Investment Operations and the Blockchain Evolution

Taking Advantage of the Next Era of Trade Settlement Technology

By Katarina Hauben, COO of Archer

Soon after Bitcoin came into existence in 2009, cryptocurrencies and blockchain technology have been synonymous in the minds of many investors. However, the two are far from the same thing, and separating the two can help show how blockchain technology may revolutionize the future of investment operations.

While Bitcoin is a popular cryptocurrency, blockchain is the distributed ledger technology that allows bitcoin to exist. The use cases for blockchain extend far beyond supporting cryptocurrencies. Whether it be revolutionizing the mobile payments industry, securing the exchange of healthcare data, or refining supply chain management, blockchain technology has the power to change the global economy as we know it. Amazon, Oracle, and IBM, three of the biggest names in technology, have already launched blockchain-as-a-service (“BaaS”) offerings of their own.

Blockchain’s potential applications to various industries are far ranging, and the asset management industry is no exception. It would seem the most likely application of blockchain in asset management is in the area of trade settlement. Most experts agree that a blockchain-supported distributed ledger has the potential to supercharge the securities settlement process, adding ease, efficiency, transparency, and precision by unifying parties’ access to a single, distributed, gold copy of each transaction. The disruption could feasibly displace the long accepted network of trade communication from asset managers to custodians.

In fact, DTCC Chief Executive Mike Bodson confessed that his organization will need to completely change as blockchain matures. Instead of being the exclusive holder of the gold copy of trade records, Bodson said DTCC will need to change its focus to becoming the entity running the distributed ledger technology models for the industry.

This revolutionary technology is still in its relative infancy, and a transition to a distributed ledger in the trade settlement process won’t happen overnight. However, the pace of change is increasing and it’s important for asset managers to start thinking about their operations and whether or not they’re positioned to capitalize on this inevitable shift.

A Community of Data Sharing

A distributed ledger environment essentially creates a secure community of data sharing where a gold copy of trade information can be accessed by managers, counterparties, and custodians in real-time, while allowing for complete traceability. In order to participate in the community, managers must have the ability to access and share information using blockchain-friendly methods. What does that mean for investment operations?

At the base level, it means data rigidity must go by the wayside if managers are going to be active participants in a community of data sharing. Flexibility will be key to successfully integrating blockchain technology into operations. To truly benefit from blockchain technology, systems must be data agnostic — with the ability to process information in various forms and from multiple data streams. Operational flexibility and nimbleness will be critical attributes for success, especially during the interim evolution of blockchain technology when some, but not all, parties will be participating and some, but not all, transactions will be included. That flexibility is likely more easily achieved with a variable-cost operational infrastructure which flexes as needed to accommodate each asset manager’s unique complexities. The ability for technology and infrastructure to adapt to rapid change can determine who will thrive and who may be left behind.

Fully-implemented blockchain is likely still a few years away, but data-agnostic systems and variable-cost operations are available now, and moving forward fast to accommodate the imminent trade operations disruption.

This article was originally published June 14, 2018 in FinTech Weekly (https://medium.com/fintech-weekly-magazine/investment-operations-and-the-blockchain-evolution-600934d8f377)