Blockchain—the technology best known for its use in the creation of bitcoin, the first digital currency—is touted by proponents as being as manifestly revolutionary as the Internet was in its infancy.
Though blockchain wouldn’t exist without the Internet, this prediction is no means an exaggeration—especially regarding impacts on financial services. That’s because the distributed ledger technology allows users to establish indelible, decentralized records of ownership, to make contracts and to facilitate transactions and payments.
Accordingly, financial uses are among the most prominent among the broad array of blockchain applications under development, which harness and adapt open-source blockchain software that lives on the Internet. Anyone can download this software and use it to build applications that store data of various types, for various purposes, permanently for all to see and verify—but not to alter it. Blockchain data is an immutable, transparent audit trail that’s impervious to fraud, and thus discourages disputes.
With the exception of data protected with private keys, anyone can access blockchain data. Users, rather than a central authority, are in control. Blockchain is what’s known as a distributed ledger, which doesn’t need a central authority to enable, facilitate, validate or legitimize transactions. Its direct, peer-to-peer capacity made it the obvious vehicle for crypto-currencies (including bitcoin) —borderless payment vehicles that eliminate the central authority of a bank. Thus, blockchain is inherently disruptive and threatens intermediaries or middlemen in many fields, including financial services.
Blockchain development efforts, which are drawing venture capital and corporate investment aplenty, hold prospects for fundamentally changing the advisory industry, starting in the next few years. Over a longer period, the impact will probably amount to a Brave New World for advisors in how they trade securities, hold assets, on-board clients, comply with regulations, position their practices and seek to distinguish themselves with value propositions.
As blockchain’s full impact on the industry will take years or decades, learning about its potential may seem like a priority only for younger advisors. But, as initial impacts are likely to come hard and fast, older practitioners should make preparations, too—if only by starting to get their heads around the iconoclastic concepts underlying blockchain, which explodes traditional custodial/intermediary business models. They also need to develop a conceptual grasp of bitcoin, whose raison d’etre is to defy the ordinary conception of currency as relying on the central authority of a government, and of Internet payments as requiring the central authority of a bank.
For the short term, blockchain’s impact on retail advisors will be largely indirect, but they will still feel it in areas including crypto-currency-focused hedge funds, which are springing up like mushrooms after a summer rain. Many advisor funds will soon feel blockchain’s impact on institutional operations. For example, UBS and Barclays have both been experimenting with blockchain as a means of expediting back-office functions.
Blockchain’s impact will also be felt in exchanges. After experimenting with blockchain technology in recent years, the Australian Securities Exchange (ASX) is now planning to convert its settlement system to a distributed ledger (blockchain) by 2020 or early 2021 to speed up settlement while reducing costs. (This year, the ASX has been gathering user feedback on its comprehensive tentative plan for the new system, as set down in a detailed white paper.) If this transition is as successful as test results promise, similar transitions will probably follow soon in at exchanges in the U.S. and Europe. Ultimately, all this could reduce trade settlement intervals, now two or three days (T+2 or T+3), to a day (T+1) or less (T+0).
Blockchain also may enable trading of shares of private companies. Nasdaq has teamed up with Chain, a bitcoin infrastructure firm, for a pilot program to test the use of blockchain for trading private shares.
Further down the road, concerns about the efficiency of public exchanges or private marketplaces may disappear as blockchain chips away at such centralized authorities. Instead of using exchanges, people could trade shares of stock on directly on blockchain by making payment with bitcoin and moving shares from the seller’s bucket to the buyer’s.
Other likely impacts include:
• Easing the transfer of assets from one advisor to another, making this process virtually instantaneous. Clients will simply use their private keys to blocks holding their asset-ownership data to move data from one advisor’s blockchain location to another’s. This convenience would make it a lot easier for clients to fire advisors and get started with new ones.
• Reducing or eliminating rigors regarding know-your-customer (KYC) rules relating to clients’ identities. Among the blockchain applications that are spawning various startups is identity-protection solutions. A byproduct of enhanced identity protection might be improved access to identity-related data by fiduciary advisors authorized by clients who provide their private keys—the same technical tool used for holding bitcoin securely while enabling transfer in transactions.
• In the distant future, escalating the existential threat that artificial intelligence (AI) may pose to advisors. Access to blockchain data by AI devices could create a brave new world of DIY robo-advising. Instead of asking Alexa for a restaurant review, we could ask her highly evolved descendants for financial advice derived by analyzing blockchain data. Instead of calling their advisor, clients sitting in their living rooms could just ask: “Should I roll-over my 401(k)?” This scenario’s plausibility is heightened by the proliferation of IOT (Internet of things) devices, everyday appliances equipped with modems, computer processors and connectivity. If you’re in the kitchen when you have a thought about your strategic asset allocation, you could ask your refrigerator to advise you. If you’re in your car when the analysis is completed, the fridge could send it to your car. You could then tell your car to place trades (which won’t be unsafe because the car will be driving itself).
Does this mean blockchain will make it easier for toasters to replace human advisors? Well, toasters do have the advantage of making toast. Seriously, though, advisors could compete by acquiring intelligent tools to locate and cull blockchain data. They could then analyze and interpret this data for clients with empathy and compassion that may not be possible for Alexa’s descendants.
Also, human advisors will still be able to demonstrate value by showing clients how to meet life goals and linking advice to lifestyle preferences—skills essential to competing with other human advisors today. To prepare for this scenario, advisors who haven’t already would be well advised to start learning about concepts underlying blockchain and its evolving applications—and about its means of transferring value: bitcoin.
Eric C. Jansen, ChFC, is the founder, president and chief investment officer of Westborough, Mass.-based AspenCross Wealth Management (AWM), which teaches clients how to make smarter financial and investment decisions and to use disruptive technology to help them live the lives they want. AWM provides cryptocurrency educational services to clients nationwide, and recently began accepting bitcoin as payment for financial planning services.