Blockchain in investment management

The investment management industry is closely related to securitisation and other credit treasury products – with numerous overlaps. What they also have in common: the blockchain technology and smart contracts are most promising vehicles to lead them to a further stage. So it makes sense to read this publication in conjunction with the ‘blockchain in securitisation’ report (also take note of our ‘blockchain in securitisation and other credit treasury transactions’ event in January 2018).  

Imagine a world where customers carry a trusted digital identity that is linked to their financial records and transaction history. The customer’s digital approval of a new account registration triggers a smart contract to execute a search of the records and return an authorization to open (or not) the kind of account proposed by the financial institution. Upon completion of the eligibility review, digital account-opening documentation is securely presented to the new customer on a personal smartphone app. The time, location, and electronic signature characteristics for each component of the new financial relationship are captured and secured to the blockchain. The app then secures the funding of the new financial relationship through an automated payment system or an automated securities transfer. This approach equally applies to private equity fund administration where blockchain and smart contracts can manage raising and calling capital, thereby tightening the process and removing some of the risk. Smart contracts and blockchain have the potential to provide a selectively automated process, with a “person in the loop" as applicable or desired.

The current state of blockchain in IM is the proof of concept or working prototype stage, a few steps behind the vision above. However, many IM firms are actively exploring development, signaling significant change on the horizon. This paper covers the focus of intellectual property development in blockchain, important examples of blockchain developments, and a guide to getting started with blockchain. The path to a blockchain-enabled future typically holds risks and potential rewards, presenting reasons to consider that path carefully. In IM, the potential changes to be seen from blockchain range from the truly transformational to marginal efficiency gains, where processes are legally mandated with a person in the loop.

Blockchain is a powerful technology, yet the maturity level of this technology is still far behind that of traditional databases and legacy systems. However, given the attention and investment levels allocated to blockchain more broadly, and to IM over the past two years, blockchain and smart contracts are poised for innovation.