The continued emergence of blockchain technology is already prompting a flurry of new use cases throughout the wealth management landscape. With the ability of digital ledgers to not only improve access to alternative investment strategies but fundamentally transform the mechanics of investing, it’s clear that investors are already able to reap the benefits of a revolutionary tool.
Blockchain’s capabilities in providing real-time settlement models, smart contracts, single point of truth (SPOT), and automated investment vehicles can all provide utility in the field of wealth management.
As the technology develops, blockchain’s transformative impact on IT infrastructures and the services provided by financial institutions will revolutionize wealth management, paving the way for a more robust, fairer, and adaptable ecosystem.
The Future of Asset Management
At an institutional level, the asset management sector is set to reap the benefits of blockchain in several ways.
One core facet of asset management is smart contracts, which take the form of immutable agreements between two or more parties that automatically execute when pre-determined parameters are met. This can help to improve efficiency in trade clearing and settlement with fewer operational costs and risks.
Tokenization is also set to emerge as a transformative presence in the asset management landscape. Tokenization refers to the representation of real-world assets stored on a blockchain, and the World Economic Forum has suggested that $16 trillion worth of assets could be tokenized by 2030.
To understand the potential of tokenization, Kim Verhaaf, managing director of group payments at Lloyds Banking Group, has likened tokens to shipping containers that can accommodate anything that fits within its boundaries. This paves the way for a series of financial products to fit into these digital containers to drive stronger liquidity for markets that haven’t traditionally been accessible such as insurance, funds, or pensions.
The flexibility of tokenization also opens the door to fractional ownership of assets that can be quickly transferred from investor to investor with greater efficiency. These innovations can all significantly grow investor participation across many investment strategies.
Peer-to-Peer (P2P) Lending
Blockchain also opens the door to a series of alternative investment strategies where individuals can make use of some innovations in transparency and security leveraged by the technology for a more diverse approach to wealth management.
P2P lending is powered by decentralized technologies, and blockchain can provide several benefits for lenders and borrowers alike by using smart contracts to bypass traditional banks.
Blockchain-backed P2P lending is especially effective in privacy preservation and borrower quality distinction. This means that lenders can gain access to an accurate risk profile of their prospective borrowers and better determine the dangers of defaulting against the prospective interest that can be accrued.
With the help of self-executing smart contracts, borrowers have the freedom to propose the best possible interest rates based on their creditworthiness and capacity for repayment while retaining their privacy and preventing the risk of herding.
P2P lending is a leading example of the alternative wealth management options investors have amid the blockchain revolution. However, the landscape is still in its infancy and while there are many platforms for investors to engage in the strategy, it’s not advisable for someone looking to save a lump sum to embrace P2P lending due to the possibility of borrower defaults.
Adaptable Crowdfunding
While P2P lending is sometimes referred to as ‘debt crowdfunding,’ it’s worth looking at the wider opportunities provided by blockchain crowdfunding strategies in wealth management.
Crowdfunding has existed in a more traditional form for some time, and the strategy allows investors to raise funds for startups and new projects. There are many different types of crowdfunding, including peer-to-peer, rewards, donations, and equity.
While donation crowdfunding refers to stakeholders raising funds with nothing expected in return, rewards and equity crowdfunding have plenty of use cases emerging from the blockchain ecosystem.
Rewards crowdfunding can be improved with the help of tokenization, and tiered rewards can result in more bespoke blockchain rewards that can be stored in digital wallets as NFTs or other digital currencies.
Donation-based crowdfunding is another strategy that can bring greater profitability for investors with the help of blockchain. Here, every investor can receive an asset and become a co-owner of their chosen startup. With the help of smart contracts, investors can record their stake in the endeavor to sell when they wish, while the business can use equity crowdfunding as an alternative to VC investment to scale their operations.
Accelerating Use Cases
Blockchain technology has been growing since 2009 but is still very much in its experimental stages. However, digital transformation initiatives among financial institutions are growing, and this is likely to see more use cases for blockchain in wealth management emerge at a faster pace.
Despite the road from ideation to implementation at scale leaving some challenges in its wake, the future of blockchain in wealth management and alternative investing appears to be bright. As the technology continues to mature, more institutional interest and blockchain solutions are assured.
With smart contracts and tokenization providing more security, efficiency, visibility, and liquidity throughout markets, early use cases are showing that adopters are already reaping the rewards of the wealth management revolution.
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