Since its inception, blockchain has been considered one of the most promising technologies, that will impact our lives for decades. Many companies and institutions have tried to implement it, but its detractors believe blockchain is still in its early days.
We know blockchain has the capacity to disrupt several sectors across finances, including asset management, so we sat down with Laurence Arnold, Head of Innovation Management Strategic Initiatives at AXA Investment Managers, a firm with over $1 trillion in assets under management (AUM) to discuss. This is what she told us.
Q: Can you tell us about AXA Investment Managers, what are the assets you are interested in and why does the firm believes blockchain technology has such great potential?
A: In 2021, crypto-currencies have further aroused global interest. Yet, as a traditional asset manager, the real strategic interest rests not so much in this “new” asset class, but rather in the underlying technologies and their disruptive power for asset management processes.
Blockchain holds the potential to impact every layer of an asset manager’s operations by significantly reducing the complexities of the industry, thus substantially influencing productivity and profitability trends for the industry as a whole.
For the past decade initiatives around blockchain technology in the asset management sector have been experimental. There was no concrete implementation, and it was unclear how and when this technology might be scaled up and come of age. However, the past year has witnessed a rapid escalation in activity, quickly bringing blockchain into 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 €100m digital bond on Ethereum – a decentralized, open-source blockchain, and the U.S. Fed has been in talks for months on whether to issue its own form of digital currency. In parallel, the broader world of decentralized finance (DeFi) and cryptocurrencies is in the middle of a dramatic expansion. Overall, our framework of financial references is in the process of being significantly reshaped.
At AXA IM, we, therefore, lead several Blockchain initiatives on both fund distribution and portfolio management, for our alternative and core platforms. Tokenization of assets opens up many opportunities.
Q: From supply chain to tokenization of real-world assets and works of art, 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-trading processes – blockchain technology is mainly impacting middle- and back-office procedures. The fund distribution business is an interesting case for blockchain technology. Processes are fragmented across different local markets; the number of intermediaries is high and there is a need for permanent reconciliations. A lack of transparency and costly distribution models add to the (good) reasons for leveraging the technology in this space. Tokenizing funds – the issuance of funds on blockchain – and automated subscriptions alongside redemption flows through smart contracts are bringing major efficiency gains. In addition, tokenization also enables fractionalization. There are multiple advantages to this – it can attract new retail investors with lower capital amounts and create liquidity for funds that hold illiquid assets. Financial securities have the potential to be issued on the blockchain, which in turn could reduce issuance costs, streamline settlement processes, reduce reconciliations between financial institutions and, at target, allow a fully automated asset-life cycle.
Q: What do you think is going to be 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, a part of the mutual fund distribution business might transition from bank counters to digital platforms and the use of blockchain technologies could accelerate this trend toward decentralization.
For the financial services industry, blockchain has yet to become a priority, partly because of the stigma around its use in unregulated cryptocurrencies, like Bitcoin. Blockchain poses challenges to the assumptions of the structure of many financial services sectors. But the potential for growth and renewal in an industry battling lower margins is there to be achieved.
Here at AXA IM, we recently completed our first market transaction based on blockchain infrastructure in collaboration with Société Générale-Forge. Through our Fixed Income platform, we have purchased from Société Générale €3 million of “unsecured” bonds issued by the European Investment Bank (EIB) in the form of “security tokens” on the public blockchain Ethereum.
This transaction is part of our innovation journey as we are keen to carry out tests in our changing ecosystem, discovering new techniques, new markets with the desire to serve and share our knowledge with our clients.
Regulation is evolving rapidly and Financial Institutions such as Central Banks are already dedicating resources to such topics. Though to be able to scale, the industry will need to set standards, regulation will have to be clearly defined, the technology will need to evolve (standardization, interoperability, energy consumption, …) and on top of tokenizing assets, fiat currencies will also need to be on-chain to offer the full potential for automated asset life-cycles.
Q: Do you agree with some regulators and institutions that have claimed cryptocurrencies, such as Bitcoin, are a secondary application for blockchain? What is your take on the value of this nascent asset class as they could potentially be integrated with traditional business models?
A: There is a lot of uncertainty around regulation, and we find questions around stablecoins to be most interesting. In our view, the backstop is a key distinguishing characteristic of stablecoins. It is an essential design feature, one likely to influence the path of adoption of any nascent digital currency. The idea is to limit excessive price swings typical of cryptocurrencies, therefore aligning the new digital currency with existing, traditional currencies: “Originally envisioned as an accessible and borderless way to pay, crypto-assets have generally suffered from severe price volatility and limited capacity to process transactions compared with existing arrangements… The developers of the crypto-assets labeled ‘stablecoins’ seek to reduce volatility by anchoring the ‘coin’ to a reference asset (e.g. a sovereign currency) or a basket of assets.”
Lacking a comprehensive regulation, the benefits of adopting stablecoins for our monetary system are probably inferior to a CBDC (e.g., counterparty risk, non-standard format, nonuniversal means of payment and so on). Nevertheless, a hybrid model should also be considered, one in which “the public sector could focus on issuing digital coins and delivering on sound money, while the private sector could build rails and applications”
With several options on the table, our impression is that a coherent regulatory framework will always be policymakers’ instrument of choice to better align incentives and risks. In the meantime, at AXA IM we will continue to look at opportunities worldwide to fully implement digital asset lifecycles, enabling us to project future operating models.
Q: In that sense, how do you and AXA Investment Managers envision the future of finance? One where only CBDCs or cryptocurrencies can exist, or do you think the world is headed to a hybrid financial system where everyone can choose their preferred way to transact or settle financial operations?
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 moving step by step, but still far quicker than expected. There probably will be a hybrid financial system and a convergence to a decentralized and even more automated ecosystem. The complexity it generates short term and the many uncertainties (regulation, cash, standards, etc) will have to be addressed quickly to trigger the profound change Blockchain can bring to our industry. The DeFi world brings many innovations and new ideas which can benefit our industry. With solid analyses and real experimentations, AXA IM is willing to actively contribute to such transformation, while being fully aligned with our client’s interests.