Asset servicing companies are evaluating and investing in disruptive technologies at a faster pace than anyone expected. In fact, more than US$1.1 billion of venture capital has been invested in blockchain in the past five years.
Yet, wider mainstream adoption is still a vision that requires upheaval, risk containment and investment in infrastructure and people. It may take years to overcome the hurdles and complexities, but it is not too soon to begin the initially painful process of developing a strategic platform and collaborating on how wider adoption can be achieved. Initial efforts will result in a new level of transparency and accountability — and prove to be a competitive differentiator.
Blockchain addresses several challenges in the asset services industry, particularly by overcoming inefficiencies caused by mismanaged data. Capturing data at inception and managing that data through the value chain is a benefit that will result in a continuous cycle of innovation and disruption.
One of the most promising opportunities is the distributed ledger’s ability to significantly curtail errors from mismanaged data. Errors include data that is not collected properly from the source, such as trade details which with blockchain would need to be substantiated by two parties before being applied to the ledger.
Another area where data management qualities can apply and errors can be reduced is when securities are issued and facts about the security and how it needs to be mastered throughout its lifetime are made available on the distributed ledger. These errors materialize as early as trade initiation with disagreement on trade price for instance. This simple mistake can easily escalate to costly settlement failure and is only one example of data mismanagement costs. With an environment that is able to capture and share information at origin, mishandling errors that lead to failures will be reduced.
Key questions for a solid blockchain strategy
When asset servicers make the decision to utilize blockchain technology, they will benefit from a three-pronged approach: the ability to capture high-quality, accurate data; apply data management to correct the errors of mismanagement; and ultimately, deploy technology as a tool to disrupt the entire data chain.
There will be many hurdles along the way, and it may take years for blockchain to emerge fully as a disruptor. It is important for firms to understand what steps to take to remain ahead of their competitors. As blockchain transforms the industry, ask these questions to build a solid strategy:
- What steps are you taking to leverage blockchain technology? Do you have the protocols in place for widespread adoption?
- Are you looking to in-house solutions, shared solutions or automating whatever is necessary to reduce costs and manage operational risks?
- Capturing data at inception and managing it effectively is a major benefit; is it high on your firm’s agenda?
- Is your business model changing to address the fundamental shift from traditional functions to value-added services for compliance, hedging and risk-intermediation?
- Are you investing short term in technology and infrastructure to achieve ultimate long-term goals?