How Blockchain and Cryptocurrencies Can Change The Industry of Wealth Management and Financial Services. Miscellaneous.
New investment opportunities
Many initial coin offerings give investors an opportunity to double, triple and quadruple the money very quickly, which could be of interest to many high net worth individuals that want a high-risk investment for a part of their portfolio. For example, the price of Bitcoin in 2009 was so close to zero that it is hard to say what it actually was. By March of 2010, the price grew to USD$0.003, which means that in 2010 it was possible to buy three bitcoins for a penny. At the height of the market in 2017, the price of Bitcoin was close to $20,000, which means that 1 cent could become USD$60,000. Many other initial coin offerings also turned out to be extremely lucrative investment opportunities. For instance, the price of NEO (previously Antshares) went from about 3 cents to about $90 at the peak of the market. Even with the $30 price when the markets are down, turning three cents into $30 is still an unbelievable investment. Ethereum initial coin offering presented a similar opportunity with token originally selling for about thirty cents in 2015 and reaching about USD$1,000 at the top of the market in 2017.
Current financial settlements may take a long time, especially if the amount of the settlement is significant. This happens because banks use an antiquated third-party trust-based system to verify transactions. Also, when the amount of a transaction surpasses a certain amount, the transaction may be a subject to verification and approval by tax authorities. When a person wants to transfer money from one country to another country, the process may take even longer.
None of these issues exist with blockchain technology. On the Bitcoin network and on most other cryptocurrency networks, it is possible to send funds to anyone at any time with no bank, and no tax authorities slowing down the transaction. The transaction can also be in any amount. The real revolutionary breakthrough that the Bitcoin network brought into the world is about the way it records transactions. Before Bitcoin, computer scientists and cryptographers could not figure out how to prevent someone on a digital network from sending money to several parties at the same time. Because in essence digital money is just data, the problem is similar to someone copying a file on a computer a number of times and presenting each copy as the only one. Bitcoin solved this issue by making all transactions visible to the entire Bitcoin network as users initiate the transactions and then recording them onto the Bitcoin ledger in a secure and immutable way. The network has existed since 2009 and so far nobody was able to hack it even though many have tried.
What is even more interesting is that the Bitcoin network is becoming more secure the more people use it and today hacking the network is much more expensive and complex than it would have been in 2009 or 2010.
As of the writing of this article, the Bitcoin network has over seventeen million Bitcoins in circulation. At $5,000 per Bitcoin, that’s over eighty five billion dollars of value, which is more than any wealthy individual could want for just one transaction.
Automated investment decisions
While the Bitcoin is a purely financial network, networks such as Ethereum and others have smart contract functionality. A smart contract on a blockchain is a set that consists of “if/then… or else…” statements.
When you apply for a bank account today, the bank will ask you for your identification, social security number, address and will run a credit check on you. This process is known as Know Your Customer or KYC and the requirements for what banks have to do as parts of this process vary from jurisdiction to jurisdiction. For larger sums of money, banks also have to perform what is known as anti-money laundering verifications or AML. Both processes can be inefficient and can take a long time, especially with AML and especially when transferring a large amount of money from one country to another. A customer may need to produce documentation about political intentions, business dealings and interests, and more. Using blockchain technology to speed up both processes would make not only the processes go faster, but it would also make the data about identities immutable and secure.
Just like with financial transactions on the Bitcoin and other cryptocurrency networks blockchain technology serves as a third party that both participants of a transaction trust, with verification of identities blockchain technology could serve as trusted third party for identity verification, eliminating the need for multiple manual verification steps that so many banks and financial institutions have to perform today as a part of KYC and AML processes.
Obviously, it is in the interest of every wealth manager, be it a small solo practice or a large corporate institution, to make the results of their work look the best. Unfortunately, as the examples of companies such as Enron, Wells Fargo and Bernard L. Madoff Investment Securities LLC show, companies sometimes fall into temptation of misrepresenting their results and their financial numbers.
Because records on blockchains are immutable, blockchains are an excellent way to store both financial data and data about the performance of the companies with metrics such as customer satisfaction. This way, any customer of a company in the wealth management industry could check the reviews about the company knowing that the reviews have not been altered.