Blockchains have attracted significant interest in the financial sector, a rare occurrence for a new technology in an industry not known for being at the forefront of technological innovation. However, dig a little deeper into where the interest is coming from, and you’ll see a host of sell-side financial institutions and back-office groups working on prototypes. Most of the R3 consortium members, for example, are sell-side banks. Notably absent is the buy-side, made up of pension funds, mutual funds, hedge funds, private equity and other money management firms.
The buy-side has different structures and mandates, but at the end of the day, investor risk-adjusted returns are a primary concern, and the blockchain can help with that.
The back-office is interested in blockchains because of the ability to simplify settlements, and provide reconciliation of data among different parties without explicitly moving and verifying data across organizational borders. This saves a check on data validity at each entry and exit point, as a consensus mechanism is accessed collectively by a group of participants.
But while interest from the buy-side has been generally muted, it would be a mistake for these firms to ignore blockchains. Cost reductions
The obvious win for the buy-side is the possible efficiency gains that could be achieved by using a blockchain-based solution at the back-office for custody and settlement.
Asset custodians charge a few basis points for assets held by clients, which can quickly add up. By improving efficiency, the total cost of servicing assets by a buy-side firm should fall.
The other longer term benefit could be regulatory costs.
Buy-side firms today spend a significant amount of money on compliance and following regulations. Markets that adopt the blockchain could potentially encode a lot of these rules into the blockchain as smart contracts , thus reducing the need for human intervention and oversight.The […]
