Magazine Issues » September 2018

ASSOCIATION COLUMN: The blockchain solution

José VeigaFor some time now, there has been a lot of talk about blockchain and its disruptive influence on financial markets and business models. We at the Portuguese Funds and Investment Association (APFIPP) recently teamed up with Deloitte, Portuguese technological university IST and the surveillance of the local regulator (CMVM) to trial a proof of concept on the application of this technology to the distribution of funds.

If the blockchain proved to be technically feasible and economically viable for day-to-day operations, then we would had learned something, and we would be better prepared for technological challenges ahead.

As everyone in the investment funds business knows, the current models used in fund distribution make it a complex activity that starts with the investor submitting a subscription/redemption order and ends with the reception, by the investor, of the shares bought or the product of the shares redeemed.

In between, several communications, checks, cross-checks and other operations take place, which makes the distribution of investment funds a time-consuming and costly affair.

When the proof of concept was concluded and the platform we designed was running, we demonstrated that blockchain technology can be applied to fund distribution, allowing it to become really cheap for fund distributors and fund managers.

It would also open doors to fund distributors to broaden their offer at an insignificant cost (to the benefit of their clients), and fund managers to enlarge their net of distributors, potentially reaching a larger number of clients and thus increasing sales with limited or nearly no extra costs.

This platform would also benefit clients that could access a broader range of funds at a single distribution point (currently, if a client wants funds from several fund managers, he/she will probably need to open an account with different distributors), and also regulators, that would have immediate access to every transaction made in that platform, allowing a more cost-effective supervision of the fund distribution’s business.

We concluded beyond doubt that the fund distribution business will one day evolve to a blockchain environment, benefiting every stakeholder involved (fund managers, distributors, regulators and specially, investors). The APFIPP is committed and ready to team with market players (fund managers, depositaries, fund distributors and market regulators) and other interested parties to convert this proof of concept into a live operating blockchain platform that we call Funds Harbour.

The Portuguese investment funds market, especially locally domiciled funds, suffered in the recent financial crisis. If we consider only mutual funds (Ucits and AIF), the amounts under management are less than half of the pre-crisis figures.

Although there is a long way to go to reach pre-crisis levels, APFIPP is convinced that the implementation of this platform would play a significant role in achieving this aim, by boosting fund sales, allowing a greater share of Portuguese household’s savings to be allocated to these instruments and contributing to closing the gap with the EU average.

José Veiga Sarmento is chairman of Associação Portuguesa de Fundos de Investimento, Pensões e Patrimónios (APFIPP)

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