While still in its infancy, blockchain technology is seen by many as shaking up the financial services industry. By providing a trusted distributed ledger, it offers a secure, immutable digital alternative to centralised record-keeping. This is in contrast to a traditional bank or an asset manager’s ledger, which requires a trusted counterparty to certify ownership and clear transactions.
Blockchain, which can be either public or private, offers a host of benefits to asset managers thanks to its accuracy and traceability. Not only does it promise to reduce operational risk through the removal of settlement error, but its complete audit trail makes it less susceptible to fraud and therefore financial crime risk decreases. It has the potential to radically improve settlement times and dramatically reduce the costs associated with reconciliation
by providing a single shared version of the truth, available to all participants, including regulators.
With such huge potential, it’s easy to see why industry consortia are rapidly forming and why blockchain is dominating the headlines. The reality, however, is that we are likely to be several years away from an industry-wide rollout.
There are still so many unknowns of this young technology. What is the end state? What complexities will the migration hold? Can it stand up to the volume of transactions it would need to process? How will the industry standards around blockchain be normalised? How will regulation be applied?
While there is much work to be done, however, the asset management community can still harness this technology in the near term through bilateral or private applications.
Regulation continues to place increasing pressure on the buy-side and this manifests into a need for more data more quickly.
A blockchain that works on a private level across asset managers and their service providers could therefore play a critical role in closing down any air gaps that exist between each party. Not only would this drive down risk and better empower
asset managers to respond to regulatory change, but it could also play a huge role in improving fund performance.
Bilateral blockchain adoption could also be extended to the processes that continue to be manually intensive, stretched across multiple participants or simply not quick enough. Take Ibor (the investment book of record), for example, and the challenges many face in aggregating data across different platforms in order to generate this – a process that can take up to 24 hours. With a single, shared book of records, Ibor in real time could become a reality.
The processing of corporate actions is another inefficient activity that could be transformed. Currently the process originates with the service provider, which gathers and validates the data, before updating its records and, lastly, informing the asset manager so they can update their positions. A blockchain solution, on the other hand, would allow for the source data to be posted directly to the shared ledger, giving the client and service provider an updated position significantly faster.
Looking ahead, blockchain has the potential to underpin a market utility for corporate actions, providing a solution to a longstanding industry bane.
The seemingly endless possible uses for blockchain are what make this technology so enticing. Internal or bilateral adoption is the first evolutionary step. Bridging from these back to existing infrastructure, and interoperating with other private blockchains, will be key to moving towards an end state where all trading and settlement is performed on distributed ledgers. For the asset management industry, this could result in a lower cost environment free from settlement error and counterparty risk.
Stephen Bayly is chief information officer at HSBC Securities Services
©2016 funds europe