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Calastone, an investment funds transaction network, said that they will shift their entire system to blockchain in May, a move that could slash costs for the sector by billions of dollars a year.
The benefit of moving to blockchain is a simplification of processes and reduction in costs as information does not need to be re-entered at each stage of the fund transaction.
Calastone, which provides services to over 1,700 firms including JP Morgan Asset Management, estimates the plan could help the industry save up to £3.4 billion (or $4.3 billion) in fund distribution costs, excluding the U.S. market.
The shift should see more than 9 million messages a month between those counterparties – worth more than 170 billion pounds ($217 billion)- completed on blockchain, marking a move into mainstream finance for a technology whose hype has rarely been matched by widespread usage in major industries.
Campbell Brierley, Calastone’s chief innovation officer, said:
“By bringing all trading relationships together, within our shared blockchain-enabled infrastructure, all participants benefit through the real-time view of each record and powerfully, from a data perspective, a single version of the truth.”
He also added that this alleviates common friction points such as reconciliation and settlement.
Currently, three separate messages are sent digitally between firms as they buy into a fund: one to place orders, another to confirm receipt, and a third to confirm the price.
Though more reliable than manual methods of communicating like faxes – still used by some in the industry – that messaging process is still cumbersome and time-consuming.
Savings on such a scale would be a boon to the fund industry as it is buffeted by investor pressure to lower fees – its main source of revenue – and rising costs, much of it linked to tougher regulations after the financial crisis.
Andrew Tomlinson, chief marketing officer at Calastone said:
“The more you can automate, the more you de-risk, you more you streamline, the more you speed up.”
Banks and asset managers are being concerned about the security of blockchain, said Matthias Huebner at consulting firm Oliver Wyman in Frankfurt.
“How secure is the technology? Is there a risk of fraud? Is there a risk of data just getting lost?”
Still, Calastone said all of its users would see their trades move to the blockchain.
JP Morgan Asset Management and Invesco – listed as clients on Calastone’s website – declined to comment.
BNP Paribas Asset Management and Ostrum Asset Management have already completed end-to-end fund transaction tests using blockchain, while Standard Life Aberdeen and Columbia Threadneedle Investments said they had formed a retail platform specializing in impact funds that will use blockchain.
Just for a reminder, in October, ASX Limited, Australia’s leading market operator, has announced that it is planning to release blockchain technology for settlements in 2021. According to the announcement then made by Australia’s leading stock exchange operator, ASX Ltd., They are ready to replace the Clearing House Electronic Subregister System (CHESS) that it has been using over the years with a new system powered by a digitized, decentralized and distributed ledger technology.
Last month the blockchain and crypto-friendly Asian country Singapore took several initiatives for a structured growth of tokenized assets. Singapore’s central bank – The Monetary Authority of Singapore (MAS), and the Singapore Exchange have joined hands to develop a blockchain-powered tokenized assets settlement system which can work on different blockchain networks.
Dubbed as Delivery versus Payment (DvP), the system leverages the power of smart contracts for settlement of tokenized assets. Furthermore, the system also allows for simultaneous asset swapping along with the corresponding payment. This will allow for instant payment upon the exchange of assets.
There are moves elsewhere to leverage blockchain for funds but in a more fragmented manner. New York startup Symbiont is working with giant fund manager Vanguard to use blockchain for distributing trade index data for tracker funds. London-based SETL has a blockchain record-keeping system for funds called IZNES. Its public announcements indicate some traction in France.
In September last year Swedish bank SEB teamed up with Nasdaq to test a fund trading platform. In the announcement, the bank noted the lack of a Central Securities Depositary (CSD) compared to the stock market means there’s greater administration in the fund sector.