04.17.2018

Socializing Blockchain in Asset Management

By Deepak Sawardekar, Managing Director, Indus Valley Partners
The concept of blockchain has been around for nearly four years. Defined as, “a shared technology that allows all participants in a network to securely and directly transact with transparency and accountability,” blockchain is used for a wide range of applications such as integration into credit cards, charges for shipments, cash transfer and other peer-peer use cases. These use cases are growing by the day and blockchain is quickly becoming a credible and future digital ecosystem for the financial industry.
 
Comprised of a network of computer nodes running a common communication over an open protocol, blockchain can enable assets such as securities, bonds and real estate to be instantly recorded and confirmed on a digital ledger. The foundation for the growth and potential success of a blockchain-based network was formed with open protocols like HTTP, SMTP and TCP/IP.
Much like the origins of the World Wide Web, which enables anyone to publish a website and harness a common network to broadcast its presence and IP from anywhere on the internet, blockchain will create a new digital ecosystem for asset managers.
 
Breaking Down Traditional Barriers
Blockchain’s egalitarian initiative and goal to create a universal peer-peer network is supported by leading organizations who see its value and long-term success. However, the biggest challenge is establishing a unified protocol that not only works as a transport, but also plugs itself into the internal nuance of workflows and workarounds. This would help to provide smarter and safer interfaces to the ledger, and a better control of data quality and efficiency in internal processing systems. Several other challenges of socializing blockchain in this space include identity management, master data management and transaction lifecycle management on these private blockchains.
 
To achieve success with blockchain, networks must be interconnected and protocols translated for seamless processing. In today’s world, there are either participants whose counterparties are managed through a centralized counterparty providing key services or through the direct peer-peer transaction world where one can manually process since there is no restriction through the dealer underlying network or blockchain network. 
 
Industry participants in the distributed ledger technology (DLT) space such as R3, Hyperledger, PeerNova and others are leveraging platforms like Ethereum to build strong cases for the viability of this distributed ecosystem to their sponsors and investors. Each of the firms within the banking and capital markets space are focusing on creating a set of key participants and use cases that would establish the resonance for future rapid adoption. Some of the areas include syndicated loans, US treasury repos, trade finance, OTC derivatives settlement, cross-border payments and private stock issuance. If a credit fund or a private debt player can reduce their settlement middle-office costs and improve on their back-office processing, it will ultimately aid in reducing management fees for the end-investor.
 
The Future of the Digital Ecosystem
Reliability of the blockchain and its ability to manage transactions securely and privately at a high volume is the current focus for engineers. Presently, a lot of POC’s have success stories around peer-peer transactions on a private blockchain, which has begun to pave the way for larger buy-side groups to examine this technology more seriously. Having built on an open source allows for continuous contribution and improvement from outside players.
 
A workflow that initiates syndicated loan exchange executed as a smart contract on a private blockchain network showcases some level of promise for larger buy-side participants. However, this also means that these buy-side participants must bring the integration points into their portfolio accounting systems in order to process initial trade and ongoing lifecycle events. This requires the integration of workflow into internal systems, which can then process economics based on transaction flow. With this comes the manifestations on how data processed by these contracts are supported by master data management systems so as to not have double entries. 
 
The governance and regulatory framework for the “trust boundaries” of the distributed ledger, where data meets workflows outside the ledger and its related specifications, have to be socialized and accepted for the transactions to begin executing in complete workflows. There are also technological challenges that have to be solved by blockchain operators to ensure that nodes can process its capacity and ensure that economies of scale can be achieved for it to become truly viable.
 
Integrators and software providers that already have their platforms assimilated within the buy side across different internal and external solutions must prepare for the changes required to handle the workflows in order to be plugged into the blockchain infrastructure.
 
Software product firms who have their solutions largely in the middle and back-office infrastructure of funds will have to spearhead these efforts. Firms that are focused on helping managers in their data management, quality and provenance are well equipped to work with several private DLT providers. Mastering internal data sets for investment (IBOR) and transactions (TBOR) is the key to hook into the ledgers. This would ensure seamless workflows are orchestrated by operational teams, which would help reduce risk and significantly improve processing time.
 
Blockchain will continue to permeate the financial industry on multiple levels. The main drivers for success will continue to hinge on the potential operational and cost efficiencies. Until these are seen, we are left wondering if DLT can and will truly deliver the promise it holds.

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