Asset and wealth management firms have undergone profound changes to their operating model and technology stack over the decades – from the rise of electronic trading platforms in the 1980s and 90s, industry consolidation and globalisation of the 2000s, and now the expansion of digital assets. While firms have historically had fragmented technology stacks with point-to-point integrations, in recent years, there has been significant investment into consolidation of platforms across functions, asset classes, and regions to enable scale and efficiency. 

Traditional Finance (TradFi) vendors have responded to the operating model evolution by bringing ‘front-to-back’ investment management solutions to market, creating a one stop shop for front, middle, and back office as well as enterprise functions. These vendors have achieved this end-to-end functionality through a mix of acquisitions and partnerships, leading to increased competition for market share.

Asset and wealth managers looking to build an investment capability to gain exposure to digital assets must revisit their operating models – the people, processes, technology, data and governance that supports the manufacturing and distribution of investment products – as managing digital assets introduces nuances that do not exist in TradFi. For example, investing in digital assets requires safekeeping of assets via a wallet, which has been a central point of focus given market events such as FTX or 3AC. As a result, managers have increased their due diligence on counterparties and custodians, with counterparty and custody risk becoming a part of portfolio management decisions. In TradFi, managers typically outsource custody to a single third-party administrator, without as much concern for custody diversification and location of assets. However, custody for digital assets is paramount, with the selection decision and strategy requiring front office input. These operating model nuances have created market dynamics that have caused managers to focus their efforts on understanding how these nuances can be addressed in their existing model vs. how they need to augment existing capabilities, operating model, etc. to support their requirements.

Given the nascency of the asset class, we have seen an emergence of ‘crypto-native’ technology solutions. As opposed to the TradFi technology vendors, these crypto-native solutions were built to solve individual functional use cases. This has led to an increasingly fragmented vendor landscape, requiring managers to implement various solutions to meet their functional requirements. While the best-of-breed operating model affords managers with best-in-class functionality, it is antithetical to the consolidation they previously embarked on in their TradFi operating model. We have seen the crypto-native technology solutions start to broaden their functional use cases to support multiple functions within the operating model through internal development, acquisition, or partnerships, but we do anticipate that this will take some time to scale. 

The question then arises of how managers can integrate the digital assets technology stack with their TradFi operating model, holding true to their guiding principles of consolidation and standardisation, while also being able to operationally satisfy their digital assets investment requirements. The first item to tackle is whether the TradFi investment technology incumbents have digital assets capabilities. TradFi vendors display diverse sentiments and levels of investment to support digital assets. We have seen most take the partnership approach, which allows for speed to market, flexibility, and reduced reputational risk. Others have attempted to build out their current product suite to support digital assets; however, we have seen different levels of success to meet the digital assets requirements, along with long lead times to deploy the necessary enhancements. 

The good news for managers is that the crypto-native vendors have built their platforms to allow for open API integration, which has been previously lacking in TradFi solutions. This allows managers to employ best-of-breed digital assets solutions that will then integrate with their core TradFi investment platforms, enabling a firm-wide portfolio view for enterprise portfolio management, risk, and reporting. 

We anticipate that asset and wealth managers will struggle to adapt to these digital assets nuances if these operating model considerations are not brought forward when defining their digital assets strategy. Ensuring that the inclusion of digital assets does not jeopardise the investment and transformation journey of the TradFi operating model requires upfront planning and design. Defining the digital assets operating model and selecting the right vendor partner are integral to success when building the capabilities to invest in digital assets due to the fast pace of change within the ecosystem. 

Managers will need to partner with providers that can adapt with changes in market dynamics, support scale as complexity increases and can integrate seamlessly with the TradFi operating model. 
 

Given the nascency of the asset class, we have seen an emergence of ‘crypto-native’ technology solutions. As opposed to the TradFi technology vendors, these crypto-native solutions were initially built to solve individual functional use cases.