Blockchain in fund management: Transparency and security in wealth management

• Author:
• Author name

  Quantumrun Foresight
• January 19, 2024

Insight highlights

Blockchain technology is revolutionizing fund management, offering increased security and efficiency. By facilitating asset tokenization, it allows global trading of high-value assets and might reduce intermediary roles. Companies like Magna are leading in automating token management, indicating a shift towards more streamlined operations. However, challenges such as regulatory compliance remain. The adoption of blockchain in fund management could lead to industry collaboration, diverse financial products, and enhanced environmental, social, and governance (ESG) accountability.

Blockchain in fund management context

Fund management is the professional management of investment funds, such as mutual funds, hedge funds, and pension plans. Fund managers are responsible for overseeing the investment of the assets, making decisions about which securities to buy or sell, and ensuring that the fund is properly diversified. One key benefit of using blockchain in fund management is increased security. Traditional fund management systems are vulnerable to fraud and errors, but the decentralized nature of blockchain technology makes it virtually impossible for unauthorized parties to alter or tamper with records. This feature is especially important for firms managing large sums of money, as any security breach could have serious financial consequences.

Several companies are starting to offer blockchain solutions for fund management. For example, Singapore-based venture capital firm Blockchain Founders Fund (BFF) has invested in Magna, a token management platform that raised $15 million USD in a seed round at a valuation of $70 million USD. Magna is building software that streamlines and automates the process of distributing and managing tokens for protocols, decentralized autonomous organizations (DAOs), and crypto funds. Chief executive officer Bruno Faviero said the company was created to make it easier to start and scale crypto companies while bringing much-needed efficiency to the Web3 space.

Disruptive impact

One area of opportunity in using blockchain in fund management is asset tokenization. This process involves representing high-value items such as real estate, intellectual property, or art as digital tokens on a blockchain. This method allows for more secure and efficient investment in these assets, as the blockchain enables investors from anywhere in the world to easily and quickly trade them. 

However, the increased liquidity and reduced resell risk provided by tokenization may create new barriers for asset managers, as the technology allows for direct and low-cost trading and settlement between parties, potentially eliminating the need for intermediaries. Some firms are seeking to adapt and offer new services to remain competitive and attract new investors, including those who may be entering the market for the first time due to the expanded pool of potential capital enabled by tokenization.

Additionally, there are other challenges to implementing blockchain in fund management, such as the need for regulatory compliance. As with any new technology, there are concerns about how blockchain will be regulated and how it will fit into existing legal frameworks. Yet, as the technology becomes more widely adopted, regulatory bodies will likely develop guidelines and frameworks for its use in the financial industry. Nonetheless, for financial firms who want to explore incorporating the technology in their fund management, one of the easiest ways is to partner with a blockchain technology provider. This technique can help firms navigate the complexities of implementing this technology and ensure that their systems comply with relevant regulations.

Implications of blockchain in fund management 

Wider implications of blockchain in fund management  may include: 

• More financial service firms joining a consortium or industry group focused on blockchain in fund management. These groups can provide valuable resources and support for firms looking to explore the use of blockchain in their operations.
• Fund management firms participating in pilot projects or proof-of-concept trials to test the use of blockchain in their operations before making more costly investments.
• Fund managers offering more diversified financial products, such as tokenized assets and crypto funds.
• Financial service firms using blockchain data management to efficiently track investors’ capital, lowering paperwork and saving on labor costs.
• Sustainable fund managers employing blockchain to provide accountability and transparency, allowing them to reach their environmental, social, and governance (ESG) objectives.

Questions to comment on

• Would blockchain technology's increased transparency and security make you more likely to invest in funds that use it?
• If you have invested in any funds that use blockchain technology or tokenized assets, how has your experience been?