Funds Europe talked to Calastone’s Ken Tregidgo about the company’s blockchain development plans and the potential benefits for clients
In theory, blockchain or distributed ledger technology (DLT) is the perfect remedy for many of the ailments in the funds industry. The current transaction model is full of friction (cost and inefficiency) and prone to error, with market participants each recording and reconciling instances of the same transaction within their separate infrastructures. The current model is neither digital nor distributed and this means it carries a cost.
Theory is all well and good, as are pilots and proof of concepts, but what the industry really needs are practical projects in full production, ready to use and delivering real business benefits.
A big step was taken in December 2017 when Calastone, which runs the most populous funds processing network in the market, announced that it will migrate the core of the Calastone Transaction Network (CTN) to a private and permissioned blockchain in 2019.
“We ran a proof of concept (PoC) to understand how blockchain could create efficiency” says Ken Tregidgo, deputy CEO of Calastone. “We have been sufficiently reassured by the PoC that we can generate the necessary scale, performance and resilience to apply the technology to our entire global network.”
Calastone has been working with blockchain technology since 2014. Impressed and intrigued by the potential of DLT, the company began an internal project to see how the technology could be applied to the funds industry.
Having originally looked to apply blockchain for order routing, they then extended their plans to apply to the transaction life-cycle for the market as a whole. Tregidgo says: “It became clear to us that by extending our PoC to test the application of blockchain across the market, we would be able to deliver greater benefits. All participants share a single, undeniable version of the truth by transacting in a shared ledger, which, when combined with smart contracts, enables a fully digital distribution chain where all participants agree on the data and the outcome”.
Calastone is also working with its design partners to develop new services in parallel with the migration. But amid all this work, Tregidgo is keen to emphasise that there will be little disruption for clients. “It will not change the way we interact with clients but it will improve resilience, enable us to scale up and offer a migration path to blockchain-enabled services,” he says. Through the PoC, Calastone has proven its ability to process the necessary volumes on blockchain and to scale up. “We currently support
more than 1,400 clients in 34 countries with hundreds of thousands of trading relationships between distributors and individual funds,” says Tregidgo. “We took the equivalent of that volume, pumped it through the system and checked that we could process the typical daily transaction volumes successfully. We checked that all the balances were correct and we found that we were able to process everything at many times the normal speed.”
Satisfied that it has the scale, performance and reliability to move its network onto DLT, Calastone is now moving onto phase two of its blockchain programme – the development of value-added services in collaboration with the chosen design partners.
The financial services industry is seeing more blockchain-enabled infrastructures emerging. For example, earlier in December the ASX (Australia’s stock exchange) announced that it is ready to roll out a new blockchain-based infrastructure. Meanwhile in Ireland, the industry association Irish Funds has collaborated with Deloitte on the development of a blockchain-based distribution platform.
There are even new indices based on blockchain investment – just this month, HFR launched its HFR Blockchain Composite Index, which includes funds that invest directly in blockchain-based ventures and offerings.
“The technology is maturing,” says Tregidgo. “In countless industries, we have seen new technology go from taboo status to mainstream. Cloud computing took five years and I expect the same thing to happen with blockchain within the next three years.
“We are already seeing some industrial-scale platforms coming to market and I expect more of them to emerge as various projects and infrastructures successfully complete their PoCs and pilots.”
The potential benefits of blockchain are profound – an overall reduction in the friction of trading and transacting and a reduction in errors, cost and risk. But of most interest to Tregidgo is the possibility of new business models and revenue streams.
Of course, with that possibility comes the threat of disruption from outside start-ups. And while it can be difficult to make any predictions about the future and technology, the question is whether the fintechs will disrupt and displace the incumbents or whether the incumbents will instead develop the capability by acquiring or partnering with fintechs.
Tregidgo says that the latter option is looking more likely as more partnerships are announced. This has been the case with robo-advisers, where some of the biggest asset managers have acquired start-ups and then powered them with capital and clients.
Furthermore, the developments should be positive for end investors, enabling them to benefit directly from new, innovative services and from any reduction in the processing of their existing products and services, says Tregidgo. “For every pound invested, it’s important that as much of that investment goes into the fund and grows, rather than be used up in frictional cost.”