From changing the face of industries around the world to becoming a sector in asset management, blockchain technology has hardly missed touching any area. Traditional asset management, whether real estate, commodities like gold, or financial portfolios, is almost always plagued with inefficiencies, high costs, and a lack of transparency. With blockchain, a decentralized and transparent ledger system becomes efficient, secure, and accessible for more types of investors for the management of assets.
This blog considers the ways in which blockchain is rapidly changing how traditional asset management has been done, from its benefits and use cases to the opportunities afforded to institutional and individual investors alike.
The Basics of Blockchain Technology
Before going into how it will influence asset management, it is important to understand how blockchain technology works. In a nutshell, blockchain is a digital ledger, running on a decentralized network, recording data in such a manner that modification, destruction, or falsification of information in its chain is impossible. Moreover, the data recorded on the blockchain can neither be changed nor removed; this makes the entire system practically immune to fraud and manipulation.
Another key feature of blockchain involves smart contracts. Smart contracts are self-executing contracts. Complying with the agreement is eminently reduced to lines of code. These smart contracts automate transactions, wherein predetermined events that lead to an execution of actions occur right away. There is no need for middlemen in such cases, like banks, brokers, and custodians.
The Problem of Traditional Asset Management
This generally means that, in traditional asset management, there are a number of middlemen involved, including brokers, custodians, clearinghouses, and legal entities. All these add to the complexity and cost of managing assets. Additionally, investors often face complex and opaque processes, settlement times dragging on for days or even weeks.
Buying company shares, for example, or investing in real estate involves a host of legal and administrative procedures. All these processes cost money and time and are also prone to human error. Besides, asset managers are often restricted by their geographical confines, thus limiting access to diversified global markets.
How Blockchain is Revolutionizing Asset Management
Most of the challenges highlighted above are addressed by blockchain technology through the introduction of efficiency, transparency, and accessibility into asset management. Here are some ways in which it is revolutionizing the industry:
One of the most innovative subjects in blockchain and asset management is the tokenization of actual assets. Tokenization implies creating and issuing digital tokens that give evidence of ownership rights in a physical or financial asset that may be sold on the blockchain. Some examples that one could mention include real estate, commodities like gold, art, or even shares in a company.
For example, the investor could purchase tokenized shares in ownership of real estate to represent his or her fractional ownership, making it more affordable. This breaks down the barriers to entry and allows more investors to diversify their portfolios across asset classes.
Transparency is considered one of the hallmarks of blockchain. In general, traditional asset management involves a lack of clarity on the part of investors with regard to the component details of their investments and depends principally on third-party reports and statements. Blockchain makes this different through its public, immutable ledger, where all dealings are recorded and verifiable.
For instance, tokenized real estate can record everything from ownership history to income derived through rent or appreciation in value on the blockchain.
Most of the manual processes, conventionally laden with intermediaries, get automated through smart contract functionality on the blockchain. Self-executing contracts ensure that the transactions get efficiently and flawlessly executed without human intervention. For example, in asset management, smart contracts may be designed to execute asset dividend payments, interest distribution, or rental income against predefined conditions or criteria.
It minimizes the role played by intermediaries, which can be banks and brokers, thus greatly reducing transaction costs and quickening the settlement process.
Traditional asset management is associated with high transaction fees because of the many middlemen, including clearinghouses, brokers, and custodians, that participate in transactions. The costs accumulate in such transactions, especially when cross-border transactions are involved. Blockchain eliminates most of these middlemen, thus cutting down on costs.
Moreover, blockchain technology speeds up transaction settlement velocity. In the traditional financial world, it takes anything from a few days to weeks for settlements. In particular, cross-border transactions become near-instant on blockchains, even further increasing liquidity and freeing up capital sooner for reinvestment.
It democratizes investment ways around geographical and regulatory boundaries. That means it opens investment opportunities globally since investors can hold tokenized versions of assets existing on a decentralized blockchain. For example, an investor in Europe can comfortably buy tokenized shares of a real estate project in Dubai or invest in gold-backed tokens issued in Singapore.
This democratization of asset management means that institutional and retail investors are in a much better position to diversify their portfolios globally without necessarily having to go through various layers of middlemen.
Because it is Blockchain, data and transactions are highly secure in a decentralized fashion. In the case of traditional asset management, major frauds and security breaches are faced due to the centralized nature of the system. The tamper-proof and immutable ledger feature of Blockchain has made it difficult to conduct fraud on it. This further eliminates a single point of failure that might compromise the entire network in case that one node is breached.
Real-World Use Cases of Blockchain in Asset Management
Blockchain has already begun disrupting traditional asset management in a variety of ways, including the following. Tokenized Real Estate: Companies are taking advantage of blockchain to issue tokens representative of fractional ownership of real estate properties, making access easier for small investors. These tokens can be traded across blockchain platforms, hence allowing for greater liquidity.
Commodity Trading
Tokenization of precious metals, such as gold, enables investors to buy digital tokens that represent physical gold kept in a safe vault. This diminishes the process and price of trading physical commodities.
DeFi
DeFi platforms make use of blockchain as a conduit for substituting traditional financial services that range from lending and borrowing to trading of tokenized assets. This allows for greater flexibility and eliminates intermediaries.
Challenges to Overcome:
The good thing about blockchain technology is that it brings so many benefits to the table. There are certain challenges that have to be met on the road to mass adoption in asset management:
Regulatory Uncertainty
With this relatively new area of blockchain and tokenized assets, regulation is still very much playing catch-up. Compliance with securities laws, taxation, and property rights differ among jurisdictions; this may also cause legal uncertainty for any user.
Scalability
One of the major issues to do with blockchain networks, and especially public blockchains like Ethereum, is scalability. The more users and transactions grow, the congestion in the network could make transaction speeds slow and maybe even more expensive.
Education and Awareness
A majority of the investors and asset managers are still unaware of blockchain technology and its potential applications. This can be a contributing factor to slower adoption.
Conclusion
Blockchain technology is revolutionizing asset management as we know it, making it more efficient, transparent, and a lot more secure. The innovation of tokenization of real-world assets such as real estate and gold reduces transaction costs and increases liquidity, with enormous opportunities for investors and asset managers alike.
Web3 Wealth Management advises our clients through AEFinance on how to understand the intricacies of asset tokenization and blockchain-based investments. Our long-experienced team at Wealth3 will take you through diversifying your portfolio with tokenized assets, finding new opportunities in digital finance.
Curious about how blockchain is going to disrupt your strategy for asset management? Contact AEFinance today and find out how we can guide you through the future in tokenization and blockchain technologies.
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