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Blockchain – a real, live example

We’ve heard a lot of talk about blockchain in recent years, but how will it work in principle? Will it really make transactions easier, and reduce costs? Is it secure enough?

Can blockchain live up to expectations?

Blockchain is far more than the settlements system behind Bitcoin. Financial institutions are viewing it as the next big thing in transaction settlements, thanks to its promise of lowering costs and simplifying the process. But can it deliver?

Saïd Fihri, Associate Partner at KPMG Luxembourg led a team that presented an all-new digital fund distribution platform for asset managers – FundsDLT, powered by blockchain technology.

This was not a proof of concept or philosophy, it was a real product, emphasised Fihri, before outlining the issues in the settlement system as it stands today – and how blockchain will solve them.

“As it currently stands, the investor performs the subscription order through the distributor,” he explained.

“The subscription order is then routed through the fund platform, before going through the clearing house.

“Then it goes through the transfer agent, the custodian, and the asset manager.

“But the asset manager doesn’t know his client. It’s a very product-driven industry. The only driver for selling the product is retrocession fees, but MiFID II is on the way and retrocession fees will be banned.

“Distributers will lose their incentives, fund platforms will lose their business partner, and the asset manager will be facing two problems: how can I reach my investor at a low cost, and how can I capture my subscription order when the fund platform doesn’t exist?”

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Enter blockchain

Blockchain held the answer.

“Blockchain will allow us to bypass all those intermediaries, and we will be able to reach the distributor and even better, reach the investor,” explained Fihri.

“It will automate the clearing and settlement and also automate the transfer agent activities. Thanks to digitalisation and the right interfaces, it will be able to automate what the fund platform is doing.”

KPMG’s approach was to develop a blockchain infrastructure for the fund industry that kept some of the existing ecosystem ­– the transfer agent, fund custodian and cash clearer – but also introduced two new concepts: a data hub for accessing data, such as the prospectus, and the KYC hub.

The ultimate aim of FundsDLT was to offer a platform that enabled digital transformation, gave asset managers transparency on final investors, and provided distributors with better products.

How does it work?

Watch the video to see how it works:

Speedy?

But blockchain has been criticized for its lack of speed, so how did this system get around that?

“This is a private blockchain, the mining principle is a bit different and it’s faster, we can make several 100 transactions per second,” explained Fihri.

But this was no panacea, he warned.

“You need to build the infrastructure behind it, he said. You need to build the right database, and the right APIs.”

What are the benefits?

One of those involved in testing the product is Olivier Taille, Project Manager at Natixis Asset Management, and he explained its benefits.

“The main benefit is client identification,” he said.

“This is a key point because, for the first time, it will give us the opportunity to adapt our product to better meet our investors’ needs and our distributors’ needs.

“We are one of the last industries that does not know their client, and in a digital economy, it’s not a good position to be in.”

Olivier went on to explain how this was a modern way to collect orders, and to perform and update the shareholders’ registry.

“It was also important to us to invest in a platform that could help us to run our business the same way, whether the fund is domiciled in France or Luxembourg,” he added.

In terms of cost, Olivier Portenseigne, Managing Director at Fundsquare, argued that the whole point of blockchain was to reduce costs.

“For the investor, that comes through reducing the management fee of the fund,” he said.

This was achieved in two ways, he said, reducing operational costs and the ability to put a cheaper fund onto the blockchain.

Bernard Simon, CIO at Luxembourg Stock Exchange, who is also involved in the project, allayed concerns about security, saying that, whilst the topic of security could easily take up an entire session, it was important to note that there was deep security inherent in blockchain.

“The Bitcoin and Ethereum networks have never been hacked,” he said.

“We are using same technology, but running it on a private network that has complex security. The notes are private; the data is not communicated to every client. You can be sure that the security is at a high level,” he reassured.

Those wanting to experiment themselves won’t have long to wait. The first real transaction will take place by the end of June, said Bernard, and by the middle of 2018 the final product would be delivered to industry.

Watch this space.

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