In case you missed it, the future of digital assets recently saw some big news. One of the larger UK-based investment managers, Abrdn, took a stake in Archax, a UK-based platform for trading and settlement of digital assets held and transacted on a blockchain.
A huge potential opportunity to transform the industry
Blockchains, which are the technology that enables cryptocurrencies such as BTC and ETH, have been around for several years and many people see the potential for significant cost and operational benefits using this technology post-trade in traditional securities markets. Transforming trading and settlement activity across the massive global markets for traditional security instruments such as derivatives, equities, bonds, funds, and property could unlock real benefits for all market participants. However, adoption and take-up from institutional groups have been slow and sporadic at best. Some inertia is down to the old adage, “if it isn’t broken don’t fix it”. Additionally, unilateral adoption benefits can be marginal, and usually, adoption across the whole industry is needed to unlock the full potential. Traditional securities markets do work fairly well today so it has rarely been an easy sign-off from management to replace existing technology with a blockchain solution given the operational pain and investment needed.
First movers are needed
Our own experience interacting with the traditional wealth groups also indicates a reluctance to adapt and change. They too will need to make infrastructure investments and changes to operational processes. In part, their reluctance to embrace digital change is down to a lack of awareness and communication about the very real benefits of digital assets for investors, a greater variety of risk exposures, easier access and switching exposure between instruments, real-time settlement, and of course cost savings to pass onto their wealth owners. There is also, currently, a dearth of digital assets available right now because this is all new. Abrdn’s bold decision to embrace the potential of digital assets should be a catalyst for change from here. They clearly see the direction and travel and wish to be amongst the first movers. This is an encouraging and exciting swing in institutional sentiment.
Regulation and technology
It is worth considering what Abrdn has bought into with its investment holding and involvement with Archax. From a user’s perspective, Archax is a venue where digital assets can be traded and settled all using blockchain technology.
In effect, Archax deals with financial instruments whose ownership register and transaction activity are recorded on and managed through a blockchain. Understanding the type of blockchain used here is critical. Archax works with private and permissioned blockchains which are very different from the public and permissionless blockchains that underpin cryptocurrencies like BTC and ETH. A private and permissioned blockchain is necessary to give centralised control, operational functionality and transparency needed to meet regulatory standards.
Operationally, Archax is primarily a broker, regulated by the UK FCA as an MTF (multilateral trading facility as defined by MiFID). In addition to price discovery and trading, the settlement on a blockchain means that Archax needs to be able to offer custody of digital assets too.
WELREX likes the potential for digital funds
We at WELREX believe in the future for digital assets and are working to future-proof the WELREX infrastructure and processes to handle these digital assets as they come to market. We are fortunate, being a new business, that we are unencumbered with legacy technology.
Abrdn is a large provider of mutual funds. We would expect digital mutual funds to be one of the first digital instruments they push to develop. There are real benefits for investors here, instant switching across managers, new liquidity windows and secondary markets, real-time settlement, and of course lower fund TER costs which drive improved returns for wealth owners.
Investment Director – Digital assets and cryptocurrency
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