Blockchain technology is a promising option for wealth management and financial services. Three specific application scenarios are particularly promising right now: cryptocurrency and digital assets investing tokenization non-bankable assets (nBA), and decentralized finance(DeFi).
Distributed ledger technology, or blockchain, makes it possible for new investment and business models to be created. Digital tokens are at the heart of this. They can be used to represent a variety of crypto assets, including traditional and completely new ones. Blockchain technology can be used to promote digitalization, automate processes, and drive automation.
This can significantly reduce costs for financial institutions. Blockchain-based transactions are more efficient and can reduce costs for managing financial products throughout their lifecycle. The ideal situation is that both the investment object as well as the payment method are digitally stored on the blockchain. This makes them practically invulnerable to manipulation.
With the help of smart contracts, completely digital processes are thus possible, which, among other things, allow atomic "delivery-versus-payment". This has many benefits, including the ability to reduce counterparty risk and deposit reserves as well as fast settlement. Blockchain technology can be used by financial institutions to simplify and optimize processes, as well as to reduce costs and increase efficiency in the back office.
While the technology has many advantages, such as traceability, security, robustness, and transparency, it is not appropriate for all applications. It is crucial to ensure that the technology is used according to the requirements. A private Blockchain platform can be used in situations where traditional technologies, central approaches, and databases are more appropriate.
Blockchain technology can be used to solve problems in these three areas. It offers promising prospects for both financial institutions and their customers or investors.
Investing in digital assets or cryptocurrencies
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Challenge
Investors should have a broad portfolio to protect themselves against the risk of losing their investment in times like these. The digitalization of financial assets offers significant opportunities to create wealth for the masses. Digital crypto assets include digital representations of alternative investments that are not only possible with cryptocurrencies but also have high-level barriers to entry.
This requires that you are educated about the risks and potential returns of digital assets. For example, volatility in cryptocurrencies or other investments. It is important to understand the complexity of digital financial assets. Not only is it necessary to communicate the nature and characteristics, but also the purpose of the underlying assets. To establish trust, financial institutions must also make sure that customers have a basic understanding of crypto technology.
Although the step to an investment in digital property is in principle the same as direct investment, it may still need some explanation. Digital investments in works of art, such as a non-fungible token (NFT), or intellectual property are a different story. Digital assets will lead to profound changes.
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Solution
Financial institutions can now enter the digital asset field with minimal effort thanks to new technological solutions. Customers can also benefit from the same technology. Their financial institution should offer all options for investment, including traditional investments and cryptocurrencies. Digital assets can be used to issue shares in non-regulated funds. This reduces technical hurdles and security concerns for both the financial institution as well as its customers.
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Prospects
Financial institutions can now offer new investment options and portfolio diversification options to their clients through digital assets. Digital assets also offer new denomination options, which allow them to reach new customer segments. The industry could be experiencing rapid growth in financial transactions products that are based on digital currency assets. Banks and asset managers will need to be able to seamlessly integrate digital currency assets with their clients. This greatly lowers barriers for investors to access digital assets, such as cryptocurrencies.
Tokenization non-Bankable assets/illiquid assets
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Challenge
One-third of global assets are now non-bankable assets (nBAs), or illiquid assets. These assets include works of art and valuables. Banks often find it more difficult to deal with nBAs than traditional liquid assets like shares and bonds. This is due to the high barriers investors face when investing in money. Alternative assets are more difficult to price, forecast, and calculate risk. For example, works of art are not traded because they are so diverse and difficult to compare.
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Solution
It is possible to offer nBAs as tokenized assets using private blockchain technology. This reduces entry barriers such as minimal investments and creates liquid markets. This technology allows financial institutions to offer nBAs to a wider investor base.
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Prospects
Tokenized assets enable financial institutions to promote the democratization and accessibility of alternative asset classes. Clients will be able to trade fractions of an antique car collection, a luxury villa, or a Picasso painting as traditional shares through tokenization. This will lead to both a growing demand for nBAs as well as new advisory services.
Financial institutions can tap into new revenue streams, expand their portfolios and reach new customer segments by doing this. For example, in the case of a tokenized Picasso it may be necessary to prove ownership and also ensure that the physical asset has been properly stored and if required, insured.
These two services could become part of future service offerings for financial institutions. The Tokenization of NBAs is a growth strategy. It can often be done without additional acquisition costs. They can most likely rely on existing customers.
The potential for the nBA financial market's growth is enormous. If one takes into account all liquid assets, the long-term potential is certain to be much greater.
Decentralized Finance (DeFi).
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Challenge
Decentralized Finance (DeFi), is an alternative to centrally-organized financial services. It uses a decentralized network model. Peer-to-peer approaches to replace the intermediary, to put it simply.
Conventional centralization has many disadvantages. It may not only have the advantages mentioned, but it can also lead to dependence on the other participants. This can expose them to bureaucratic inefficiencies and obstacles.
This is evident, for instance, in the creation of central financial centers with regional specifics such as regulation, language, and laws. Consumers often have to adapt.
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Solution
Blockchain technology allows financial services to be decentralized. Smart contracts store transaction data in a distributed digital ledger and also set the rules for transaction costs. Smart contracts replace trusted intermediaries and allow investors to interact directly with one another.
Other modern technologies, such as the Internet of Things (IoT), big data, and artificial intelligence play an important part in the new DeFi concepts. Decentralized Applications (Dapps), which allow direct access to a variety of DeFi services such as peer-to-peer payments, loans, and decentralized exchanges via the public Blockchain network, without the need for a financial intermediary, are called Decentralized Applications.
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Prospects
The DeFi program opens up many opportunities for economic growth. It can also financially include people who have never had access to banking services. DeFi's goal is to eliminate intermediaries and increase inclusion. However, financial institutions are able to open new business models within the DeFi context.
This includes the safekeeping of private keys, innovative insurance options, or automated verification of identity. In just one year, the dollar value of DeFi applications increased fifty-fold. Therefore, it seems sensible to examine the problem and find business opportunities.
