The Financial Conduct Authority's (FCA) discussion paper on the future development of Distributed Ledger Technology (DLT) highlights several ways this innovation could be applied to improve the processes and systems used by asset managers.
The paper, published in April 2017, identifies the ability to share information efficiently and cost-effectively as the most attractive features of DLT for the financial services industry. In particular, DLT may radically improve know-your-customer (KYC) procedures and streamline compliance with anti-money laundering (AML) regulations.3
Key insights
- The FCA recognizes that DLT has the potential to disintermediate the management of funds
- Financial services firms seeking to integrate DLT will need to make significant changes to their processes, policies, and IT architecture
- The full extent to which DLT can deliver efficiency to financial firms depends on the development of regulations that govern the use of DLT in financial services
- Among the most widely recognized use-cases for DLT is its ability to streamline AML/KYC procedures
Financial firms, including asset managers, have been cautious but optimistic about DLT. While the full impact DLT will have on the financial services sector remains to be seen, there is growing consensus that it has the potential to significantly influence how the industry performs its activities. The Bank of England, for example, recently partnered with Ripple, a San Francisco-based start-up, to trial DLT technology that would facilitate cross-border payments.4 Around 80 percent of executives at financial institutions now recognize that DLT will be transformative and will impact capital markets.5 A similar percentage expect their organizations to begin incorporating DLT into their core systems before 2020.
The disintermediation of asset management
Asset managers often use intermediaries such as transfer agents to aggregate orders and custodians to maintain their client records.
DLT has the potential to disintermediate the client-asset manager relationship by allowing asset managers to deal with clients directly rather than through third-party entities. From a fund perspective, this would provide asset managers a more transparent view of ownership, and could create greater efficiencies for fund groups at a distribution level.
Established firms that want to capture the benefits of DLT must make significant changes to their processes, policies, and IT architecture. Leading financial firms around the world have already embarked on major efforts to overhaul their IT systems to prepare for the advent of DLT. For example, New York-based start-up R3 has brought together more than 80 banks and other intuitions to develop DLT for use in financial services and is close to launching its first product.6 Steps like these may put participants ahead of competitors who have yet to move ahead with DLT-related initiatives.
There is growing consensus that DLT has the potential to significantly influence how the industry performs its activities
Reducing distribution costs
Financial service providers and asset managers are in the early stages of considering whether DLT can be used to make transactions cheaper, faster and more secure. The full extent to which DLT can deliver these efficiencies will depend on the development of regulations that govern the use of DLT within the financial sector.8
As with many disruptive technologies, DLT has the capacity to broadly affect the financial services industry. From streamlining KYC onboarding and lowering the cost of cross-border payments, to improving the efficiency of securities settlement and clearing, blockchain technology is likely to become an integral part of financial services. Firms and regulators are committed to ensuring that it has a positive impact on financial markets and the industry overall.
Is a distributed ledger a blockchain?
A distributed ledger is a decentralized database of transactions, parts of which are able to be accessed by a number of users. This contrasts with traditional databases that are typically owned and operated by a centralized or single entity. A blockchain is a type of distributed ledger, where blocks of transaction records are added to the chain.1 Bitcoin, for example, is a public blockchain.
DLT is not limited to the financial services industry. For example, the music streaming service Spotify acquired the blockchain technology company Mediachain Labs in April 2017, as a tool to reward online content owners with royalty payments.2
Sources
- The Merkle (March 25, 2017) Distributed Ledger Technology Vs Blockchain Technology
- TechCrunch (April 26, 2017) Spotify acquires blockchain startup Mediachain to solve music's attribution problem
- Financial Conduct Authority (April 10, 2017) Discussion Paper on distributed ledger technology
- The Telegraph (March 17, 2017): Bank of England trials artificial intelligence and blockchain in bid to stay ahead of the pack
- Bain & Company (February 9, 2017) Blockchain in Financial Markets: How to Gain an Edge
- Financial News (August 17, 2017): Leading blockchain club readies first commercial product
- Ibid. Discussion Paper on distributed ledger technology
- Ibid. Blockchain in Financial Markets: How to Gain an Edge