Blockchain is already reshaping investment operations

Sally Rose

By

05/03/2018

Blockchain technology is set to disrupt the investment operations industry over the coming decade and leading players are already embracing it.

In 2017, Northern Trust became the first custodian to use a blockchain solution to manage the custody operations of a private equity fund.

Northern Trust found using a blockchain-based ledger to be beneficial for all stakeholders, not just the general partnership operating the PE fund.

“It had the full involvement of investors, regulators, administrators and ourselves as custodians,” Northern Trust senior vice-president, market advocacy and innovation research, Asia-Pacific, Danielle Henderson said. “We saw it could deliver efficiency, reduce risk and increase transparency for all on the platform. We will continue to develop and deploy that capability.”

Blockchain refers to digital distributed ledger technology best known for its application in underpinning the platforms on which bitcoin and other digital currencies are traded. The main attraction of ‘blockchains’ or ‘DLTs’ are that they create a permanent record of transactions that can be added to, but not edited – making them reliable as source of truth between parties.

Henderson is confident the technology has a big role to play in shaping the future of investment operations.

“It [blockchain] is a significant technology that if implemented correctly could reduce settlement times, reduce risk, and increase transparency, bringing great benefit to the financial services industry,” she said.

Henderson made her comments at the 2018 Investment Magazine Investment Operations Conference, held in Sydney on February 20.

Disruption for exchange operators

Speaking on the same panel was National Stock Exchange of Australia head of new products and markets, Chan Arambewela − who agreed that blockchain is set to have a big impact on the investment operations industry.

The NSX is one of a handful of alternative sharemarket operators, including Chi-X and the Sydney Stock Exchange, that aim to rival dominant local market operator the Australian Securities Exchange (ASX).

The ASX operates the CHESS Depositary System, the settlements platform all market operators must use, and has announced plans to replace CHESS with a new system that uses a blockchain-like distributed ledger technology.

Arambewela said that advocating to be involved in the development of the replacement for CHESS, and ensuring an outcome that allowed transparency and a fair playing field for all market operators, was obviously a priority for the NSX. But he said there were also many more opportunities for NSX from blockchain.

“I see a lot of opportunities for NSX from blockchain, particularly in the private markets space, also in OTC markets…We believe we can re-stack our exchange to provide a lot of solutions, really providing an end-to-end service,” he said.

Arambewela also noted possible opportunities arising from pending legislation to allow for the development of a secondary market in crowd-sourced funding.

Also speaking on the panel was Anthony Bertini, a venture capitalist who co-founded and chairs TBSx3 − a start-up company with a supply chain management solution underpinned by blockchain technology designed to combat international trade in counterfeit products.

He predicted blockchain will cause massive disruption to the investments industry.

“What I like about blockchain is that it is going to disrupt everything that has a central database,” Bertini said. “What you have to start doing is building all modules with your partners and working out what to do now. It’s kind of like working out how to use the internet in 1994.”

Superannuation industry ripe for disruption

He said the superannuation and funds management industry was particularly vulnerable to disruption caused by new blockchain players, because it has been making so much money for such a long time.

“I think a lot of what you do is probably over in this great shared economy,” Bertini said. “One of the problems is you are so big and are going to be hampered by incumbency. Eventually, somebody’s going to eat your lunch, and blockchain is going to be an enabler for somebody to do that.”

Deloitte partner, payments, Jonathan Perkinson, said the global accounting, auditing and consulting firm recently worked with a local financial services company to work up a “proof of concept” to use blockchain to build an alternative to a traditional clearing house for a specific, thinly traded, financial instrument.

Perkinson said it was clear quickly that the technology would work, but the experiment was abandoned because of regulatory issues related to capital provisioning. He said this was an important lesson in the importance of addressing all the attendant regulatory and business strategy issues that might be connected to moving to a blockchain solution, rather than being preoccupied by the technology.

“The project unravelled, but we failed safe and quick, and cheap,” he said. “The big lesson to be learnt is look for the big problems first so you don’t go down the technology route too far.”

Milestone Group director, multi-asset solutions and innovation, Mark Neary said the investment automation software provider now spends plenty of time working with its clients and their stakeholders to implement “applied innovation” around the way multiple organisations within an investment ecosystem interact.

Neary said Milestone was looking at how to pull costs out of the process of interactions and communications between organisations. Blockchain is “a great example” of a technology that should support multi-party collaboration, he said.

He added that a number of organisations that Milestone thought of purely as competitors10 years ago were now also collaborators. Neary’s advice to funds and custodians looking to experiment with blockchain was to “remember that you can’t own collaboration”.

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