by two or three days. One key advantage of Blockchain’s immutable ledger functionality is that trade execution, clearing, and settlement are one in the same action. As completion of a transaction on the Blockchain requires approval from all parties, counterparty risk is eliminated and capital availability is improved.
Eventually, as the technology evolves, we should expect Blockchain systems to replace Automated Clearinghouse (ACH) and Automated Customer Account Transfer (ACAT) systems.
Easy Regulatory Compliance
Speed, transparency, and traceability are the key elements to satisfying most regulations and the inherent structure of a Blockchain system optimizes these factors.
Compliance is ensured when each and every node, or party within the system, verifies the authenticity and correctness of a transaction. Further, each data block becomes an immutable piece of the audit trail, providing not only a transaction’s financial details but also an unalterable date and time stamp alongside a digital signature.
Direct Listings On A Peer-To-Peer Exchange
One of the core value propositions of the Blockchain is the disintermediation within financial services. Creating a digital security can allow fund managers to list their offering directly for other parties to acquire without having an intermediary involved. You can transact directly with your potential clients within a trustless environment resulting in thousands of dollars saved in fees that would traditionally be spent on centralized listing services.
How Are We Helping?
MetaVest’s platform enables fund managers to scale their client base without the overhead. The seamless management of the entire fund lifecycle from issuance to redemption allows fund managers to efficiently create funds and automate many of the administrative work.
Send us an email for a demo at firstname.lastname@example.org or contact us here.