Digitalisation and Cyber Security
Big data, artificial intelligence and blockchain - digital technologies are fundamentally changing the world providing new opportunities for the fund industry. The financial sector, policymakers, and regulators have all recognised the opportunities and risks of technological progress. They have put in place appropriate regulations including rules for the application of artificial intelligence and for improving the operational stability of digital systems in the financial sector.
The fund industry is already highly digitised. Nevertheless, digital technologies such as distributed ledger technology (DLT), big data and artificial intelligence as well as cloud computing may cause massive upheaval in the financial sector over the next few years. Asset managers will be significantly affected by improved availability of data, by algorithms, the digitisation of assets, and by new processes in custody, settlement and reporting. To ensure that fund providers will be catching up with the new developments and to strengthen the technological competitiveness of the financial industry, the BVI is promoting a national blockchain initiative in asset management.
The BVI has successfully campaigned for the introduction of electronic fund units and crypto fund units. Crypto fund units are electronic fund units being issued on basis of the blockchain technology. Therefore, traditional investment funds, for instance, are also able to issue crypto fund units.
Crypto funds, i.e. funds that invest in crypto assets such as bitcoins, need to be distinguished from crypto fund units (see BVI position crypto funds).
To implement end-to-end automation in asset management, standards must be set, and regulatory aspects must be clarified. To be able to execute transactions in a legally secure manner, for example, digital identities will be required. Therefore, the BVI is calling for political action including initiatives such as the end-to-end use of the Legal Entity Identifier LEI (ISO 17442). Regulatory reporting and transaction processing need to be automated across the board based on ISO standards, in particular ISO 20022. Furthermore, financial instruments and currencies must become DLT-enabled. That is why we advocate, among others, the introduction of a digital euro as means of payment for DLT transactions.
Digitalisation also affects the operational workflows at investment management companies and entails operational risks. In its digital finance legislation, the EU has adopted rules to strengthen the IT security of financial entities. The so-called Digital Operational Resilience Act (DORA) came into force on 16 January 2023 and has to be implemented by 17 January 2025. It provides a legal framework for the operational stability of digital systems.
Cyber security is becoming increasingly important due to the fund industry’s dependency on information technology and its increasing exposure to IT threats. That is why the members of the BVI are providing a cyber security guide to fund companies and their service providers.