News analysis: asset managers look for 'single source of truth' with blockchain experiment
Fund houses are beginning to toy with new technology in the form of blockchain, and investors could also benefit if the digital database technology is able used to improve transparency, an area in which asset managers have often been criticised.
Transparent management and transaction fees are increasingly at the forefront of regulators’ requirements, but simplicity is also a major focus. As the FCA takes steps in the institutional arena on breaking down transaction costs, the simultaneous growth of blockchain technology could provide the answers.
Blockchain first emerged as the underlying technology behind the digital currency bitcoin, but many firms are experimenting with extending its prospects beyond the currency.
The asset management industry is investigating how best to incorporate blockchain into businesses – with regulatory reporting, trading settlements, payments and record keeping the most-cited uses.
A recent report from JPMorgan on the potential uses for blockchain in financial services says the technology’s fundamental impacts at this stage of development are “creation of secured, shared data with common standards; reduced need for reconciliation; and seamless transfer of digital assets”.
The report goes on to suggest blockchain “will bring groups of buyers and sellers together” and induce lower trading costs to increase activity, creating greater liquidity to encourage more “market participation”.
Behind all of these uses is the concept of transparency. Blockchain was first created to track bitcoin exchanges, creating a ‘block’ for every transaction made with the currency and a ‘chain’ created in chronological order to connect the blocks.
Users can then view what others in the network are doing by looking at the blocks in the chain because databases are replicated across all network participants. An algorithm within the platform validates that the information is from the correct user and is accurate.
Kimberly Yurisich, Alpha FMC’s head of digital, says: “The great thing about blockchain is it creates that single source of truth.”
Different members of the blockchain could have different permissions over how much information they can view based on their role in the financial services industry. The FCA could have full access to the chain, whereas investors may only be able to see the transactions of funds they use.
Nigel Solkhon, director in direct custody and clearing at Citi Group, adds: “Industry support for new ledgers and transparency will bring new reporting benefits as all parties see the data at the same time, and the reconciliation and matching processes are reduced.
“Other areas, such as corporate governance models for voting and asset-servicing data, may also add to data quality and timeliness.”
The availability of industry transactions could eliminate the need for time-consuming regulatory reporting, and the FCA has already begun looking at how best to address blockchain in financial services.
Christopher Woolard, director of strategy and competition at the FCA, says the distributed ledger technology of blockchain “has the potential to offer genuinely innovative solutions to financial services” and “presents real opportunities in the regulatory space”.
Ms Yurisich says her clients who are looking into using the system have reported the FCA to be “encouraging at this stage”, rather than warning again potential misuse.
“It’s more curiosity, support to explore the technology and interest in how it could help the industry,” she adds.
However, the potential to improve transparency in the investment industry only works as long as users and investors believe the information on the digital ledger is accurate. Accenture, the digital consulting company, recently patented a tool that would allow users to edit entries on the blockchain.
“Tools like Accenture’s would essentially defeat blockchain’s purpose of being a permanent digital history of activity. I really don’t understand why they felt the need to come out with that technology because the whole point is transparency,” Ms Yurisich explains.
“If something needs to be corrected, you go in and create an offsetting entry to correct and back out the trade. I can’t imagine the regulator in particular is going to want that functionality of being able to go in and edit entries.”
Once a regulatory framework is in place and the technology can meet the scale of the asset management industry, then blockchain could become a staple in financial services.
Ms Yurisich said: “You’ll definitely start to see mass adoption once some of these issues get addressed.”
