Bitcoin – and its price – may be grabbing the headlines currently, but the underlying case for blockchain technology, and it’s associated investment opportunities, should not be missed, says Dr Nils Bulling, Head of Digital Strategy & Innovation at Avaloq…
By Dr Nils Bulling (pictured), Head Digital Strategy & Innovation, Avaloq – While bitcoin – and its price – continues to drive headlines, the underlying case for blockchain technology should not be missed. It is, in fact, increasingly finding real-world applications in a range of industries and it remains one of the most exciting recent technological developments globally.
We believe that this momentum will accelerate. Think, for instance, of the extreme cost pressures many banks face. Blockchain technology, or more generally distributed ledger technology, can contribute to cost reduction due to its high potential for extensive digitalisation, allowing transactions to be carried out with much greater efficiency or product lifecycle management costs to be reduced.
Fully digital processes can also enable atomic delivery-versus-payment, which reduces counterparty risk and associated costs. In general, blockchain technology has the potential to greatly reduce back-office resource requirements and make processes more efficient.
For us as a leading provider of digital banking solutions for financial institutions, especially with regards to private banking and wealth management, the technology is particularly interesting as it enables new investment opportunities for a broad range of customers.
In addition to cryptocurrencies, the tokenisation of assets – whether traditional or alternative ones that were historically reserved for high net worth individuals only – is very exciting. Through tokenised assets, financial institutions can drive the democratisation of wealth management and make alternative asset classes accessible to a broader market. It can well be that we are at the dawn of an explosion of asset classes.
When banks or wealth managers offer their clients a seamless integration of digital assets it lowers the entry barriers significantly, whether these are cryptocurrencies or other tokenised assets.
Avaloq‘s recently launched crypto assets turn-key solution enables financial institutions to tap into this new business opportunity with little effort. The same holds for banks’ customers. Customers receive all investment options by their trusted financial institution from a single source, removing the hassle of transferring money from one bank to another and enjoying a seamless experience. Technical hurdles as well as possible security concerns are removed, for both financial institutions as well as customers.
For investors, an investment in a cryptocurrency like bitcoin is, to a certain extent, a question of faith or trust. In principle, this is similar to investments in gold, but it is much newer and therefore sometimes more difficult to grasp. Here, education on the topic, in particular on the risks and benefits, is key.
Cryptocurrencies like bitcoin promise huge potential returns, but are also extremely volatile and, thus, subject to significant risk. Restraint is therefore understandable. As mentioned above, however, cryptocurrencies are just the first step towards blockchain technology in finance. The changes brought about by digital assets are likely to be even more profound.
The tokenisation of assets allows new groups of clients to invest in certain asset classes that were previously often reserved for wealthier clients. This, then, enables greater diversification of portfolios, which in principle leads to a reduction in risk for the customer.
With these use cases and also the adoption of stable coins – cryptocurrencies backed by fiat money or other assets – confidence in cryptocurrencies and digital assets in general, is likely to increase.
Moreover, by means of tokenisation, non-bankable assets such as collectables and fine art can become bankable, driven by increased accessibility and ease of handling. Customers will, for instance, be able to trade fractions of a vintage car collection, a luxury villa or a Picasso painting like traditional stocks. Arguably, this will imply a demand for new advisory services, providing new revenue opportunities for financial institutions.
In the case of the tokenised Picasso, for example, a proof of ownership is also important, as well as that this physical asset is kept safe. Both could be part of the new services of a financial institution in the future as well.
While it is still relatively early days in the development and use of blockchain technology, we believe it is important for financial institutions to get to grips with it now in order to offer the appropriate solutions when client interest increases further and demand grows. We also see promising growth forecasts regarding the digital asset market in the next five years – this sounds like a long time but it’s not, thus it is time to act now. If an institution is not prepared, it could have disadvantages in acquiring new customers – or even lose existing customers.
Looking ahead, we firmly believe that blockchain technology and its applications will very likely affect the way banking will be done in the future. In general, the level of digitalisation will continue to increase. In China, for example, digital payments are already much more advanced than in Germany.
We also believe that stable coins will continue to drive this process and that the tokenisation of assets will influence the service offering of traditional financial institutions, promising significant new revenue opportunities.