Since its inception, blockchain has been considered one of the most promising technologies, which will impact our lives for decades. Many companies and institutions have tried to implement it, but critics believe that blockchain is still in its infancy.
We know blockchain has the ability to disrupt multiple sectors of finance, including asset management, so we caught up with Laurence Arnold, Head of Innovation Management Strategic Initiatives at AXA Investment Managers, a firm with more of $1 trillion in assets under management (AUM) to discuss. That’s what she told us.
Q: Can you tell us about AXA Investment Managers, what assets are you interested in and why does the company believe blockchain technology has such great potential?
A: In 2021, cryptocurrencies have again attracted global interest. Yet, as a traditional asset manager, the real strategic interest lies not so much in this “new” asset class, but rather in the underlying technologies and their disruptive power to asset management processes.
Blockchain has the potential to impact every layer of an asset manager’s operations by dramatically reducing industry complexity, thereby significantly influencing productivity and profitability trends for the industry as a whole.
Over the past decade, initiatives around blockchain technology in the asset management industry have been experimental. There was no concrete implementation and it was unclear how and when this technology could be scaled up and matured. However, the past year has seen a rapid escalation in activity, quickly bringing blockchain to the forefront of the asset management landscape.
Platforms have acquired new ways to distribute funds, central banks are working on digital currencies in response to potential private digital means of payment, and regulators are designing new frameworks. In April, the European Investment Bank issued a €100 million digital bond on Ethereum – a decentralized, open-source blockchain, and the US Fed has been in talks for months over whether to issue its own form. of digital currency. At the same time, the broader world of decentralized finance (DeFi) and cryptocurrencies is expanding. Overall, our financial framework is being thoroughly overhauled.
At AXA IM, we are therefore leading several Blockchain initiatives both in fund distribution and portfolio management, for our alternative and core platforms. The tokenization of assets opens up many opportunities.
Q: From supply chain to tokenization of real-world assets and artwork, blockchain has seen many use cases, how can it be applied to asset management? And can people and institutions benefit from this application?
A: From fund distribution to investments, trading and post-trade processes, blockchain technology mainly impacts middle and back-office procedures. The fund distribution business is an interesting case for blockchain technology. Processes are fragmented in different local markets; the number of intermediaries is high and permanent reconciliations are necessary. A lack of transparency and expensive distribution models add up to (good) reasons to leverage technology in this space. Funds tokenization – issuance of funds on the blockchain – and automated subscriptions alongside redemption flows via smart contracts bring major efficiency gains. Additionally, tokenization also enables splitting. This has multiple benefits – it can attract new retail investors with lower amounts of capital and create liquidity for funds that hold illiquid assets. Financial securities have the potential to be issued on the blockchain, which could in turn reduce issuance costs, streamline settlement processes, reduce reconciliations between financial institutions and, at target, enable a cycle of fully automated asset life.
Q: What do you see as the main real-world use case for blockchain in the coming years and how is AXA Investment Managers preparing for a potential increase in adoption?
A: Today, change is already underway in B2C models. With the advent of digital currencies, some of the mutual fund distribution business could move from bank tellers to digital platforms and the use of blockchain technologies could accelerate this trend towards decentralization.
For the financial services industry, blockchain has yet to become a priority, in part due to the stigma surrounding its use in unregulated cryptocurrencies, such as Bitcoin. Blockchain poses challenges to the assumptions of the structure of many financial services industries. But the potential for growth and renewal in an industry struggling with lower margins is there to be realized.
At AXA IM, we recently concluded our first market transaction based on a blockchain infrastructure in collaboration with Société Générale-Forge. Via our Fixed Income platform, we purchased from Société Générale 3 million euros of “unsecured” bonds issued by the European Investment Bank (EIB) in the form of “security tokens” on the public Ethereum blockchain.
This transaction is part of our innovation journey because we are committed to carrying out tests in our changing ecosystem, to discovering new techniques, new markets with the desire to serve and share our knowledge with our customers.
Regulations are changing rapidly and financial institutions such as central banks are already devoting resources to these topics. Although in order to be able to evolve, the industry will have to establish standards, the regulations will have to be clearly defined, the technology will have to evolve (standardization, interoperability, energy consumption, …) and in addition to tokenization assets, fiat currencies will also have to must be on-chain to deliver the full potential of automated asset lifecycles.
Q: Do you agree with some regulators and institutions that have claimed that cryptocurrencies, such as Bitcoin, are a secondary application for blockchain? What do you think of the value of this nascent asset class as it could potentially be integrated into traditional business models?
A: There is a lot of uncertainty around regulation, and we find the questions around stablecoins to be the most interesting. In our opinion, the backstop is a key distinguishing feature of stablecoins. This is a critical design feature, likely to influence the adoption path of any nascent digital currency. The idea is to limit the excessive price fluctuations typical of cryptocurrencies, thereby aligning the new digital currency with existing traditional currencies: processing transactions against existing arrangements… Developers of crypto-assets labeled “stablecoins” seek to reduce volatility by anchoring the “wedge” to a reference asset (eg a sovereign currency) or to a basket of assets.
In the absence of comprehensive regulation, the benefits of adopting stablecoins for our monetary system are likely to be less than a CBDC (e.g. counterparty risk, non-standard format, non-universal means of payment, etc.) . Nonetheless, a hybrid model should also be considered, one in which “the public sector could focus on issuing digital coins and delivering sound currency, while the private sector could build rails and apps” .
With several options on the table, our impression is that a coherent regulatory framework will always be the instrument of choice for policymakers to better align incentives and risks. In the meantime, at AXA IM, we will continue to seek opportunities around the world to fully implement digital asset lifecycles, which will allow us to project future operating models.
Q: In this sense, how do you and AXA Investment Managers envision the future of finance? A system where only CBDCs or cryptocurrencies can exist, or do you think the world is heading towards a hybrid financial system where everyone can choose their preferred way of transacting or settling financial transactions?
A. The recent proliferation of blockchain-based solutions adds to the complexity of our existing financial ecosystem. There will be no big bang; things are progressing step by step, but always much faster than expected. There will likely be a hybrid financial system and a convergence towards a decentralized and even more automated ecosystem. The complexity it generates in the short term and the many uncertainties (regulations, treasury, standards, etc.) will have to be addressed quickly to trigger the profound change that Blockchain can bring to our industry. The DeFi world brings many innovations and new ideas that can benefit our industry. Backed by solid analyzes and real experimentation, AXA IM wishes to actively contribute to this transformation, while being fully aligned with the interests of our clients.