Analysis: It is a humble back office function, yet blockchain has everyone excited. So what will its arrival change for pension fund investors?
Blockchain is a distributed ledger technology, where a record of a transaction is held by all parties involved. This creates trust between the involved parties, as the blockchain forms a transparent record that cannot be changed.
When we look back in five years’ time, it will be commonplace
Calum Cooper, Hymans Robertson
As such, the peer-to-peer technology has the potential to render intermediaries like clearing houses – or retail banks when it comes to payments made by individuals – obsolete.
Interaction with existing technologies an issue
BNP Paribas Asset Management is reportedly looking to partner with blockchain platforms, having successfully completed a full end-to-end fund transaction using blockchain. The French fund manager confirmed its commitment to the technology back in 2016.
The insurance-linked securities team at Lombard Odier Investment Management also said it recently completed a securities transaction made through blockchain.
As the technology is entering the financial sector, the Financial Conduct Authority published its next steps on distributed ledger technology in a discussion paper in December. It plans to engage with stakeholders as well as international and other national regulators.
Simon Vuille, portfolio manager in Lombard Odier’s ILS team, is convinced blockchain will be a trend, but cautions that the change will not happen tomorrow.
“Probably what you may have is… relatively small groups of people that know each other relatively well organise themselves on private blockchains,” he predicted.
Vuille said there are a number of hurdles for blockchain trading solutions to be more widespread, despite the technology being relatively easy to reproduce. This is because it has to work with every other technology and process used in financial markets.
He said market participants need to not only understand what a blockchain is but also manage the interaction, which requires “quite masterful design of contractual relationships, a lot of legal work. That’s really the part that is difficult”.
Vuille said the main benefits of the technology for investors could be reduced cost, but also increased flexibility in how transactions are structured, as it allows services that would normally be packaged together to be unbundled.
Lower costs could be the main benefit for investors. Calum Cooper, partner at consultancy firm Hymans Robertson, said he thinks a move to blockchain is in the best interest of the end investors.
Cooper predicted investors gradually moving away from those asset managers that fail to "embrace the future" and adapt to the new technology.
While there might always be asset classes that are not traded in this way – such as private equity for example – “when we look back in five years’ time, it will be commonplace”, he said. Even house purchases could be made on a blockchain.
Cooper also saw a use for the system in the pensions risk transfer, where a blockchain could be used to achieve “a cash flow marriage” between pension funds and insurers.
Blockchain could become a utility like the internet
But Ben Cocks, founding director of investment automation specialists Altus Business Systems, stressed there are still hurdles to be overcome.
He agreed however that eventually blockchain could be a utility like the internet, which will be universally used across financial services.
Cocks questioned how easily the technology could be scaled up to deal with large volumes of transactions, however, and pointed to unresolved issues around governance. “Who is in charge of that system, who is responsible when it goes wrong?”
From faxes to blockchain
The pensions world has been particularly slow in adopting new technologies.
“We’re still trying to persuade people not to send faxes,” said Cocks.
It may therefore be a while before pension funds ask their asset managers whether they use blockchain.
Donny Hay, who is a client director at professional trustee company PTL, recognised the current system for proving ownership of securities is “a little bit clunky, because it requires you to interface with custodians”.
He could therefore see that blockchain “could spread to other asset classes”.
