Investment funds transaction network Calastone, a founding member of the Linux Foundation-led Hyperledger Project, is shifting its entire system to the blockchain.
The firm, which assists its client sell their funds all over the world via banks and financial advisors, expects to complete the switch to what it is calling the Distributed Market Infrastructure (DMI) next year in May.
The move is expected to radically transform how funds are traded especially in an era of rising costs by creating a global funds marketplace that will allow both buyers and sellers to connect and transact.
Per a press release, Calastone’s client list consists of over 1,700 organizations for which it offers back office and even middle office services in 40 global markets. The likes of JP Morgan Asset Management, Invesco and Shroders are some of its clients.
The move by Calastone to adopt distributed ledger technology will see over 9 million messages involving transactions that are passed between various counterparties completed on blockchain. At the moment, the process involves sending three separate messages – one message to place orders, a second one to confirm receipt of the order and another to confirm the price.
The process is also laborious and inefficient as the firms ranging from asset managers to transfer agents have to enter the same data and this is time-consuming, expensive and error-prone.
According to Calastone, the adoption of blockchain technology could save the global fund industry approximately US$4.3 billion in annual costs outside of the U.S. market – there is already a centralized system for trades settlement in the United States known as the Depository Trust and Clearing Corporation.
The cost-savings, coming at a time when the industry is under pressure from investors to reduce fees and tame rising expenses, will be achieved by pooling both trading and settlement processes. The pressure from the investors is not unwarranted as the funds industry is falling behind other sectors in the financial services category with regards to the adoption of new technologies. Per the CEO of Calastone, Julien Hammerson, the existing system is not sustainable:
“Funds remain a vital investment vehicle, though remain hampered by continually rising costs and threat of competition, ultimately rendering the current system economically and operationally unsustainable. Through leveraging blockchain technology, the DMI transforms the way in which funds are traded, enabling an investment management community that can meet the changing needs of investors.”
Additionally, investors are seeking faster transaction speeds and transparency and the DMI is expected to improve the investor experience in the wider value chain.