The financial world is spending countless hours — and millions of dollars — hypothesizing how blockchain — the new distributed way of storing information — could eliminate huge operational costs. Banks, broker-dealers, exchanges, and securities depositories have started exploring its potential vast use with the help of technology providers. Blockchain could theoretically be applied to almost any kind of recordkeeping, agreement, contract or register, they say.
FinOps Report has detailed three of the latest and most thought-provoking ways that blockchain could be applied, who is sponsoring these ideas, and what makes them important.
The global consultancy generated a lot of media buzz recently when it announced the development of a new algorithmic program would would turn one of the most well-known aspects of blockchain on its head. The point of blockchain, say is advocates, is that the information input is immutable. However, Accenture is now suggesting that the users of permissioned blockchains will benefit from the ability to change transactions or data. Depending on the governance model, the blockchain could be edited by a central authority such as a regulator, court or government entity, or based on a certain number of participants agreeing to the change.
“There are extreme, albeit rare, circumstances when the information input has to be altered,” cautions Chris Brodersen, an executive in the blockchain technology unit of Accenture in New York. Those circumstances include possible fraudulent transactions, compliance with new European data privacy rules allowing for the deletion of customer data from company files, and human error booking a trade. A rogue employee, a customer or a bank’s compromised internal system could be responsible for entering a fraudulent transaction into a blockchain. .
Typically, cancel-and-correct situations caused by trade booking mistakes can be addressed through simple reversals or updates that would not require editing the blockchain. However, when misbooked trade information is made visible to the wrong counterparty in a blockchain application, a simple reversal wouldn’t be enough. In these rare situations, an edit would be required to protect client confidentiality. A full explanation of the rationale behind editing blockchain can be found in Accenture’s new report entitled “Editing the uneditable blockchain: Why distributed ledger technology must adapt to an imperfect world.”
Co-developed with Giuseppe Ateniese, a professor of computer science at The Stevens Institute for Technology, Accenture’s new blockchain function can edit, rewrite, or remove blocks of information stored on a blockchain by recreating algorithms that link the two blocks of information together with secure private keys. The function is based on a variation of what is called the chameleon hash function. Modifying the traditional chameleon hash will preserve the strength of the original blockchain and will work in the current decentralized environment, say Accenture and Ateniese, who dispute critics’ claims they are creating another database.
Broadridge Financial’s Proxy
The financial technology giant’s purchase of the blockchain-based technology assets of rival Inveshare for a total of US$135 million piqued the interest of securities analysts. Broadridge, which is the world’s largest distributor of proxy materials, did not offers specifics on its vision for the integration of of Inveshare intellectual property with its current its proxy business.
Compared against the $10 million that transfer agency giant Computershare paid for its 10 percent stake in Inveshare in 2013, the $95 million initial pricetag for Inveshare’s not-fully-developed technology assets appears high, according to Peter Heckmann, managing director of research for Avondale Partners, who called the deal a defensive move for Broadridge. “Inveshare seems to have been off to a good start with a distributed ledger application for proxy distribution and voting but may have lacked the resources and market position to take [the application] to the next level,” he says. He added that Broadridge appears to be cognizant of the risk of getting leap-frogged by a competitor using distributed ledger technology.
Inveshare, which will continue to operate its proxy distribution service, retained a perpetual license to use the acquired legacy technology assets. It will also reportedly receive an additional $40 million upon delivery to Broadridge of the blockchain applications. Founded as Swingvote in 2003, Inveshare has been unsuccessful so far in taking any meaningful bite of Broadridge’s dominant position in proxy distribution. At the time of its investment in Inveshare, Computershare also won the option to acquire all of Inveshare in 2018 or 2019.
Here is what Broadridge had to say about the Inveshare deal in a statement issued to FinOps Report: “Inveshare’s technology assets, although lacking the extensive and critical functionality of Broadridge’s industry leading platform such as ProxyEdge and other voting reconciliation and compliance tools will provide Broadridge with a dynamic architecture that can enable us to more quickly develop blockchain applications. Those applications have the potential to bring significant benefits to the proxy process over the years to come.” ProxyEdge is Broadridge’s electronic proxy voting platform for institutional investors.
In its statement, Broadridge outlined the three benefits of blockchain technology: reducing the complexity of the vote reconciliation process; increasing security and increasing vote confirmation — that is, the issuer’s verification that it has received the investor’s vote. Reconciliation refers to matching up the number of votes received by the voting tabulator to the number of votes that investors are entitled to cast.
Sometimes banks and broker-dealers will “overvote” or send more votes than its customers are technically entitled to vote. Such a situation often occurs when a client has shares held in a “margin account” or an account that is created when the client has borrowed money from the broker. That is because a broker can “lend out” the shares including their voting rights to other brokers, while the shares are still reflected on the client’s account statement.
Broadridge’s potential use of blockchain in proxy voting wouldn’t be the first time the financial industry has considered such an application. National Settlement Depository, Russia’s securities depository, and Strate, South Africa’s securities depository, have also completed proof of concepts for proxy voting using blockchain. The two depositories have recently signed an agreement to work together on these projects.
Synechron’s KYC Accelerator
The financial services consultancy says it has developed a blockchain application for know-your-customer onboarding requirements that can be used by either existing or new know-your-customer (KYC) utilities or know-your-customer data providers. The application is based on Hyperledger’s technology.
Financial firms are required to clearly identify and create a risk profile of any customer it accepts before opening its account. The process could take anywhere from several days to several weeks. Synechron’s Blockchain Accelerator for KYC would build upon work done by existing KYC utilities by providing two-way linkages, says Synechron. End- customers would be able to provide data once and then define rules for access by others in the blockchain. Synechron believes such a scenario would reduce administrative burdens and promote market interest in using the utilities.
Synechron expects its blockchain technology will co-exist with the legacy utility services for some time before a full transition takes place. The Depository Trust & Clearing Corp. and a joint venture between IHS Markit and Genpact are considered the largest KYC utilities that enable their user banks and broker-dealers to more easily onboard new customers through standardized rules and data formats.
“We have designed the Blockchain Accelerator for KYC as a permissioned blockchain application with over 2oo common data fields that must be completed,” says Sandeep Kumar, managing director of Synechron in New York. “In the case of its being used by a KYC utility, the utility will need to consider whether it makes sense to cannibalize its existing business model for longer-term benefits. We expect the utilities to do this in order to differentiate and disrupt what is currently a competitive stalemate between leading and largely similar emerging utilities.”
For KYC data providers — such as Dun & Bradstreet, Bureau van Dijk and Bankers Almanac — the success of the KYC utilities is a major threat according to Kumar. Using Synechron’s KYC blockchain application, a KYC data provider can become a utility itself by leveraging its existing KYC data stores, bank relationships and brand name.
A KYC utility, using Synechron’s blockchain application, would also accept daily feeds from KYC data providers and authoritative sources such as national company registration institutions and stock exchanges. Of the 200-plus data fields required to be completed, about fifty would be extracted directly from the KYC system of the bank which owns the data. The administrator of the blockchain — either the KYC utility or the KYC data provider — would manage the access rights to the client data. Firms paying a basic subscription fee would be able to see only 150 data fields while those paying a higher premium fee would see all of them.
Synechron has yet to fully define the process for one bank editing another’s data on the blockchain if it believes it is erroneous or out of date. However, Kumar expects it to follow the current utility process of raising an alert on the specific data and providing evidence. It has not be determined whether the utility or profile-owning bank would process the alert.