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Fund management needs to make a digital change

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The writer is Financial Director of Schroders

Advances in a variety of technologies have led the investment industry to the edge of an important step towards the future. The evolution of artificial intelligence, Big Data and distributed accounting technology are game changers. While the world of investment has modernized in recent decades with automated processes for efficiency, a change towards digital assets could mainly wire industry.

This could gather the large number of processes throughout the industry and allow transactions that are faster, simpler, more traceable and less prone to error. It means that portfolios that are totally personalized for individual investors could be created.

The so -called “composite financing” would break down investment in digital construction blocks packaged as tokens. Today Fund administrators and investment advisors prepared a portfolio of traditional assets (mutual funds, bonds, shares, products, etc.) who believe it is the best approach to what their client needs. But there are limits of how precisely this can be adapted.

An investor can only buy a complete bonus, not just the fragments we could really want. Composite financing resolves these challenges, both for issuing and investors. Programmable intelligent contracts and tokens, which are executed by self-executive when certain conditions are met in the Blockchain networks, would mean that the portfolios can remain aligned with the individual objectives of the investors. A specific client who does not want exposure to certain sectors of the economy? Scheduled correctly, the code in the tokens might make it impossible to be added to its portfolio.

It could also automate, by design, much of the preliminary work currently carried out in the markets. Traditional assets require important equipment throughout the fund management industry to keep finance in motion: we create and destroy units in funds, we process corporate actions such as dividend payments and execute purchase and sale orders.

From the point of view of guard dogs, potential victories are huge. Digital markets can meet the design, building requirements such as rules against money laundering in tokens themselves.

But compound financing is a great deviation from where we are today. Suppliers must find ways to offer digital components that offer immediate benefits in the current market and help generate familiarity. These component solutions will need to integrate existing structures and players. As we have cash, credit cards and digital wallets that coexist, so we will have to find a way of having tokens, ETF and mutual funds that cohabit.

A clear example would be the funds of the Tokenised money market. The stablecoins, digital assets linked to the dollar or other currencies, are increasingly popular. But Stablecoins owners often renounce the yields generated by the underlying fiduciary currency. A tokenized mmf could facilitate stable transactions in the same way, while providing monetary performance.

This type of service is an example of a bridge between traditional finances and the new digital universe to which the industry is moving. Regulators already there is a growing recognition of those established: in the United Kingdom the government has I just published the provisions draft to regulate the exchanges of cryptographic assets and the broadcast of Stablecoin. There is a regulation established in the EU and the emerging rules in the United States.

And in a world in which some people do not feel safe committed to traditional capital markets, but buy cryptography, the fund management industry must do more to better attract younger generations digitally native. Composite financing will help.

If this is the future, what are the blockers? Experience in recent years suggests that there are two main reasons. First, while regulation is generally neutral technology, many detailed rules based on current products remain. The block chains and the chips, by their very nature, go beyond the form of the current market structure. The regulation must make the same jump to a truly based on principle approach.

Secondly, existing industry processes have resulted in specialized intermediaries and gain centers that are at risk in a true transformation. The enormity of this legacy and the cost to change these create resistance bags. Assets management has been transformed before and can do it again. The key is to start the trip with tangible examples that advance the industry, educate investors and encourage investments to a regulated but more agile infrastructure of capital markets.

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