The RSMR Broadcast: Blockchain - fairy tale or the future?

24 Jan 2022

The RSMR Broadcast: Blockchain - fairy tale or the future?

In the fast-moving world of IT, blockchain technology is old news, but having only been created in 2008, it’s a relatively recent invention. Has blockchain already had its day or is its real potential yet untapped?

A blockchain is a peer-to-peer network made up of records that can be accessed simultaneously across multiple locations at the same time. The data is decentralised so there’s no master copy and no controlling authority. It’s public and open so every member has the same access to a complete and accurate version yet it’s almost impossible to hack so nothing can be changed without alarms going off in every direction.  

Blockchain technology already exists in a usable format and is used in various industries to create and manage data. It’s used in property to process transactions and register ownership, in health to manage patient records, in insurance to increase efficiency with claims and in cryptocurrency to record transactions. It hasn’t gone unnoticed in the investment sector and many companies are now seeing the potential and looking to bring blockchain products to market.

We’re not talking about a standard investment vehicle that invests in blockchain technology but a scenario where the fund itself and any related administration are run on blockchain technology. Currently, with open-ended mutual funds, a financial adviser trades on behalf of their client, by putting their money onto a platform. The platform aggregates the trades from all clients, usually once each day, sending them all through to the different fund management houses. The platform either distributes the money or takes it from accounts, depending on whether they’re buying or selling, and the units for the funds go into or from the client accounts. It’s not a process for the faint-hearted and although it’s partially automated, there’s still a reasonable level of manual involvement.

Not surprisingly, it takes a minimum of 2 days for the process to complete, and if we’re talking equities, it’s much longer; for offshore equity funds it can take up to 5 days. The process is cumbersome at the very least and you can’t know at any given time where your money is. This is where blockchain technology comes into its own. In theory, you could trade 365 days a year, 24/7 and you would be able to sell shares and get your money instantly. From a client perspective, you can make much faster trades. From an investment manager’s perspective, you can also trade financial assets such as government bonds or equities. The goal is to reduce the number of people in the chain, lower the cost, achieve greater transparency and trade instantaneously.

In March 2020, fear and uncertainty gripped the markets, causing an extraordinary volume of people to buy and sell but with the T+2 concept (‘T’ stands for trading day), it becomes challenging to understand what a fund is worth on a day-to-day basis. Managing the fund’s liquidity becomes a difficult task. It’s only when the requests come in from platforms once a day that you can start to understand the available liquidity. With real-time transparency of how much money is flowing in and out, trading positions and needs would be more discernible, making management of the fund much easier. From an investment perspective, this is one of the key drivers and advantages of a fund that runs on blockchain technology.

After approval from the SEC, Franklin Templeton launched the first fund that runs on blockchain technology in June 2021 – the Franklin OnChain US Government Money Fund. Other prominent investment houses are also looking to invest in blockchain technology. The gross expense ratio for the OnChain Fund is currently around 3.5%. Franklin Templeton has another, standard fund, that’s run with the same investment strategy, but the charge is much lower at 0.52%. Clearly this original OnChain fund isn’t low cost, but as it’s a pilot, both systems are being run simultaneously - the blockchain and the manual administration that sits behind the average fund. The theory is, when the infrastructure is in place across the industry and the fund achieves scale, it will be much cheaper to run, and the cost will naturally be much lower.

It’s not hugely complicated to transfer existing funds onto the blockchain, as it’s effectively changing one ledger for another, but it requires capital expenditure, so demand needs to be there. A percentage of the industry needs to get on board to invest in and build the infrastructure so that platforms can talk to fund managers and to each other.

With advantages such as security, distribution of information, accessibility, transparency, traceability, and immutability, a blockchain can remodel storing, maintenance and sharing of data, reducing manual intervention, improving efficiency, and reducing cost. The collaborative technology still has some major hurdles to overcome in terms of acceptance, performance, resilience, scalability, and regulatory surveillance, but the possibility of streamlining operational procedures in the financial sector is becoming impossible to ignore. To make the fairy tale come true, the industry needs to unite to allow a standard blockchain technology to flourish and with one report suggesting that blockchain may save the financial services industry $6 billion a year globally, it seems like it’s only a matter of time.


QUIZ QUESTION: By the end of 2024, how much are companies expected to be spending on blockchain?

LAST WEEK'S ANSWER: According to myths, the animals of the Chinese zodiac were selected through a swimming race.


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