How will distributed ledger technology such as blockchain affect wealth management? Is it a "solution looking for a problem," or does it help with genuine challenges and add value to the industry? We talk to the law and professional services firm Ince.

This news service examines the world of digital assets, and the distributed ledger technology – aka blockchain – that underpins those assets. How does this technology affect wealth managers’ business? We examine how these technologies affect privacy, pricing, efficiency, regulation and customer service.

Below, we talked to Edward Chapman, managing associate, corporate and commercial at Ince, the law and professional services firm. His remit includes sectors such as technology, media and telecoms, along with fintech. 

In the broadest sense, how do you see distributed ledger technology affecting wealth management today and in the next few years?
My take is that DLT is currently on the periphery of the wealth management world. There is increasing interest in some applications of DLT, most noticeably with investment possibilities associated with cryptocurrencies and non-fungible tokens (NFTs). 

While these areas are high profile and newsworthy, I anticipate that DLT’s impact on wealth management will be rather more subtle. The nature of the technology makes it suitable for improving a number of "back-end"/operational processes. In particular, I expect this will involve private/permissioned blockchains being used to achieve greater efficiencies, while retaining more traditional concepts of information security and control over access rights.  

Ultimately DLT may end up being like HTML code is for a website. Crucial for things to function, but something that for most people (coders and tech enthusiasts aside) will be hidden in the background.

What potential does DLT have for enabling data privacy protection – an obviously important area for private banks, family offices and wealth managers? Where do you see areas such as know-your-client checks being helped, if at all, by this tech? Can blockchain provide any benefits for those trying to defeat hackers?
DLT offers ‘privacy by design’ through the use of public and private keys. This is a form of cryptography where the keys are randomly generated. Think of the public key as an email address, and the private key as the account password. The public key can be shared with anyone you wish, but without the password you cannot access the relevant information. However, while passwords are routinely predicted by hackers, it is not possible for a hacker to guess the private key by looking at the public key. As a result, DLT can offer increased security over existing forms of authentication.

KYC checks are a vital part of any financial institution’s security and anti-money laundering procedures. As it stands numerous inefficiencies remain, as matters are often still time consuming and involve risks of human error. In particular, there is a lot of duplication ‘baked in’ to current processes. Each entity in the wealth management world has slightly different KYC requirements, which leads to separate firms having incomplete data held in private centralised servers. 

The use of a KYC blockchain system can offer a ‘single source of truth,’ which is immutable (non-editable) and transparent. All institutions could refer to this blockchain to verify information securely and quickly.

Could blockchain tech help to onboard clients more quickly, but paradoxically, also make it easier for clients to switch firms and hence lead to more staff turnover, as suggested by Deloitte in a report?
Yes, depending on how the DLT is deployed it could be easier for clients to switch firms. By this I mean that if public/permissionless blockchains are used then this could lower barriers to entry and reduce friction. I would say there is a move towards increased turnover generally through the use of technology more broadly e.g. open banking and current account switch services.

What impact do you think DLT will have in areas such as banks’ settlement systems? Blockchain could make settlement a real-time phenomenon, driving down costs, counterparty risks and barriers to obtaining capital. It might also hit banks’ fees, which means that they will need alternative sources of income. What’s your take on this?
In theory, DLT could introduce the benefits you reference. The clearance and settlement process could be speeded up considerably, and reduce complexity, reduce the need for reconciliations, increase transparency and increase data resilience. I agree that it might lead to banks looking for different sources of income to replace lost fees.

However, there are still several hurdles to overcome before these systems can become more widespread. The main issue is ensuring scalability and interoperability with current systems, and a regulatory/legal framework will also be needed.

As discussed in our call, a lot of people still have very sketchy ideas about what blockchain and cryptocurrencies are, and what they are good for. Is this still very much a niche and, in your view, unlikely to really go mainstream? 
The increasing exposure to cryptocurrencies on corporate balance sheets (e.g. Tesla and MicroStrategy), and increased exposure in the media indicates to me that this is a growing niche, and one which could become mainstream. 

However we are not there yet, and it may take central banks using the technology (through what are being touted as ‘Central Bank Digital Currencies’) to make that leap.

Where might cryptocurrencies most likely find a successful home – emerging markets where currencies are often worthless and unreliable? Do you see much traction in more developed economies? Will rising inflation encourage people to hold the stuff? 
While cryptocurrencies can be volatile, they pale in comparison with some currencies. In Venezuela hyperinflation has led people to use crypto, for example to send remittances and mitigate against inflation eating away at wages.

El Salvador has adopted bitcoin as legal tender and, again, remittances are at the heart of this. A significant part of the country’s GDP arises through remittances, and the costs of sending these funds are therefore highly relevant. 

In more developed economies I can see cryptocurrencies being held as a hedge against rising inflation. However, the way that many people hold crypto is more like a commodity (some would say ‘digital gold’) than a traditional ‘fiat’ currency.

There’s a patchwork of different regulations around the world. Where is the most liberal place in your view and where is the most restrictive? What do you think might happen to the regulatory landscape in the next five years? 
In general, smaller nimbler jurisdictions have taken the lead by introducing specific DLT legislation. Gibraltar is one example (we have Ince colleagues based there who specialise in the area), as is Malta. Certain states in the US are particularly DLT friendly, for example Wyoming.

On the other end of the scale, China is very restrictive (but is using DLT for its own digital yuan), and a number of northern African countries (Egypt, Morocco, Algeria and Tunisia) have banned cryptocurrency.

There will be increased regulation introduced in developed countries, including the UK, and it will be interesting to see what level of consumer protection may be brought in for cryptocurrencies. I also consider that larger countries will be closely watching regimes introduced by smaller jurisdictions. 

The Law Society recently released its second edition of a comprehensive report entitled Blockchain: Legal and Regulatory Guidance, and I consider that English and Welsh law could become a legal foundation for DLT in the coming years.

What do you make of the remark that blockchain is a solution in search of a problem? Does it provide real benefits or is it just another way of connecting people?
Blockchain has been touted as the solution to numerous problems, and that might be the issue. 

I do not see it as an answer to all ills, but do believe that it provides real benefits in certain scenarios, particularly where there is a need to build trusted relationships and provide verification of information.

Author:
Edward Chapman. In addition to his corporate and commercial work, Chapman, based in Bristol, has a specialism in emerging and disruptive technologies, and is a blockchain thought leader who has spoken internationally on the topic. This followed a secondment working with sector experts at Anderson Kill in New York. The Ince Group has offices in nine countries across Europe, Asia and the Middle East and has more than 700 people.