Perhaps you clicked on this blog because Blockchain and Distributed Ledger Technology (DLT) is the hottest tech topic we’ve heard about in years. Perhaps you’re interested in the specific impact it will have on investment industry players. Whatever caught your attention, I’m with you. We are all following the buzz intently for our own reasons: disruption, efficiency, the next big thing, etc. Speaking more personally, the reasons the topic resonates with me is simple: it sparks my imagination.
Blockchain technology is not mature enough for widespread investment industry application today, but the potential is almost endless. And beyond the technology, blockchain’s intrigue owes something to its roots: technology designed to avoidinternational banking regulation. With its inspiration and intrigue, it’s no surprise that blockchain has sent us into a fintech frenzy.
In our paper The Buy-Sider’s Guide to Blockchain, we discussed the potential maturity curve for the technology and its likely impact on our industry. In the months since we released our paper, we’ve watched as industry players assumed their usual roles when it comes to sniffing out new technology: the buy-side is taking a cautious approach (larger players are leading/participating in some POC activity), while vendors and service providers are leading the development charge.
In the case of DLT, it appears that those with business models that will be directly impacted—namely, intermediaries and recordkeepers—have the most motivation to change. Below are five ways I see service providers for buy-side investment managers being impacted by Distributed Ledger Technology:
- Lower Cost - The focus of buy-side driven DLT investment today appears to be made largely by the service providers with reducing cost as the key driver. Whether it is providers working internally to evolve recordkeeping or reconciliation systems, or collaborating with clearinghouses like DTCC to reduce settlement friction, bank-driven investment is rooted in wringing out cost from the settlement process.
- Shifting The Value Proposition - Transforming into data and analytics providers and leading the digitization of investment operations are very real efforts that providers are driving today. Blockchain is another technology-led avenue that service providers are looking to as they evolve their value proposition from a traditional safekeeper of assets to a largely digital enterprise.
- Processing Power V3 - At one point, investment managers looked to service providers for added scale. Simply put: People Power. Then, provider's power continued to evolve to offer investment managers value through added capability, such as Global Scale or Complex Asset Type coverage. Another major step in improving the industry’s processing capability is, literally, power. Computing power. DLT at scale will require an enormous amount of computer processing capacity to solve cryptographic equations and power will be an asset. Service providers and their formidable cloud capability will be positioned to support this needed utility. It also aligns with their intended digital evolution.
- Forcing Innovation for Core Back Office Systems - Did you know that an estimated $3 Trillion USD in daily commerce still flows through COBOL-based systems, developed almost 60 years ago? There is a reason that the technology still runs in many bank's ecosystems: it works, it is the definition of "critical path" and no code replacement could justify itself enough to overcome a massive replacement effort. DLT may be just the technology to force change due to the scale at which distributed systems operate. No one likes paying for infrastructure ... unless that infrastructure holds the key to survival.
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- Evolution as Technology Partner, Incubator - Providers have often pitched themselves as a technology partner for their clients but today, they are making FinTech investments, participating in technology consortia and driving POCs in the interest of keeping up with the latest developments in DLT. This technology is increasingly driving outward-focused technology behavior from the service provider community.
Whether the full scale of DLT potential hits the world economy is anyone’s guess at this point—but it seems almost certain that it will impact our industry. Since we’re already seeing service providers actively invest in DLT, the question has become whether the buy-side will follow along this path and invest their time, attention and budget. At this point, the wait and see approach continues to be the road most travelled for smaller managers but the dynamic could change quickly if the POC’s coming out of leading investment managers demonstrate concrete value.
