By Ian Hutchinson, Propositions EMEA, Bravura
History is littered with ‘revolutionary’ ideas being initially met with cynicism and sometimes even denial, before being refined over a long time and making a genuinely positive impact.
Take the barcode as an example. Having initially been conceived as an idea in 1951, with patent approval granted the following year, it took almost two decades for the first pack of Wrigley’s Juicy Fruit chewing gum to be passed over a scanner at a Marsh Supermarket in Ohio in 1974.
The fact it took more than two decades for the barcode to become a reality wasn’t because it was a bad idea. Rather, it was because the invention was streets ahead of its time and the inventors lacked the appropriate technology – namely a minicomputer and very bright light to scan the code – and wider industry backing.
Barcodes are now an everyday part of life and used across a variety of industries, boasting the ability to boost productivity by eight to 10 times compared to manual data entry. Imagine if something so transformative was in touching distance to fund managers and investment firms in the UK. Surely, the industry would embrace it with open arms?
Well, the financial services sector is on the cusp of a similar revolution with the continued development of digital assets and Central Bank Digital Currencies (CBDC), which as of today 130 countries representing 98 percent of global GDP are actively exploring. A figure that has mushroomed since 2020, when only 35 countries were actively exploring the technology.
Next generation investments
Faced with growing pressure on fees, the need to achieve scale and operational leverage, and increased regulatory burden, asset managers continue to see profits and margins face downward pressure. In tandem, investors’ expectations for digital services and real-time data are increasing, leaving asset managers to do more, but for less.
To ease pressure on the bottom line, asset managers are increasingly turning their focus to deliver efficient and cost-effective administration services, all backed by modern, shared technology platforms capable of servicing a broad range of asset classes. These investments will most likely include ramping up interest in tokenization technologies and digital assets.
While it is a mystery to some, Ian Hunt’s whitepaper on Digital Issuance describes this type of technology as simply a pledge between customer and issuer. This can be held in the form of a smart token that contains all the conditions and data necessary for its own execution, in one place. It can be accessed by whoever has a reason to see it – the customer, the issuer, the adviser, the regulator, the auditor, the custodian, the accountant, the distributor etc.
It’s still early days for digital assets but with its ability to enable a new asset class with fewer participants in the value chain, as well as various other benefits – including atomic settlement, cost reduction and improved efficiencies – it’s certainly an area we expect to receive more attention and investment moving forward.
The time is now
At the same time, the current value chain strips value away from the investor. In 2018, the Chairman of the FCA’s Institutional Disclosure Working Group, Professor Chris Sier, suggested that the real cost to the investor of an equity ISA may be as much as 3.5% annually. This, according to Sier, had no fewer than sixteen layers of intermediation.
Whilst fees may have reduced since this report there are still a complex web of companies serving the end investor – something the end investor (or many in our industry) most likely don’t understand.
It is well documented that multiple small percentiles can result in huge shortfalls in returns over an investor’s life. What if we could reduce the replication of records, administrative layers and reconciliation? What if we could simplify the auditing, oversight and regulation, that has grown to mammoth proportions, governing this big beast of an industry?
As Ian Hunt observed, the benefits of moving towards an ecosystem of digital issuance – i.e. tokenised conventional assets and native digital assets – are huge.
At its best, it could enable the industry to become less complex and more democratised, impacting everything from trading, pricing, and the liquidity of securities, to potentially creating more efficient clearing and settlement. Much like the humble barcode, it is a disrupter, and one that has implications for all stakeholders in the industry, not least of all asset servicers.
Enacting change in the UK
A simple digital investment model could pave the way forward for the industry. But, to do so effectively requires industry-wide collaboration. It also means that everyone involved in the current value chain needs to refrain from the natural behaviours of self-protection, and instead embrace a new way forward.
A transition of industry participants to a new core technology basis is likely to be over an extended timeline so this will be an ongoing talking point until the market catches up. A big part of how mainstream DLT, Tokenised Assets and Native Digital Assets will become relies on whether regulators like the FCA give providers a reason to adopt these technologies.
There’s been some positive movement in this regard recently. Just last month (July), the FCA announced its digital sandbox, a vital testing environment for new technologies, will be available broader range of businesses, start-ups and data providers on a permanent basis. Also, the recently launched Government-led Digital Securities Sandbox (DSS), should allow authorised firms to launch digital assets under supervision. However, it does say it expects the DSS will last up to five years, so there are no silver bullets expected on the horizon in the near term.
Moves to create native digital cash, in the form of CBDCs – such as the Bank of England’s Britcoin – are a step in the right direction and, if regulation catches up with the speed of innovation, we can expect to see more serious consideration given to both technologies, not only by disruptors but also the traditional players, too.
If the UK is to stay competitive on the international stage, we need industry bodies to come together and embrace change now – much like Marsh Supermarkets did in the US with the barcode back in 1974 – or we risk the UK losing out on domiciled next-generation investments.