Recently there has been much excitement in the trade press about the UK government’s ambition to deliver a "blockchain enabled digital fund", as revealed in the government’s second UK Investment Management Strategy. However, I believe that this excitement is misplaced and does not herald imminent change.
For a critical sector such as the UK asset management industry, representing 1 per cent of GDP, the strategy is vague and lacking in clear direction, let alone ambition.
The strategy’s approach to blockchain hopes that the Investment Association will create a “taskforce to agree to a framework to take this work forward”. This might represent exciting progress at Whitehall but is unlikely to stir anyone in the City to action, whether in Canary Wharf’s gleaming banking towers or the grittier post-warehouse tech offices around Silicon Roundabout.
Beyond Government however, there is huge excitement about the potential for blockchain technology to revolutionise parts of the investment industry. For example, in Luxembourg, BNB Paribas carried out two experimental trades in 2017 in funds via blockchain technologies, and they hope to start onboarding “pilot clients” later this year.
While in the UK, Calastone has completed its proof of concept, and plan to “blockchain-enable” their technology by 2019. However, the practical impact of this on trading of UK funds this decade is likely to be minimal.
Many consider blockchain a “solution in search of a problem”, and it is hard to see how blockchain can solve all of the problems the industry is excitedly waving it at.
Much of this is because, in all the noise and excitement, several key challenges and implications of blockchain technology are not widely understood.
Private or open?
The first challenge centres on the difference between “private” or “open” blockchains. Much of the excitement around Bitcoin (the first mainstream use of a blockchain technology) is that it is an open network. This means anyone can set up a server (or these days a small data centre) and start “mining” Bitcoin and validating and approving the “ledger” of all the transactions ever completed (and be rewarded in Bitcoin for doing so – hence the term “mining”).
- The government has talked about the potential use of blockchain technology in investment funds.
- The complexities of blockchain mean it may not immediately be cost saving.
- Active fund managers will face a transparency dilemma when it comes to using blockchain.
Consequently no one can control Bitcoin, as recent public splits of Bitcoin into rival currencies (Bitcoin vs Bitcoin Cash) attest. Bitcoin’s open network model disintermediates the banks for sending and storing “money”. In the fund industry, most of the experimental uses of blockchain technologies involve “private” networks with vetted membership, and while the press releases talk of “disintermediation”, private networks may merely entrench existing intermediaries.
The second challenge is that much is being made of the “speed” of blockchain, but this may merely be shorthand for “24x7” compared with antiquated central bank settlement systems, which only operate during working hours. The truth is that Bitcoin, by far the largest and most high profile blockchain instance, struggles to commit even 10 transactions per second globally to its blockchain. The credit card networks run thousands of times faster; if they did not the queues in the shops would stretch around the block.