Written by Adam Jones, Guest Blogger on Friday 27 January 2017
Article first appeared in Trustnet January 2017
In a Hitchhikers Guide to the Galaxy, the Earth was not a planet but in fact a giant supercomputer designed to find the Ultimate Question of Life, the Universe and Everything. The question whose answer was 42. It’s this broad and overarching purpose which brings to mind ‘Blockchain’ and the myriad articles you will have probably seen purporting it to be everything from the best thing since sliced bread all the way through to the downfall of civilisation.
This article is not meant to provide a detailed guide to all things Blockchain. For that, I would recommend this article. Instead, I wanted to take a look at the implications for advisers and investment professionals. In order to do this however, and to make sure we are all on the same page, the following points are worth noting:
- There is a cryptocurrency called bitcoin.
- The piece of technology that makes bitcoin work (creates it, records ownership and changes of ownership etc.) is called the Blockchain.
- In principle, it is a distributed ledger, meaning that multiple copies of the same ledger (list of transactions) are shared among all of the users of the technology. It also means that any change applied to the ledger is applied on everyone’s copy automatically at (roughly) the same time.
- The application of changes is done via a load of secure cryptography (maths) and automated logic which ultimately means all of the ledgers should always match.
- It is a ‘write-only’ concept, meaning it is not possible to alter the records which have already been written into the ledger. If you want to change something, you have to add a new record which says “the old record is no longer valid, use this one instead”.
Because of the way this technology had been created there are a few core benefits. Many of these centre around concepts of security, robustness, permanence and distributed power.
Putting all the exciting (or geeky) technical stuff to one side for a minute, these characteristics (along with a few others) ultimately give Blockchain the capability to digitise trust between two parties who don’t naturally trust each other. By giving all parties visibility of the same ledger, Blockchain technologies provide transparency and a permanent record which all parties are responsible for updating and maintaining.
It is this point above all others which has led to the explosion of start-ups and consortia working on these technologies in Financial Services, trying to solve the myriad ills of an industry covered in broken processes and reconciliation issues. Be it in respect of payments, asset trading or other types of information exchange, there is potential for Blockchain technologies to provide a solution. This idea has caught the mind of a host of major FS firms. Anyone who has had a role which touched on any aspect of operations will know these areas are expensive to run, time consuming and often result in poor business and customer outcomes.
So, let’s for a minute assume someone hits the nail on the head with a solution (not that anyone has managed to thus far). What does that mean for our bit of the industry, and for the key players in it? Broadly speaking, I think you can split the world of investments into two types of party:
The providers of intelligence – e.g. Fund Managers, Financial Advisers, Discretionary Advisers
The keepers of records – e.g. Transfer Agents, custodians, registrars
If you fall under the ‘providers of intelligence’ heading, congratulations. You’re occupation is relatively safe and removed from the disruption of distributed ledger technologies. The world around you might shift enormously but your core craft will be left as is with only the threat of AI, robo advice, ever increasing value chain pressure and differentiation in an overcrowded market to worry about. Happy days!
If, however, you fall into the ‘keepers of records’ category I’m afraid you might want to prep your CV. These parties typically exist solely for the purposes of maintaining records of transactions between parties. They are centralised sources of truth which are used by various parties to ensure the things they thought they owned, are indeed owned by them. A transfer agent is a nice example here. A fund manager has a record of who it thinks owns units in a fund. The investors have a record of which funds they think they own. The transfer agent sits in the middle and makes sure both sides agree.
If instead, the investor had a record of the funds they actually held, and the fund manager had access to the same record, and both were comfortable that the record was absolutely correct, what role is the transfer agent playing?
Of course, ‘keepers of records’ can see this issue coming (at least some can) and are working on solutions to place themselves squarely at the centre of this mix by becoming ‘the providers of the Blockchain infrastructure’. They may succeed at this, or indeed, they may fail. Either way though, there is a good chance we will see significant change in the value chain (including a massive decrease in the cost of custody services) as a result of innovation driven by Blockchain technology. So, in the spirit of the Hitchhiker’s Guide description of Earth as “Mostly Harmless”, I’d like to propose a tentative description of “Mostly Disruptive” for Blockchain and distributed ledger technologies.
For those ‘keepers of records’ who haven’t seen the Vogon Battle Cruiser of Blockchain coming, I recommend peril sensitive sunglasses!
Comparitech have also put together a guide with help from 10 experts and produced an explainer video to answer the question 'what is blockchain?'