But blockchain is considered as a long-term strategy to improve the asset pricing process because it requires changes to the existing information technology infrastructure, he said in an email to FSA.
Asset pricing requires “collecting position information from various systems, combining these positions into a holistic view, applying external valuation information, then running certain prescribed calculations to retrieve the final pricing or net asset value”, explained Hu.
“State Street has been focused on improving the end-to-end pricing processes through a series of improvements that include near-term and longer-term strategies,” he noted.
Near-term strategies include the automation of some rule-based processes, or robotics process automation (RPA), according to Hu. “It broadly encompasses the use of software programs to augment or replace repetitive manual procedures previously involving humans without massive and fundamental changes to existing IT infrastructure.”
Blockchain can do more than that, as it involves the sharing of immutable and secured information, he continued.
“Blockchain would seek to ensure all the data are sitting on the same rail,” he said. “Once processes are restructured on the blockchain, validity of data can be trusted.”
Hu believes the implementation of blockchain is likely to start in the alternatives space instead of traditional asset classes, “simply because the process and scale are smaller”.
The bilateral nature of alternative assets will help, he added. “It’s easier to get a few parties together to try something new than an entire exchange, which has a complicated process already.”
Later, the process can be applied to other assets, Hu added. “Once these technologies are mature they will fit all markets.”
Blockchain explained
“[Blockchain is] a database where recorded transactions are copied to a participating network of computers,” wrote Larry Cao, CFA Institute’s Asia-Pacific director of content, in the institute’s special report on fintech.
“Since the information is disseminated across multiple computers using sophisticated cryptography, it can be viewed by all those with access rights to the network. Once the data has been entered, the information cannot be modified.
“That means we wouldn’t need confirmation from our bank to know that we paid our utility bill, and our utility company couldn’t claim it hadn’t received remuneration. Once we made the payment transfer, the information would stay on the network for people to see.”
Four out of ten participants in a CFA Institute poll of 333 people in October last year said they believed that blockchain technology could bring significant changes to the financial services industry. When comparing to other new technologies, only 22% said the same about robo-advisors and 19% about mobile payments.
In particular, blockchain can make the Know Your Client process more efficient, Cao pointed out. It can be used by banks to check a customer’s identity and to obtain information on their risk tolerance and investment experience, he explained. “As an added benefit, [it] could help cut down on identity fraud.”
The industry does not expect significant changes to happen quickly, however. A State Street survey showed that blockchain was expected to be most applicable to the investment management business in five years, as reported earlier.
State Street’s Hu cautioned against rushing into blockchain implementations. “The most challenging part of integrating new technologies is to balance the benefits of these new and emerging technologies with the idiosyncratic and systemic risk they could cause if rolled out prematurely,” he said.
