Blockchain and the investment industry stack
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Provides initial reflections on the potential of blockchain to transform the end-to-end retail investments industry
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Blockchain and the investment industry stack
- 1. Blockchain and the investment industry stack Some reflections March 2016
- 2. Evolving from Bitcoin to Distributed Ledger Bitcoin • A de-centralised, globally distributed cryptocurrency devised in 2008 and launched in 2009 introducing Blockchain technology to the world • Bitcoin Public Blockchain uses computationally expensive mining with rewards and proof of work processing to maintain system integrity amongst anonymous counterparties (trustless) Distributed Ledger • Rebranded from “Blockchain” to distance from Bitcoin reputation • Known counterparties, no mining or proof of work (trusted) • Suitable for regulated institutions and existing legal frameworks • Smart contracts automate business rules and industry standards
- 3. Seven characteristics of Distributed Ledger # Characteristic Description 1 Decentralised All participants (nodes) have own copy of all data in the system. No central authority. No single point of vulnerability or failure 2 Distributed Standard network protocol ensures every node receives every transaction in near real-time and applies same rules. Transactions are grouped into blocks for processing 3 Consensus Mechanism to ensure all nodes agree on the integrity of transaction data in the system, replacing the need for a trusted third party with technology 4 Traceable Every transaction block is immutably and verifiably linked to the previous block. A full history can always be reconstructed right back to the beginning (the genesis block) 5 Scripting Every transaction has standardised scripted rules built-in to enforce rules and conditions. Sophisticated “Turing complete” scripting is currently referred to as “Smart Contracts” 6 Security Encryption with Public Key Cryptography. Anonymous Public Key stored with every transaction on ledger. Matching Private Key required for authority to access that transaction 7 Accessible On Permissionless (No Trust) systems eg Bitcoin, anyone can install software and participate. On Permissioned (Trusted) systems, participation is restricted and governed. Levels of access between these two extremes. e.g. read/write or read-only access.
- 4. • Inefficiency and waste in the investment industry stack • Multiple and duplicated processes and systems • Drive for cost transparency • Poor investment returns • Pressure on margins • Regulatory action: MIFID2, charge caps, FCA thematic reviews The industry stack: inefficiencies & duplications
- 5. • Transformation of financial services industry infrastructures • Counterparties share unbreakable copy of same digital record • Changes updated in near real-time • Industry market practices captured in code and automated as ‘smart contracts’ on distributed ledgers • A new trusted industry fabric for financial services • Fostering ever closer industry collaboration and transparency • Reduction of the industry stack by removal of trusted third parties • Certain organisations must reinvent or risk disintermediation The potential
- 6. Opportunities: possible use cases Screening criteria • Multiple databases and parties recording their view of common data • Lack of complete trust between those parties (competitors) • Non-synchronised processes • Troublesome, expensive reconciliations • Lots of offline interactions • Activities where greater standardisation would be beneficial
- 7. Use Case 1: adviser CRM/ platforms: now Input Process Output Adviser CRM Customer data Customer authorisations/approvals Adviser data eg authorisations Updates from fund admin Money in Customer marketing and onboarding Fact finding and risk profiling Cashflow planning Tax planning Recommendations investments, decumulation strategy Portfolio servicing Adviser business management Adviser professional development Illustrations Investment portfolio buy/sell requests Reports Event prompts & triggers, e.g. reviews Client comms and reports Money out FCA data updates e.g. Gabriel Platform/ Product Provider Investment buy/sell requests Data from fund managers/fund admin, e.g. factsheets, prices Money in Process investment buy/sell requests Deduct adviser and platform remuneration Administer tax wrappers (pension, ISA, onshore & offshore bonds) Administer payroll (for drawdown) Monitor accounts (individual and nominee) Reconciliations Investment buy/sell orders Illustrations Tax reporting Adviser comms End-customer comms Money out Investment buy/sell confirmations Fund Admin Buy/sell orders from platforms & product providers Data from financial data vendors and share registrars, e.g. corporate actions Process buy/sell orders Manage suppliers e.g. brokers, custodians Collect income Administer fund accounts Administer corporate actions Maintain registers Monitor accounts (individual and nominee) Reconciliations Confirm buy/sell orders Reports to fund managers Data to platforms
- 8. Use Case 1: adviser CRM / platforms: de-duplication Input Process Output Adviser CRM Customer data Customer authorisations/approvals Adviser data eg authorisations Data from fund managers/fund admin, e.g. factsheets, prices Money in Buy/sell confirmations Customer marketing and onboarding Fact finding and risk profiling Cashflow planning Tax planning Recommendations investments, decumulation strategy Portfolio servicing Administer tax wrappers (pension, ISA, onshore & offshore bonds) Administer payroll (for drawdown) Adviser business management and remuneration Adviser professional development Illustrations Investment portfolio buy/sell orders Reports Event prompts & triggers, e.g. reviews Client comms and reports Money out Tax reporting FCA data updates e.g. Gabriel Industry Distributed Ledgers for Product and Fund Registers Fund Admin Buy/sell orders from Advisers Data from financial data vendors and share registrars, e.g. corporate actions Process buy/sell orders Manage suppliers e.g. brokers, custodians Collect income Administer fund accounts Administer corporate actions Update registers Monitor accounts (individual and nominee) Confirm buy/sell orders Reports to fund managers • Single record • Re-use of data • No reconciliations • Straight-through- processing • Realtime transparency • Fewer systems • Less risk • Lower costs
- 9. Use Case 2: Funds settlement on industry distributed ledger • No reconciliation, lower costs • APIs ISO20022-compatible • Fewer mismatches • No net payment authorisation • Real-time transparency • Settlement period 0 to 2 days • Reduced: • Counterparty risk • Counterparty infrastructure • Investor out-of-market risk • Investor costs (lower charges)
- 10. The UK Government is concerned about proliferation of pension pots as people change jobs every two years…. A consumer “dashboard” that can find and report on all of an individual’s pension pots will provide vital information and encourage pensions saving Use Case 3: UK pension dashboard
- 11. • Immature technology that currently does not meet the non-functional requirements of very large systems ie transaction capacity/ scalability • Development tools and environments are also immature • Does not permit high speed data searching equivalent to modern databases • Being immutable, existing transactions cannot be directly cancelled or reversed to meet legal/ contractual obligations • Regulators are supportive but may be slow to catch up • Collaborative business models and agreement of standards • Open Source software development, legal risks and management The challenges
- 12. Implications Some possible first steps • Work on new services / processes rather than legacy • Choose non-critical applications first • Engage and experiment with the new technology • Build coalitions of the willing • Consider how to help less capable counterparties with “on- and off-ramps” Implications for incumbents • Existing business models under threat • Current industry infrastructure providers are well-placed • Disruptive new entrants may struggle to build consensus • Legal and business challenges are at least as significant as tech issues: • Collaboration, governance, legal framework, security, market practices, standards, SLAs • An effective response will require: • Horizon-scanning and open-mindedness • Consensus-building • A readiness to experiment
- 13. People are doing discovery projects Discovery tasks • Select scope of processes / stack layers to be addressed • Identify organisations, systems, resources involved • Assemble and analyse current performance data: Cost, timeliness, waste / rework, risk management • Involve representative players • Confirm processes offering best potential • Identify use case(s) and indicative costs & benefits • Assess major barriers to adoption e.g. Lack of collaboration, no common standards, scalability, data security and privacy concerns • Identify potential coalition of the willing Discovery outputs • Assessment of potential for Distributed Ledger: • Scope of potential use case(s) • Business case for each major type of player • Revenues, costs, risks • Potential benefits of auditable chain of transactions • Template and proposal for collaborative Proof of Concept: • Basis for collaboration: shared interests • Parties to collaborate: representative players • Governance arrangements • Identify emerging legal / regulatory implications • Funding
- 14. Discussions held with… • Transaction automation provider • Institutional payment & settlement blockchain infrastructure provider • Global systems integrator involved in multiple blockchain proofs of concept • Transfer agent • Investment admin software provider • Tech legal firm • Industry standards body Recent forums … • Ethereum DEVCON1, London, November 2015 • SWIFT Sibos15, Singapore Recent reports studied … • UK Government Office for Science, Blackett report, January 2016 • DTCC Report, January 2016 • Euroclear Report, February 2016 Recent developments examined… • Ethereum Homestead Release • Microsoft Azure “Blockchain as a Service” • Linux Foundation, Hyperledger Project A note on our methods so far….
- 15. Alan Sherriff, MD www.cboxx.com alan.sherriff@cboxx.com +44 7939 222 354 @CBoxxLtd David Taylor, Partner www.ocp.co.uk david.taylor@ocp.co.uk +44 7768 077 796 @rdavidtaylor Contact us to discuss Distributed Ledger discovery projects … O C P♦ ♦