Blockchain Technology Set to Disrupt Investment Operations in the Coming Decade

Blockchain technology will disrupt the investment operations industry in the next 10 years, and leading players have already started adopting it.

In 2017, Northern Trust became the first custodian to use a blockchain solution to manage a private‑equity fund.

Northern Trust found that a blockchain‑based ledger benefits all stakeholders, not just the general partner operating the private‑equity fund.

“It fully engages investors, regulators, managers and us as the custodian,” said Danielle Henderson, Senior Vice President of Market Advocacy and Innovation Research for APAC at Northern Trust. “We see it can improve efficiency, reduce risk, and increase platform transparency. We will continue to develop and deploy this capability.”

Blockchain is a digital distributed‑ledger technology best known for supporting Bitcoin and other digital‑currency platforms. Its main attraction is an immutable transaction record that can be appended to but not edited, providing a trusted source for all parties.

Henderson believes this technology will play a crucial role in shaping the future of investment operations.

She added: “Blockchain is an important technology that, if implemented correctly, can shorten settlement times, lower risk, increase transparency, and bring huge benefits to the financial‑services industry.”

Henderson made these remarks at the 2018 Investment Operations Conference in Sydney on February 20.

Impact on exchange operators

In the same panel, Arambewela of Australia’s National Stock Exchange (NSX) agreed that blockchain will have a major impact on the investment‑business industry.

NSX is one of the few alternative stock‑market operators, including Chi‑X and the Sydney Stock Exchange, aiming to compete with the dominant local operator, the Australian Securities Exchange (ASX).

ASX runs the CHESS settlement system that all market operators must use and has announced plans to replace CHESS with a new system built on blockchain technology.

Arambewela said that developing an alternative to CHESS and ensuring transparent, fair competition for all market operators is a priority, and that NSX sees even more opportunities from blockchain.

“I see many opportunities from blockchain, especially in private‑market space and OTC markets. We believe we can re‑stack exchanges to provide many solutions, truly delivering an end‑to‑end service,” he said.

Arambewela also noted potential legislative opportunities that could allow secondary markets to develop in crowdfunding.

Anthony Bertini, a venture‑capitalist and co‑founder of TBSx3, a startup offering supply‑chain‑management solutions built on blockchain to combat counterfeit products in international trade, predicted massive disruption to the investment industry.

“I like blockchain because it will disrupt everything that has a central database. What you have to start doing is building all the modules with your partners and then figuring out what to do next,” Bertini said, likening it to early internet research in 1994.

Impact on outdated industries

Bertini said superannuation and fund‑management sectors are especially vulnerable to new blockchain entrants because they have amassed large amounts of money.

“I think a lot of what you do in this great sharing economy may already be finished,” he warned. “One problem is you’re too big and are blocked by incumbents. Eventually, someone will eat your lunch, and blockchain will be the driver that forces change.”

Deloitte partners reported that global accounting, audit and consulting firms have recently collaborated with a local financial‑services company to create a proof‑of‑concept using blockchain to replace traditional clearing houses for a specific, low‑volume financial instrument.

Perkinson said the technology will work, but regulatory issues related to capital supply halted the experiment. He emphasized that it is crucial to address regulatory and business‑strategy challenges alongside the technology.

“The project failed, but we learned safety, speed, and cheapness,” he said. “The big lesson is to first identify a big problem so you don’t go too far.”

Mark Neary noted that investment‑automation software vendors now spend considerable time collaborating with clients and stakeholders to achieve “application innovation” across multiple organizations in the investment ecosystem.

Neary explained that Milestone is researching how to pull costs out of inter‑organizational interaction and communication, describing blockchain as a “paradigm” for multi‑party cooperation.

He added that some organizations that were competitors ten years ago are now partners, and advised fund managers to remember that you cannot own collaboration.