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Harnessing the potential of blockchain

Blockchain-based innovation set to reward nimble and collaborative investment firms

Blockchain, the technology underlying bitcoin, is disrupting the investment management value chain. While acknowledging the transformational power of distributed ledger technology (DLT), governments and financial institutions are looking to understand how this can be leveraged and implemented into their business processes. The promised rewards range from cost savings resulting from reduced transaction and administrative inefficiencies through to automation and potential revenue generation through the creation of new business models and offerings.

Key insights

  • Investment firms should consider collaborating with industry partners and even competitors to realize the benefits of DLT for their businesses
  • Reduced inefficiencies promised by blockchain will not necessarily give asset managers a competitive advantage as the benefits will ultimately be enjoyed by all firms over time
  • Governance and privacy headwinds could slow the adoption of DLT, but should not discourage investment firms from acting now to test such technologies within their businesses

According to panelists at a recent Technology Workshop Series event in Sydney, moderated by RBC Investor & Treasury Services' Marian Azer, Head of Product & Chief Operating Officer, Asia Pacific, Global Client Coverage, investment firms may find it challenging to strike out alone in the race to adopt DLT solutions that will transform their businesses, and may find it beneficial to collaborate with industry partners and even competitors. 

“Most of the time when you crunch the numbers you will find that the business case will not add up because this is a cost, and especially one that has not really been proven," commented Laszlo Peter, Head of Blockchain at KPMG Australia. 

“However, if you look outside your organization, when you start to collaborate, you realize the problem you have is most certainly the problem faced by your competitors. Collaborating can allow you to actually compete on products and services rather than operations. It creates a brand new way of thinking around new business models." 

From proof-of-concept to production 

Such “incentive-based collaboration" is being seen across the globe, with industry partnerships between banks, fintech start-ups, and software engineers working on numerous proof-of-concept initiatives that apply DLT to fund transactions, digital identity, and trade finance. A number of firms have successfully tested blockchain-based asset management platforms that use smart contracts to process transactions and order-routing, including FundsDLT, a product developed by Fundsquare, a subsidiary of the Luxembourg Stock Exchange, InTech, and KPMG Luxembourg.1

It is estimated that administrative cost reductions could save fund managers approximately USD 2.7 billion a year, according to London-based technology company Calastone.2 The streamlining extends to reducing the friction in storing, sharing, and updating customer identity through blockchain-based KYC (Know Your Customer) platforms and simplifying anti-money laundering checks.  

“You can see blockchain being used to improve existing offerings for your customers by automating relevant processes and making them more efficient across the business network or value chain. DLT has the potential to transform back office functions, which interface with the business network and enable improved customer interactions, including digital identity management and the secure sharing of financial information," said Michael Aaron, a Sydney-based blockchain consultant. 

Collaborating can allow you to compete on products and services rather than operations

While welcome, such efficiencies will ultimately be shared across the investment management industry and will not in themselves provide a competitive advantage for asset managers seeking new funds and investors. The real dividend will be enjoyed by firms able to harness the blockchain ecosystem to produce innovative product and service offerings that will not only help to retain existing clients, but also win new clients from younger demographics. 

“It is about facilitating clients' access to invest in new managed funds. How do you grow your funds?" said Peter. 

He added, “It is not the blockchain alone that is going to help, it is the platform where you start to look for efficiencies to access new markets—and remove the barriers for investors to invest in your fund. For example, if I can invest in a fund from the comfort of my phone, it is very different than receiving complex 10-page documents that have to be signed and faxed back."

“I suggest that a blockchain DLT-based transformation is similar to a core systems or enterprise resource planning (ERP) replacement project, relying upon current state to future state transformation programs of work, except that the whole value chain needs to be involved, including external partners, regulators and industry associations. This means that blockchain DLT-based transformation is a 'team sport' and your first step is to identify the team and look at the big picture," said Michael.

Squaring the ledger with privacy protections 

While DLT continue to attract significant attention, adoption faces a number of potential headwinds ranging from governance in competing jurisdictions to privacy concerns. The advent of the EU's General Data Protection Regulation (GDPR) coming into force in May 2018 will enshrine European residents' 'right to erasure' (often called the 'right to be forgotten') into law, compelling data controllers to erase personal data on request or in circumstances when the data is no longer necessary in relation to its original purpose. 

A key feature of blockchain architecture is that transactions cannot be changed or deleted after the fact, raising concerns that service providers may have difficulty fulfilling their obligations to erase personal data linked to transactions on the digital ledger.3 There is also a lack of consensus for appropriate industry standards to govern the application of DLT, even though there is a growing acceptance that much of the technology should be free and open source, according to Stephen Wilson, Vice-President and Principal Analyst at Constellation Research. 

DLT has the potential to transform back office functions, which interface with the business network and enable improved customer interactions

“If you are running network-critical infrastructure, you are going to have to think about what sort of governance applies. If there is a bug, you need to know when it will be fixed. The free and open source public blockchains of Bitcoin and Ethereum have taken years arguing over bugs. So we see the private blockchain momentum coming out," said Wilson.

While standards and governance questions are likely to take years to resolve, investment management firms can start by forging industry partnerships to explore how the technology can benefit their business for the long-term. “The earlier the better, not just because it will immediately give them massive savings and new product overnight, but because they will have resources inside the organization that will understand what they are dealing with," said Peter.

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