Wealth Management

FROM EFFICIENCY TO NEW INVESTMENTS – WHY BLOCKCHAIN IS MORE THAN MEETS THE EYE

Published

2 years ago

February 18, 2021

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Thomas Borrel, chief product officer at Polymath

Blockchain has been an extremely hot topic in 2021. With companies and financial institutions internationally having to adapt to an increasingly digital world, the true potential of blockchain is becoming increasingly clear. We have seen hospitals using the technology to track vaccine distributions, major blue-chip companies floating digital assets or ‘stablecoins’, even progress made by central banks in piloting and adopting digital currencies

When it comes to the world of finance, much of the attention has focussed on the booming price of Bitcoin, and there has been much excitement around using cryptocurrencies as an alternative investment. However, the real potential of blockchain technology stretches far into traditional finance and beyond.

Improving access to investment options

Security tokens created and issued on the blockchain are already being used to improve efficiency in a variety of more traditional asset classes, ranging from real estate to green bonds. The Sustainable Digital Finance Alliance (SDFA) and HSBC Center of Sustainable Finance recently joined forces to highlight how security tokens for green bonds can reduce management costs and increase operational efficiency by up to ten times. And in early 2020, RedSwan CRE Marketplace tokenised $2.2B in commercial real estate, making it one of the biggest tokenisations we’ve seen so far.

Thomas Borrel

However, the potential of tokenisation does not only stand to improve the process of trading traditional assets; blockchain can also open up the pool of investors able to participate. To date, the focus has been on how fractionalisation brings benefits to retail investors by lowering the bar to entry. However, the retail regulations are still very stringent, which is important to protect non-professionals from disproportionate losses.

Tokenisation can be used to enable large institutional investors to buy into smaller projects. Referred to as aggregation, this process can be used to bind assets together so that they meet an institution’s minimum investment threshold. Because of the transparency of blockchain, the investor is still able to inspect each individual offering and ensure each element meets their quality and risk requirements, but by packaging it into one larger token, an institution can diversify with assets that would have otherwise flown under its radar.

Optimising efficiency and minimising risk

Risk management and operational efficiency are usually at the core of any financial institution’s wider strategy. However, no matter how much firms optimise their own processes, there are a range of financial instruments that are still very prone to issues in these areas, especially those that are traded ‘over the counter’ (OTC). The best example of this is likely the bonds market – a multi trillion-dollar market, where OTC trades are still common practice.

When an OTC trade is conducted, it is often so over the telephone – one person calling another to make a deal. This introduces significant information risk with securities operations teams reporting error rates as high as 40%. When instructions for the trade are passed on to the custodians, they will spot the discrepancy. They then have to investigate and find out what has gone wrong, often resulting in very long delays to settlement times.

Blockchains go a long way to solving this problem, providing transparent access to trade and clearing information so that operational issues can be caught earlier and help mitigate settlement risk (i.e. settlement failure). For example, on Polymesh settlement instructions must be affirmed prior to settlement, in a case where an OTC trade has been improperly captured by one counterparty, the counterparty which has affirmed the instruction can see that the other counterparty has not affirmed the instruction within a defined period. In this way, the affirming counterparty can reach out proactively prior to the settlement date to rectify the situation and avoid settlement failure.

Trading on blockchain also generates an easily accessible, secure ledger of trading information. When it comes to reporting in traditional asset classes, the process is highly manual and often expensive. But, with a blockchain solution, reporting is built into the ecosystem from the ground up. There are no significant additional costs or resources required to extract this data and share it where necessary, and the number and complexity of the steps required to complete reconciliations between different entities are reduced and simplified.

Is tokenisation a ‘cover all’ solution?

Fundamentally, certain traditional asset classes are not right for the blockchain yet. Instruments with well-established frameworks, like publicly traded stocks, already have very well-formed, rigorous rails in place, and so transferring to a blockchain could cause disruption and incur unnecessary costs.

It is very common to hear blockchain advocates claiming that blockchain technology should be introduced into every corner of the finance space, which is misguided. Blockchain should be introduced where it brings value to investors or institutions. It should be about augmenting and supplementing the marketplace – not overhauling it, or at least not until the incumbent systems no longer keep up with demand.

The costs and infrastructure associated with capital markets have made some assets – like green bonds or real estate – too expensive to bring to market and service, or too difficult to invest in. These use-cases are examples of where tokenisation can really shine.

Blockchain is an extremely powerful tool, with a range of exciting applications and potential benefits for businesses and financial institutions, ranging from risk management and efficiency through to enabling new investments. However, as with any product, it isn’t the answer to all problems, and must be treated as a powerful enabler – not as an agitator.

Top 10

5 Often-Overlooked Investment Options To Consider Exploring In 2023

Published

1 week ago

March 17, 2023

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When choosing what to invest in, many people will initially focus on the stock market which is considered a more mainstream investment. However, investments are more than stocks, and there is a wide range of alternative investments you can add to your portfolio to not only add growth to your long-term returns but also to spread the risk. If you’re looking to diversify your investments or if you simply want to get started with something different, this guide will cover the overlooked investment options that you should consider in 2023. From investing in EIS schemes and commercial property to commodities and collectables, there is plenty to discover.

EIS Schemes

One of the first on our list of overlooked investments is EIS investment opportunities, one of many flagship policies developed by the UK government to support early-stage companies. With an EIS investment, you would be helping to support businesses in exchange for various tax reliefs. Depending on your circumstances, this could include 30% income tax relief, tax-free gains, CGT deferral, loss relief, or inheritance tax relief. To understand more about investing in EIS schemes and their benefits, head over to Oxford Capital, to learn more.

Property Bonds

When property developers are looking to finance new commercial or residential projects, they typically do so with property bonds. These bonds are used to raise capital for the projects from investors and typically last for a fixed term, between two and five years. This form of investment is attractive due to the higher interest rates, ranging from 4% to 15%, offered in comparison to traditional government bonds, which generally perform at under 4%.

While there is a risk that the project could be abandoned due to external factors such as a rise in material costs, disruptions to supply, and a lack of finances, if the project goes to plan, you will see a return of your original investment as well as any interest accumulated. However, you can also opt to receive the interest payments monthly, quarterly, or annually throughout the course of the project, in which case, at the end of the project, your original investment will be returned with any leftover interest that has not yet been paid.

Commodities

The term commodity encompasses a variety of physical investments you can make. Unlike traditional investments such as stocks, bonds, or funds, these investments have both a use-value and an exchange value. This is because when you invest in commodities, you gain ownership over a small amount of the resource you are investing in. As there is always a need for physical goods, these commodities are an excellent way to diversify your investment portfolio and hedge against inflation, market changes, and the depreciating value of different currencies.

Some of the most common commodities you can invest in include:

Gold.
Agricultural products.
Crude oil.
Precious metals.
Timber.
Diamonds and other precious stones.
Spices, sugar, and salt.

Commercial Property

When looking into properties to invest in, many people choose residential options as they can renovate and sell or rent these homes. However, as the property market can be particularly volatile, a great option when you want to invest in properties is to look to commercial options instead. When it comes to commercial property, there are many ways you can invest, and these include:

Direct investment:This means buying a share or all of a property, which can then be rented out to businesses.
Direct commercial property funds:Often referred to as bricks-and-mortar funds, this is the most popular way to invest in commercial property. With this fund, you invest into a scheme that invests directly into an existing portfolio of commercial properties, which pays out the interest of your investment monthly, quarterly, or annually.
Indirect property funds:Similar to the direct commercial property fund, with this fund, you would invest in a collective investment scheme that invests in the shares of property companies in the stock market.

Peer-To-Peer Lending

Peer-to-peer lending is a risky venture where you would invest directly into start-up enterprises in order to help them get off the ground. It’s an excellent way to help small business owners get going with their dreams while also creating a lucrative investment. When you choose peer-to-peer lending, you loan the start-up a specific amount with the promise to pay back with interest. You can determine a timeline for this, or you can also choose to have the interest paid back monthly, quarterly, or annually.

However, as already mentioned, peer-to-peer lending is a risky venture, as the company you invest in could fail, and in that case, they would default on your loan. With this in mind, before you choose peer-to-peer lending, you should always thoroughly research the start-up’s fundamentals first, as this will give you a better insight into the viability of the business.

Finance

How the Isle of Man is encouraging a new generation of FinTech innovators

Published

1 week ago

March 14, 2023

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FinTech’s potential to transform how finance and business operates has gained attention around the world in recent years. In 2022, banking giant JP Morgan increased its level of tech investment to $12 billion, while the STOXX Global Fintech Index recorded a swift recovery after the Covid-19 pandemic.

However, the sector also faces challenges. The cryptocurrency market was rocked by the collapse of FTX and arrest of Sam Bankman-Fried late last year, and Goldman Sachs has recently revealed the large scale losses incurred in some of its fintech investments, which have led it to refocus on more traditional functions.

This is food for thought for FinTech businesses, however, it should be seen as an opportunity for evolution as much as a cause for concern.

Ambitious players in FinTech should see this as a moment to recalibrate and shift their priorities towards building practical, everyday products that help provide the sector with sustainable foundations for the future.

Current conditions may encourage FinTechs to iron out their relationships to regulation and further develop the range of services they provide to established businesses and financial institutions, from compliance software to subscription billing solutions.

FinTech products with more everyday business functions are becoming increasingly vital, with InsurTech and RegTech two key categories which are driving growth in the sector.

Increasingly, FinTechs will need to successfully navigate growing government interest and involvement in the sector, and to take advantage of opportunities for collaboration with both public sector actors and businesses.

Recognising these developments, the Isle of Man is taking a bold approach to growing its FinTech sector, putting collaboration and legitimacy first.

The island, which has a population of just 85,000, has a record of innovation disproportionate to its size, from pioneering the adoption of 3G mobile services, to supporting the British Isles’ first regulated GBP-pegged stablecoin.

Now the Isle of Man is on a mission to attract cutting edge FinTech businesses as part of an effort to build on the existing strengths of the Island’s economy, with its well established, thriving financial services and digital technology landscape.

Key to the Island’s FinTech strategy is the flagship FinTech Innovation Challenge, launched by Isle of Man Government executive agency Digital Isle of Man in partnership with Finance Isle of Man and supported by the Island’s regulator, the IOMFSA, and Deloitte.

The Challenge’s soon-to-be announced cohort of participants will have the opportunity to develop new products or to further refine and strengthen existing ones.

It has attracted ambitious businesses who are looking to scale up their operations, develop new products and expand into new markets to tackle a number of selected problems which face businesses on the Island and around the world every day.

Businesses will develop solutions to address foundational issues like Digital ID Management, e-KYC (Electronic Know Your Customer) and compliance and transaction monitoring.

Those participating, will develop their products with the support of the Island’s authorities, and will be able to access the expertise of its thriving digital, technology and financial business communities, some of whom are involved in the Challenge themselves as mentors and judges.

It follows the recent success of the Island’s InsurTech Accelerator Program in partnership with F10, the global innovation ecosystem, which has provided a brilliant platform for InsurTech start-ups looking to scale up, access the expertise of the Isle of Man’s highly developed insurance sector, and take their businesses and products to a global market.

The Isle of Man is an ideal environment for young, innovative FinTech businesses to grow with the help of a strong local business community and supportive government, and from the robust foundations they have built on the Isle of Man, participating businesses will be well-placed to take their products to global markets.

For FinTechs navigating a complex environment, the Isle of Man also provides the opportunity to build close, collaborative relationships with government and regulators.

As a self-governing jurisdiction, it is able to apply pragmatism to its well regarded and conformant regulation, thereby seeking to adapt to the development of the dynamic FinTech sector and supporting businesses to thrive because of, and not in spite of an increasingly regulated global environment.

Regulation, Island authorities believe, does not have to curtail the growth of innovative sectors such as FinTech – it can be a supportive, legitimising force which can offer businesses both stability and prestige.

The Isle of Man’s greatest strength is its sense of community, its openness to collaboration between local and global businesses, government and the private sector, regulators and the businesses they regulate, all of which is crucial to allow innovation to thrive.