A blockchain revolution could knock more than US$135 billion off the cost of running funds in the European, US and UK markets alone, according to a new Calastone paper, while slashing product-creation times by at least 25 per cent.
Based on a survey of 26 asset managers, the Calastone study estimates the fund sector could strip out some 23 per cent of operating costs by shifting to a ‘tokenised’ administration structure built on blockchain (aka distributed ledger technology, or DLT).
As well as introducing internal admin efficiencies, fund managers would also be able to dispense with costly back-office services typically outsourced to third-parties such as registry (or transfer agency) services and, in particular, fund accounting.
“For the average fund, tokenisation is expected to generate a 30% cost saving on fund accounting, a 25% saving on transfer agency costs, and 24% on compliance monitoring, client reporting and regulatory reporting,” the Calastone paper says.
“Across the board, these improvements are expected to amount to a 23% saving on current costs, or 0.13% of AUM [assets under management]. In dollar terms, the average fund will be saving more on its fund accountancy costs alone than it currently spends on any of the ten other line items.”
Fund managers are increasingly open to the allure of tokenised efficiencies, too, as already expensive admin services look set to spike higher.
Calastone estimates average fund operating costs amount to 0.74 per cent of AUM with the bulk (0.46 per cent) charged to back-office services and the remainder split about evenly between front- and middle-office activities: expenses are proportionated almost equally, too, between internal staff (47 per cent) and third-party providers (53 per cent).
The report says that margin-squeezed fund managers are keen to pare back admin expenses “in a recognition that these costs are only going to keep increasing”.
“Over the next three years, asset managers expect fund operating costs to rise by 32%.
“… No small part of the appeal of tokenisation is that the status quo is becoming more and more expensive to maintain.”
But tokenisation also holds out the promise of delivering a speedier production line process that could lower fund launch times from the average 12 weeks (or 14 weeks for cross-border issues) to at least nine weeks, the Calastone paper says.
“With tokenisation, the time to launch a fund shrinks to 9 weeks, or 8 weeks for those with more than $10bn AUM…”
Nonetheless, Calastone admits the funds management blockchain-transition faces several technical and regulatory challenges as well as industry scepticism that will delay widespread adoption.
“The prize on offer is substantial, but no-one in asset management pretends it will be quick or easy to unlock,” the report says.
Brian Godins, Calastone chief commercial officer, said in a release that the fund tokenisation process would likely be “incremental”.
“As firms explore its benefits, we expect to see a gradual integration alongside existing structures, enabling asset managers to modernise at their own pace,” he said.
A few managers including Franklin Templeton and Fidelity have built proof-of-concept tokenised funds while a number of experiments – including a Singapore stock exchange-hosted pilot program – are road-testing the technology.
Calastone introduced a blockchain-based system for its fund networking services several years ago while the UK-headquartered firm is also supporting the tokenisation movement via its Digital Investments arm.