Market infrastructures for the distribution of investment funds have several inefficiencies. At the operational level, the number of intermediaries between the fund issuer and the end investor is plethoric. “There are about five to six intermediaries between the issuer and the private investor. These procedures are long and costly. Moreover, in this chain, many activities are redundant. For each fund, you must reconnect with the issuer and go through the whole process again. It’s complicated, costly and slow,” says Olivier Portenseigne, Managing Director at Fundsquare.
This procedure is not visible to the private investor, but it does incur costs because each intermediary takes its share of the costs, which are ultimately included in the transaction fees, account maintenance fees or management fees.
How should you create a crypto ICO?
However, the asset management world is under pressure from clients, European legislators, and technological developments. Investors are becoming more fee conscious and are turning more to lower cost digital offerings. The new regulations to come in 2018 such as MiFID II or PSD2 will hit the management world hard with, for example, the abolition of retrocession of management fees. It is in this movement that blockchain presents itself as a technological alternative in the distribution of funds. “Blockchain is presented as a large register that facilitates access to funds for all, by eliminating redundancies and with greater transparency,” adds Olivier Portenseigne.
How does it work? Thanks to this technology, private investors will be able to connect and subscribe to mutual funds directly with the fund issuer (J.P. Morgan, Candriam, BNP AM, etc.). These subscriptions will be registered in the issuer’s records. “The investor will be able to have a cash account and a securities account on the blockchain platform to aggregate all his positions. We can also think that some online banks will use this technology to reduce their back-office costs and allow their customers to have a better digital experience,” notes Olivier Portenseigne.
Where are we in this development? For now, this technology is still in the testing phase and the production phase is only scheduled for the end of 2018. It is not really a revolution but rather a transformation of the distribution network. Initially, the two distribution methods will co-exist but, in the long term, we can think that the replacement of existing technologies by blockchain technology could jeopardize some of the big existing players. They are currently exploring the functionalities of this technology. “We are in the same evolution that Kodak experienced with the shift to digital. Existing players must not miss this transition”, warns this specialist.
Initial Coin Offering ICO: A rocket fuel for the start-ups
This new technology is being presented to local regulators who are looking into the matter. “In terms of security, blockchain is a technology that offers a high degree of security, speed and transparency,” says Olivier Portenseigne. This development must be monitored and followed by market players, fund distributors, issuers and private or institutional investors. We’ll keep an eye on it!
What is an ICO?
ICO for Initial Coin Offering is a fundraising that some companies carry out in traditional currencies but more often in digital currencies (in bitcoin or ether, for example). The new shareholders do not receive shares in the company as in a traditional fundraising but “tokens”, i.e. digital tokens that give them rights such as the ability to purchase the company’s services or to benefit from more traditional rights such as dividends or voting rights at the shareholders’ meeting.
However, these tokens do not represent shares of capital, but they can be sold on a specific market. This type of fundraising is becoming increasingly successful. Thus, since the beginning of 2017, $3 billion has been made available to companies through ICOs. It is mainly companies that are active in the blockchain sector that are using this means of financing, but companies in other sectors have also launched some.
How should I create a crypto ICO?
Why launch an ICO rather than a traditional IPO?
“The main interest of these capital raisings for issuers is that they are not regulated, which allows quick and easy access to funding, but of course with a very consequent risk for investors,” notes Alexandre Cave in an article by AGEFI. The fact that ICOs are unregulated, not subject to any control and carried out outside of traditional channels has led countries like China to ban them on their territory.
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