Lenin Perumalsamy, Senior Manager – Hedge Fund Solutions, with Maitland in Grand Cayman, Cayman Islands, outlines a vision of how Maitland intends to introduce blockchain technology into alternative fund administration.
Blockchain is one of THE buzzwords in recent years and is often used in conjunction with the other buzzword “cryptocurrency.” To be clear, cryptocurrency is essentially just digital tokens leveraging digital exchange tools which incorporate cryptography and the blockchain technology to facilitate secure and anonymous transactions.
Why are we fascinated with blockchain technology?
Governments, industries and companies alike are seeking to build what amounts to a new transaction layer based on the idea that cryptographic keys and shared ledgers can incentivise users to secure and formalise digital relationships.
The alternative fund industry is no exception and various initiatives – both individual and collaborative – are under way. Maitland is monitoring developments closely and we are committed to innovating further to ensure our leading position as an alternative funds administrator.
What exactly is blockchain?
A Google search will reveal as much detail as you wish to know, but in the words of Don and Alex Tapscott, authors of the Blockchain Revolution (2016), “Blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
Blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” Don and Alex Tapscott, authors of the Blockchain Revolution (2016).
Information held on a blockchain exists as a shared database which is continually reconciled. Authentication and authorisation, vital to digital transactions, are established as a result of the configuration of blockchain technology which eliminates the need for a trusted party to facilitate digital relationships.
As the idea can be applied to any need for a trustworthy system of record, its application in aspects of alternative fund administration is clear. The blockchain by itself has an audit trail of transactions which cannot be tampered with, thereby generating the factor of trust. Trust is key for every business – and now the sheer computational and memory power of processors has turned this into a technology solution. In the fund management industry, investors trust the investment managers, while we act in the middle as their trust agent.
What is driving the need?
Cybersecurity is another buzzword that has been rising in prominence. So it comes as no surprise that blockchain can be the panacea to avert the rising incidence of data breaches. In essence, blockchain allows for the decentralisation of information systems. The fact that currently most information systems are centralised means the data is available in one place and this in itself is a grave threat for data protection, as witnessed by the breaches at Equifax, Target, Sears, Home Depot and elsewhere. The graph below shows the number of cases of credit/debit card data being compromised, by year, throughout the US provided by Identity Theft Resource Center.
Just getting started
While data security is one huge motivation to employ this technology, there are various use cases of blockchain trending in the financial services industry over the past 12 months to three years, with 2018 regarded as an important year for implementation of applications in distributed ledger solutions. Some of the initiatives are outlined below.
Derivatives processing solutions
The Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure for the global financial services industry, announced in January 2017 that it had selected IBM, in partnership with Axoni and R3, to provide a ‘distributed ledger technology’ (DLT) framework to drive further improvements in derivatives post-trade lifecycle events.(1) DTCC have cleared more than $11 trillion of bilateral credit derivatives but derivatives processing is disjointed and redundant, and reconciliations are costly. The goal of this venture: reduce global trade barriers and increase efficiencies across supply chains.
The firms will work collaboratively to re-platform DTCC’s Trade Information Warehouse (TIW), building a derivatives distributed ledger solution for post-trade processing based on existing TIW capabilities and interfaces with technology providers and market participants.
According to DTCC, the solution is anticipated to go live in early 2018, where the distributed ledger protocol build by Axoni is set to be submitted to the Hyperledger open source community.
Hyperledger Fabric is a modular, scalable, secure permissioned blockchain framework that allows enterprises to develop their business solutions. Hyperledger Fabric leverages container technology to host smart contracts called ChainCode that comprise the application logic. Initially contributed by Digital Asset and IBM, Hyperledger Fabric has 159 engineers from 28 organisations contributing to this project.
What this means for Maitland. We at Maitland are studying the Hyperledger Fabric and looking to further explore the DTCC initiative. Integrating with the DTCC to confirm the trades and reconciling directly on the chain would result in efficient processing on both cost and time and would enhance Maitland’s hedge fund solutions offering.
Digital identity solutions
The Cayman Islands has rapidly developed into a hub for blockchain technology. Many technology companies are moving to the jurisdiction which has also recently hosted the predominant blockchain conference, “d10e”.
With Cayman Finance’s working group Fintech Innovation labs, teams are working on building an identity ecosystem and prototyping globally certified digital IDs as a federated service, where participants would purchase tokens to verify the identity information to perform their Know Your Client/Anti-Money Laundering (KYC/AML) processes. This service could be relied on by banks, for example, to vastly reduce costs – banks currently spend 20% of their expenses towards KYC/AML.
Indeed, major South-East Asian banks OCBC, HSBC and MUFG have developed and tested KYC blockchain to solve current practice of collecting and verifying personal information from customers repeatedly.(2)
What this means for Maitland. One of the spin-offs could be the potential for us to employ a faster client on-boarding process which normally is manual and labour intensive, in order to avert chances of errors on the document collection or data protection process. Moreover, this technology allows you to “sign” the data and encapsulate it in the chain to let other parties view the data by sharing a key. The technology provides the audit trail of who has viewed a specific portion of the data – and from where. Therefore, by design this basically offers a higher level control of managing and monitoring activities of the participants on the chain.
Given Maitland’s office in Cayman, we are located close to the latest developments in the exciting area of blockchain and are among the first to get information. As we build our relationship with Cayman Finance Innovation, we seek opportunities to collaborate with their Digital Assets working group.
Fund distribution solution
In July 2017, Natixis Asset Management completed a first real blockchain transaction in fund distribution. This was enabled by FundsDLT, a platform developed to enable asset managers to sell funds through a new distribution channel while significantly reducing administration costs and time to process transactions for both asset managers and other service providers. It is the result of collaboration between Fundsquare (a subsidiary of the Luxembourg Stock Exchange), InTech (a subsidiary of POST group) and KPMG Luxembourg. (3)
What this means for Maitland. This is further proof that the technology has arrived. The myriad of ways of applying it is, at this point, unlimited but certainly the functionality to be applied in our daily world is imminent.
Setting a new course
In conclusion, blockchain is here to stay and those who do not adopt the new technology will soon be left behind. Far from being a fad, the technology that is the backbone of cryptocurrencies has given birth to the Hyperledger. Through that process, it has begun to answer the call for investors and managers seeking to gain more control over how and who is viewing data. Brilliantly, blockchain has managed to simultaneously bridge major gaps in transparency while tackling data security and enhancing operational efficiencies which will extend soon into the very way we do business and lead our digital lives. To say that this is the next industrial revolution is not a hyperbole.