Blockchain: What is it and how will it affect investment managers?
These days you often come across the term blockchain. There is hardly an industry newsletter that doesn’t mention it or an industry conference that doesn’t dedicate at least one work stream or panel discussion to it. I myself will be speaking about it at this year's International User Community Meeting (IUCM).
But what exactly is blockchain?
Blockchain is a protocol for digital value exchange, which solves the problem of double spending inherent in the transfer of any digital asset. At the same time, blockchain removes the need for a centralized authority of trust – a party that would record and verify transactions.
Why does blockchain matter for asset managers?
By providing a common, ubiquitous distributed ledger technology, blockchain could reduce the friction created in financial networks when different intermediaries – such as sell-side firms, exchanges, clearing houses, central securities depositories, payment processors etc. – use different technology infrastructures.
In theory, the distributed nature of blockchain could also reduce or altogether remove the need for intermediaries to validate financial transactions. This new potential infrastructure is a possibility for buy-side firms and end users to not only trade and settle on their own, but also create their own products. This could be in the form of smart contracts in which business rules implied by a financial contract are embedded in a programming language and executed with the transaction.
However, asset managers, probably due to their low appetite for risk, are among the last of the financial giants to enter the blockchain arena, trailing several years after investment banks and exchanges.
As I see it, there are three possible outcomes of blockchain on our industry.
1. Total disruption of financial services
Under the most optimistic scenario, distributed ledger technology would become the primary means of issuing, trading and settling financial assets. Effectively, all financial assets would move to a pervasive and persistent, distributed and reliable transaction cloud. This “Blockchain Book of Records” would provide a record of all transactions, and hence ownership, for any product.
2. Partial adoption
A slightly less disruptive scenario envisages a significant level of adoption of blockchain technology only for the issuance, trading and post-trade processing (including settlement) of illiquid products that currently exhibit a low level of automation.
3. Not living up to the hype
Finally, it is also possible that the innovation and investment in the area of blockchain will dry up or end abruptly. There could be several reasons that precipitate this. For instance, a significant financial crisis or the possibility that various different regulatory authorities make discouraging moves towards a decentralized market infrastructure.
SimCorp’s position with regards to blockchain technology is to continue to actively monitor developments within the industry, while continuing to work with our Alliance Partners who are closer to the potential disruptive waves of this new technology, such as DTCC, SWIFT and Markit. Most importantly, we are engaging with our clients in conversations in order to understand their common concerns and ideas, and we welcome cooperation on any concrete proposals that have a real potential to address tangible business requirements.
Feel free to share your thoughts on the impact of blockchain on the investment management industry in the comments section below, or connect with me on LinkedIn.