
Blockchain could knock more than NZ$3.5 billion a year off managed fund processing costs globally, according to new research from UK-headquartered firm Calastone.
In a statement, Calastone, which automates many back-office fund processes, says blockchain could further remove much of the transactional grit clogging up the system.
“The forecast savings demonstrate the scale of financial impact that greater automation and interconnectivity could bring to the funds market,” the statement says.
“The numbers released by Calastone represent the tangible, financial value that a blockchain enabled distributed market infrastructure can deliver, through stripping-out many of the remaining inefficiencies currently embedded in the system, resulting in increasing cost, risk, operational and regulatory pressures.”
In January this year research house Forrester released a report showing Calastone had already delivered cost savings of about NZ$880 million via automated back-office services over the last six years. Forrester surveyed 234 funds across UK, Ireland, Luxembourg, Hong Kong, Singapore, Taiwan and Australia, the statement says.
Calastone, which entered the NZ market in 2016 offering its fund order routing service, is currently trialing a blockchain, or distributed ledger technology (DLT), expected to go live in 2019.
In a presentation to over 650 people from 15 countries late in February, Vince Lucey, Calastone programme manager, said the blockchain potential for funds management was rapidly “becoming real”.
“We have proven that DLT can support the scale and complexity of the global fund market,” Lucey told the global industry audience.
He said given financial services providers must operate under strict regulatory conditions – including know-your-client, know-your-distributor, and anti-money laundering rules – any fund blockchain would operate as a ‘permissioned’ network rather than the open ‘proof of work’ systems à la bitcoin.
According to Lucey, blockchain fund processing would cut trading costs, reduce errors and reconciliation work while supporting greater transaction volume and sharing ‘trading infrastructure’ across all parties.
For instance, he said real-time registry could emerge naturally out of blockchain transactions, simplifying record-keeping duties.
All parties in the fund chain – including managers, custodians, investment platforms, financial advisers and regulators – could also have greater “visibility” across the system.
Lucey said, for example, fund managers would be able to see, if not the whole identity, at least the kind of individual clients accessing their products via an intermediary platform. Currently, investment platforms deliver retail clients to fund managers in a wholesale, anonymous format.
“Fund managers can see the real distribution tree down to the retail level,” he said, enabling, say, a manager to block inappropriate sales of “high-octane funds” to retail investors.
Lucey said while blockchain would deliver efficiencies and potential new business opportunities “it won’t replace participants in the value chain”.
“And it won’t replace the core benefits of mutual funds for clients,” he said.