Asset managers are stepping up their enquiries into how blockchain could potentially cut costs and ease the burden of regulatory requirements.
In an effort to provide members with more detail on the transaction technology, the Investment Association (IA) is to hold exploratory discussions this month in conjunction with a consultancy firm.
Blockchain originally came to prominence by facilitating the growth of digital currency Bitcoin. Financial firms want to know whether such a network – in effect a giant public record book of Bitcoin transactions – can make their own deals cheaper, faster and more secure.
Investment Adviser’s sister title FTfm reported earlier this year that five large asset managers had joined forces to examine whether it could be used to cut a number of costs, such as those associated with trading.
Olivia Vinden, a principal at the Alpha FMC consultancy, said blockchain could also have regulatory benefits.
Asset managers could publish all trading activity on to the ledger, Ms Vinden suggested. Allowing the FCA access to the blockchain would give the regulator the ability to see every transaction in real time, thereby eliminating the need for traditional regulatory reporting.
Though the original Bitcoin blockchain publicised every transaction made with the digital currency, blockchain for financial services could include an added layer of security, where certain parts of the ledger were accessible only to those with the relevant permissions.
Ms Vinden said: “Often it’s quite arduous collating data, but if the regulator can just see into the distributed ledger, then you don’t need to do any reporting because they can see the most up-to-date version.
“If the regulator can see everything, but you can only see what you’re allowed to see, then that makes it a very flexible and low-cost solution for implementing regulatory change.”
The FCA flagged the potential uses in its 2016-17 business plan released last week, saying blockchain represents “an alternative approach to the safe storage of information”.
Using blockchain would bring cost savings through a number of different routes in addition to regulatory reporting, according to Jet Lali, director and head of digital at Alpha FMC.
A public ledger would mean fewer employees and platforms are required to support a business. A decentralised system could also limit errors relating to transaction reporting.
Use of blockchain would also improve the speed of settlement, according to Ms Vinden. “If you can transfer an asset immediately then you don’t have that one, two, or three-day settlement [time] that you might have with other asset types. It means that the cash and the assets move around much more quickly,” she said.
Custodian banks have already taken notice of the threat blockchain poses.
Ms Vinden and Mr Lali said the banks in question are trying to incorporate the technology into their own models, fearful that clearing, settlement and custody charges – a lucrative part of their business – could be swept away if asset managers develop their own public ledger.
Ms Vinden added: “My sense is that the technology is getting to a point where it might be usable and where a proof of concept can go from being just an idea to being ready to be used. As a result of that, all the investment banks are talking about it, all the consultants are talking about it, customers begin to ask about it, and you just get this critical mass where it becomes the thing that’s on everyone’s lips.”
How blockchain works
Blockchain technology underpins the crypto-currency Bitcoin, but can be used entirely separately in record-keeping.
It acts as a digital record of transaction activity conducted by every member of the chain.
Each transaction made by a member creates a block, which is then put in a sequence to create a continually growing record book of activity.
Members of the blockchain can, in theory, look at the record at any time to monitor what the other members are doing.
Blockchain is designed to remove middlemen such as banks from these transactions. Authentication processes are instead conducted via a combination of code-breaking and crowdsourcing.
A principal attribute of the technology is that it is decentralised, meaning no one company involved owns the chain. The FT Lexicon says blockchain “is to Bitcoin what the internet is to email”.
What the FCA says
Blockchain technology represents an alternative approach to the safe storage of information of value such as trade execution, clearing and settlement and custody. It can provide for secure, transparent and immediate confirmation of information that can then be distributed... without the need for a central record-keeping authority. While this new alternative approach has many advantages, it also presents new challenges related to data privacy, defect corrections and trust.
