Calastone is making a bold gamble on the power of the blockchain to transform fund management by moving more than 1,700 finance companies – for which it trades mutual funds – to the online ledger.
The London technology group will complete the transition in May. It will be one of the largest transfers in the sector to date in terms of large-scale use of the blockchain to buy and sell funds.
The change will help "transform the way the funds are traded," said Julien Hammerson, CEO of Calastone. He said the funds were "hindered by ever-increasing costs and the threat of competition, ultimately making the current system economically and operationally unsustainable".
Blockchain has emerged as a means of keeping track of bitcoin ownership but major financial groups have been eager to explore its potential to simplify processes and reduce costs.
In a traditional background transaction, companies ranging from transfer agents to asset managers often have to enter the same information, which is expensive, time-consuming and open to error. Blockchain eliminates most of the laborious practices.
Calastone estimates that the switch to the blockchain could reach £ 3.4 billion from the fund's distribution costs. This figure excludes the US market where the Depository Trust & Clearing Corporation already provides a centralized system for trading liquidation.
Calastone said it was too early to say whether its pricing structure would change, as the blockchain would fundamentally alter the way in which transactions take place. He said that it is up to fund managers to transfer any savings from lower costs.
BNP Paribas Asset Management and Ostrum Asset Management have completed end-to-end fund transaction testing using blockchain technology.
Last month investors including Standard Life Aberdeen and Columbia Threadneedle said they formed a retail fund platform specializing in impact funds that will use blockchain.
Lawmakers and policy makers are working to understand blockchain and pose risks to privacy and security.
"The rapid growth of technology and the growing menu of blockchain platforms along with its differences compared to traditional technology has made it difficult for companies to understand how to apply, use and exploit the value of the blockchain while managing the associated risks – risks that may not be fully be aware of, "according to a recent report by KPMG, the accounting group.
Calastone, which used the blockchain to buy and sell mutual funds under test conditions in 2017, said the technology is satisfactory. It will use multiple data centers and clouds to protect the system.
"We would not do it if we were not totally sure in terms of safety and security," said Andrew Tomlinson, Chief Marketing Officer.