New cyber threats, data regulations, the 24/7 global market and increasing competition, especially from disruptive fintech companies, drive asset managers, private equity firms and others to reconsider blockchain, its uses and its potential.
According to Deloitte’s 2021 Global Blockchain Survey, leaders in finance “see digital assets — and their underlying blockchain technologies — as a strategic priority now and in the near future: In fact, nearly 80 percent of overall respondents say that digital assets will be ‘very/somewhat important’ to their respective industries in the next 24 months.”
Noting that 76 percent of executives reported that their organizations see a “compelling business case” for using blockchain technology, the survey explained that blockchain’s value was rising as the “proliferation of digital everything as both a means of exchange and a store of value has expanded significantly.”
Here’s why: experts are Forecasting significant efficiencies and savings from the blockchain. Santander estimated worldwide savings of up to $20 Billion a year from blockchain-based transactions and technology. According to the consultancy Capgemini, consumers alone could save upwards of $16 billion in fees annually.
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Benefits of Blockchain
There are thousands of potential uses for blockchain, which keeps a distributed ledger almost impossible to change without both parties — and others with so-called blocks in the chain — knowing about it.
The technology is particularly well suited to the high-security needs of financial recordkeeping and compliance. Blockchain tech creates transparent, immutable logs that fund managers and others can use for system and organization controls (SOC) reporting, improving compliance, conducting audits and mitigating risk.
There’s also a defensive component to blockchain gaining significant traction as cyber threats and fraud risk mounts. After all, economic crime affects 45 percent of financial intermediaries annually, a significantly higher rate than in professional services and the tech sectors. Blockchain provides a resilient, transparent and secure ledger for transactions. But opportunities to simplify processes, cut costs and reduce friction between firms and clients drive the high interest in blockchain.
CFOs, financial service providers and others, for example, will sympathize with the World Economic Forum
Report describing the burdens of regulatory compliance: “Due to various data sources and channels or origination, regulatory reports can require costly technology capabilities and complex business processes (often supported by multiple operation teams).”
The Forum offered blockchain as a solution, outlining the various efficiencies global firms can achieve by integrating the technology into their operations – seamless KYC processes, FX liquidity capabilities, real‐time AML controls, and reduced transaction settlement time.
That’s just the start. If you think about the administrative costs of all the intermediaries that fund services employ, such as record keeping, signatures and other routine tasks, you can see how loads of time and money go wasted. Blockchain-based communications between vendors and clients cut out the middleman as partners work simultaneously on a permanent, searchable activity log.
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Gaining A Competitive Edge
For clients, investors and regulators alike, there’s a stark difference between doing business with companies using blockchain and those who aren’t. That gap will only grow as blockchain becomes an essential component of the global finance industry, whether you are operating in the private equity, fund services or consumer investing space.
The risk proposition for blockchain, in other words, has flipped. What was once seen as an untested technology is becoming an operational imperative.
Of course, there are natural obstacles, from the cost of implementation to regulatory approval to doubling down on blockchain. But financial firms today should know that innovation, while not always easy or fast, is always necessarily from a long-term perspective. It starts with early adopters validating new technology, which sets a new standard for the industry and, later, leaves unprepared firms behind.
Fund administrators don’t need to be running their system on a distributed ledger immediately. But they need to get familiar with the processes and potential of blockchain. Their smartest clients are certainly doing so. The blockchain revolution is underway.
