By Joon Ian Wong
The idea of using blockchain—the technology underpinning the bitcoin cryptocurrency—has gripped the imagination of financial institutions all over the world. One report from Spanish megabank Santander says banks could save up to $20 billion a year in infrastructure costs by replacing legacy plumbing with blockchains.
But the big banks, brokerages, and other back-office purveyors have so far had little to show for their dreams except more consulting fees. To date, financial institutions haven’t gotten beyond various proofs of concept, trials, and experiments. If the tech isn’t to buckle under the weight of its own hype, commercial deployments are needed.
That’s where Northern Trust, a Chicago-based administrator of funds, and IBM come in. They’ve devised a blockchain-based solution for the private equity world that should cut out months of pinging emails back and forth, waiting for documents to arrive and be signed, and swapping share certificates. They claim that it’s the first commercially-deployed blockchain solution for finance to date.
The asset manager using the blockchain admin platform is Geneva-based Unigestion, which has $20 billion under management, spread across private equity and other asset classes.
According to Justin Chapman, Northern Trust’s head of innovation research, private-equity fund admin is currently a mess of paperwork that a blockchain platform will automate away. “It’s an extremely manual process at the moment,” he says. “It can take three to four months to agree on legal documentation for distribution. Now it can be done as soon as the lawyer gets to the paperwork.”
Everything from share issuance to capital drawdowns and income distributions will be captured on the admin platform, Chapman says. But this can already be done with a conventional database or even a shared Excel spreadsheet, so why use fancy new tech? It’s because of blockchain tech’s secret sauce: trust. “Blockchain makes this immutable,” Chapman says. This means all the parties in a private equity deal can look at one version of transaction and other data, instead of trying to reconcile multiple copies of deal documents, which can be a laborious and error-prone process.
The Northern Trust blockchain is going to be a very tiny one, consisting of just four nodes (bitcoin has over 6,000 nodes), hosted by IBM and running on the open-source Hyperledger framework. They’ll be operated by Northern Trust, the administrator; and Unigestion, the fund manager. The regulator—in this case the Guernsey Financial Services Commission in the crown dependancy of Guernsey—can also access the database to look at transactions and other data. The various parties will have access to different layers of data.
Chapman says it’s the smallness of a private equity fund’s “ecosystem,” or the parties involved in a private equity transaction, that allowed them to deploy the platform commercially. “Some of the large infrastructure plays are going to take longer to deploy,” he says. “Blockchain is a collaborative network that needs all the participants to work together.” Blockchain tech shakeups on major platforms could be three or more years out, he says. Notable efforts include projects by the DTCC, Swift, and the Australian Securities Exchange.
Unigestion gets to use the new platform free of charge, and Northern Trust says it will evaluate the platform’s benefits and then potentially shop it to other funds, or other asset classes—perhaps heralding the long awaited arrival of blockchain tech on Wall Street.
Correction: An earlier version of this article referred to the Hyperledger framework belonging to IBM; it is an open-source project.
