Private View Blog: Blockchain, tokenisation and private markets – the $200tn opportunity

By now, you will have no doubt read countless fintech opinion pieces citing the pandemic as this great accelerant of innovation across financial markets. While there is no doubt Covid-19 has ushered in a rapid, powerful period of change and innovation, identifying further opportunities necessitates an understanding that these processes were already well underway in almost every area of financial technology. Except one.

The $200tn private market is almost four times larger, in deal and transaction terms, than public markets. Yet, it remains an area of financial markets that has been exceptionally slow to keep pace. Unlike other areas, already on their own innovation trajectories, the Covid-19 pandemic – necessitating a much-needed digitisation of the trading environment – has literally forced the hand of asset managers, noting their historic and notorious love for the paper and pen.

The problem

It’s worth exploring why this is an issue for asset management. The problem is two-fold.

The first issue is an obvious opportunity cost. Investors and asset managers are losing out in billions of dollars in transactions through needless administration and back-office processes by not availing of the emerging technological solutions, which allow the seamless end-to-end trading of private equity and other assets. Moreover, the time and human resource going into these unnecessary activities means valuable human and financial capital is not being deployed into more value-added activities.

Other areas of financial markets are enjoying the significantly enhanced security, transparency, liquidity, simplicity and profitability that integrated technologies such as blockchain offer asset managers. What possible good reason could there be for the same rigours and benefits to not be applied to private markets?

However, the wider commentary, on the efficiency savings digital backend platforms bring to fintech, misses the point when it comes to talking about lack of innovation in private markets. There are untold opportunities, through integration of the best emerging technologies such as blockchain, for the private markets to move into the 21st century – and they will reshape the private investment landscape as we know it.

Critical mass

The efficiency savings dividends are well researched and discussed. A prominent PwC study has shown that blockchain-related interest and investment have reached critical mass, and the technology has shown itself to be capable of driving major change. According to Santander, distributed ledger technology could reduce financial services infrastructure costs by between $15bn and $20bn annually by 2022, providing the possibility to decommission legacy systems and infrastructure and significantly reduce IT costs.

But the real opportunities of platforms which utilise blockchain technology remain untold.

By integrating blockchain technology, investment platforms can fully tokenise digital assets, which is a truly seismic development, with Deloitte going as far to suggest that tokenisation will allow the creation of an entirely new financial system.

For asset and wealth managers, it means more deals with less hassle and more profitable returns. But it also means unlocking liquidity and proposing new opportunities not previously available to investors.

There are also other game-changing opportunities that digitalisation and tokenisation can offer. For example, additional fee and revenue streams can be created from secondary market trading that wouldn’t have been previously available, due to lengthy and cumbersome manual transaction processes. In addition to more transaction flow, decentralised finance facilitates other innovation and ideas, including creation of entirely new products.

Digitalisation also profoundly expands client horizons by offering new access to a wider ecosystem of financial institutions and exchanges through the interoperability which technology like Corda, the open source blockchain platform, provides.

As well as increasing and expanding networks, moving to the digital marketplace empowers clients to leverage their brand, assets and deals in one place. The beauty about this sea of opportunity is that the technology is already here and it is ready to be utilised in a way which will transform the industry. But it’s time to press ahead.

Culture shift

Realising the full scale of opportunities available will necessitate the biggest culture change in the private market since the creation of the internet. It is a clash of traditional wealth and asset management with information technology – it’s about the banker and the coder coming together.

The period immediately following a global pandemic is often one of renaissance. The Italian Renaissance followed the bubonic plague. The roaring twenties followed the Spanish flu. There is now a momentary opportunity to leverage this collective agility in thinking to move into a new phase. As one of the last remaining areas of the financial markets to evolve, this period of change and reflection in the economy is the right time to press ahead.

Antoine Loth is Co-Founder and CEO of VALK, a private platform facilitating seamless end-to-end trading of tokenised assets in a digital marketplace