In a joint report with management consultant Oliver Wyman, JP Morgan argues that blockchain is the real deal, despite the risks involved. JP Morgan has also listed out the reasons for asset managers to take initiative to understand and embrace blockchain.
According to JP Morgan, blockchain will bring a radical shift in the way analysts think about financial assets and the way the financial industry will operate in the future.
Blockchain Is the “Real Deal”
The research report points out that blockchain-related interest and investment have reached critical mass, and the technology has shown itself to be capable of driving major change. The report further states that enforcing convergence on common data standards and eliminating the need for a central authority to hold a “golden record,” asset managers can reduce reconciliation and facilitate seamless transfer of digital assets. Instead of presenting a “Blockchain 101,” the report asks asset managers to make the impacts of a transition to blockchain infrastructure approachable and tangible. The document also suggests asset managers to clear common myths surrounding blockchain technology and demonstrate how it can reshape financial markets and client experience.
Four waves of anticipated blockchain deployments
JP Morgan anticipates four waves of blockchain developments
1. Information sharing (2016-19). It will include the following advancements.
• Blockchain used to share and communicate data
• Used internally and between trusted external organizations.
• Distributed ledger solutions tested in parallel with current workflows as proof of concept.
• Augmentation of existing processes.
Examples in development: CDs trade processing, payment messaging
2. Data solutions (2017-25). It will include the following advancements.
• Blockchain enables an environment to store and manipulate data.
• Incorporation of distributed ledger technology as part of existing solutions, supporting new
efficiencies in operations and workflows.
• Initial pilots may run in parallel with existing processes until user confidence is high enough to
begin migrating volumes.
• Users are faced with a choice of infrastructures developed by providers.
Examples in development: Transaction management, Regulatory reporting
3. Critical infrastructure (2020-30). It will include the following advancements.
• Blockchain adopted by market participants as the main infrastructure for critical functions
• Centralized authority still required for administrative functions (e.g., granting access rights,
setting industry standards).
• Replacement of existing asset, transaction and payments infrastructure.
• Participants forced to adopt and integrate new blockchain-based infrastructure.
Examples in development: Custody and settlement, private markets.
4. Fully decentralized (uncertain). It will include the following developments.
• Blockchain replaces centrally controlled infrastructure with fully decentralized solutions
• Direct engagement in digital asset transactions for organizations and individuals
• Legal and regulatory frameworks support asset ownership and transfers via distributed ledgers
• Disintermediation of legacy infrastructure owners
Examples in development: Open, P2P blockchain-powered economy, digitally issued fiat currency.
Opportunity for asset managers
JP Morgan reiterates that blockchain will enable asset managers to tackle challenges related to the management of data and providing solutions. Ther report also opines that an asset manager can achieve material cost benefits across front-, middle- and back-office activities through a reduction in data manipulation, decommissioning of legacy infrastructure, and lower costs of investment.
Improved data sources, greater liquidity and lower frictional costs due to blockchain will result in an increase in revenue opportunities, according to the financial institution’s report. That will enable asset managers to serve clients better. For example, real-time reporting or alternative trading strategies can be offered. JP Morgan believes that end investors may be the greatest beneficiaries as the technology will increase competition among asset managers, who will pass on the savings.
JP Morgan has estimated the following cost savings in each of the departments in a financial institution.
• Overheads – 5-10%
• Risk management – 5-7%
• Finance – 5-10%
• Portfolio management – 15-20%
• IT – 15-20%
• Operations – 20-25%
• Sales & marketing – 20-30%
According to JP Morgan, the wait-and-see approach followed by asset managers, under the assumption that any eventual cost savings or opportunities will flow downstream, is a mistake. The banking and financial behemoth has suggested asset managers to engage early and develop real world solutions.
Finally, the report states that blockchain technology should not be restricted to asset managers in an organization and top management executives of an organization, such as CEO, COO and CTO, have a role to play as part of the broader FinTech agenda.