Unlocking Economic Advantage With Blockchain

There is a growing realization that distributed ledger technology — popularly known as blockchain — will bring a radical shift in the way we think about financial assets and the way the financial industry will operate in the future.

The blockchain journey is likely to be long and the outcome is uncertain, but a consensus is forming that it is the real deal. Disregarding it is a risk.

In this joint report with J.P. Morgan, we argue that asset managers need to get off the sidelines and take the initiative to understand and embrace blockchain. The report is designed to serve as a guide to how the technology may evolve, the impact it can have on asset managers, and the action they can take. Like any guide, it is not comprehensive — blockchain is a complex technical topic and the many initiatives it has spawned are too wide-ranging to be encompassed in any single document. Rather, we have imagined ourselves in the driver’s seat of an asset manager organization and have raised the questions that the industry needs to address. For each member of the senior management team, we lay out a set of five key actions as they begin the journey.

1The report says the technology underlying blockchain is not new – why has it taken this long to emerge?

Blockchain is a combination of proven, existing technologies: peer-to-peer networking, asymmetric, cryptography and cryptographic hashing. Bitcoin was the innovation that combined these technologies, offering the ability to transfer value, while preventing doublespend in a trustless, pseudonymous, publicly accessible system. Blockchain takes this innovative formula, but reinstates the accountability and governance models that make it appropriate for banking activities.
2Why do you believe blockchain is a credible solution in the real world?

Our view of the credibility of blockchain technology is informed by candid discussions with clients, banks, exchanges, central securities depositories and existing market service providers. There has been an influx of attention and initiatives from market participants, including startups and newly formed industry consortia focused on driving technical standards and fostering collaboration.
3How soon will blockchain start being used in asset management?

Simple applications focused on more robust and consistent data sharing are already emerging. Uses are focused on three areas: sharing data between consenting parties, thus allowing the parties to reach a common data set and reduce the need for duplicative data collection; sharing instructions and messages between parties by posting them to a distributed ledger, thereby reducing the chances for tampering with the data; and making documentation processing more efficient. We expect many such deployments over the next 3 years.
4Some proponents of blockchain have suggested it could revolutionize how capital markets operate – is this true?

It remains to be seen if the financial system will ever be based on a truly decentralized infrastructure of the sort envisaged by some pioneers. We believe initial waves of deployment will be implemented and administrated by regulated infrastructure providers. However, there remains the potential for a disruptive adoption path, with issuers and end investors interacting directly on open source platforms. But it is uncertain when these could emerge.
5What are the types of benefits that asset managers could realize themselves?

The obvious benefit is cost reduction – we believe over half of a typical asset manager’s cost base is addressable with blockchain. However, revenue opportunities can also grow out of better data or greater liquidity, for example, as they enable asset managers to serve clients in new ways. Ultimately, end investors may be the greatest beneficiaries, as providers compete for their business using blockchain.
6Is there work on blockchain that asset managers need to be starting now?

We see three areas in which asset managers should look to get involved. Firstly, providing input to developers and regulators on major implementation choices. Secondly, directing external efforts toward use cases of benefit to asset managers. Thirdly, identifying early deployments that are capable of creating competitive advantages. All of these will help asset managers maximize the benefits they gain from blockchain.
7The C-Suite already have a congested agenda – do they need to be playing a role?

We believe that blockchain is becoming a C-suite issue for asset managers. As a group, management teams need to understand the potential impact on the business and right-size their response. Both business and functional heads have a role to play and a list of tasks to execute over the next two years.