Northern Trust adds auditing to distributed ledger

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One of the rare actual live distributed ledger implementations in the financial services industry is the one Northern Trust uses to manage private equity deals on the Channel Island of Guernsey. The bank developed the ledger based on the open-source Linux Foundation Hyperledger Fabric; it runs it on IBM's blockchain platform on the IBM cloud.

A year after it launched in February 2017, the ledger is still kicking and the bank has added the ability to let audit firms conduct their reviews of private equity deals directly from it. This means auditing firms like PwC, which helped design the auditing capability, can have their own node of the ledger and can perform evaluations in a self-service way, instead of requesting documents and data from each of the parties to a transaction.

Some distributed ledger and blockchain technology observers discount this project, saying it doesn’t handle real transaction volumes.

“They’re right and that’s on purpose,” said Peter Cherecwich, executive vice president at Northern Trust. “Because right now blockchain is fit for purpose for transactions that are high monetary value, low volume and low velocity. It works great. It has been improving in terms of being able to handle high volumes, but for now it’s much more fit for purpose for low volume.” (The bank refers to this platform as a blockchain; a purist would say it doesn't meet the technical definition of a blockchain but does fall under the general term "distributed ledger.")

The distributed ledger is so far used by only one private equity firm, Geneva-based Unigestion. This, again, is by design, according to Cherecwich.

“When we went live last year, we made a decision to build out all the other functionality we need to make this this more robust, versus the minimum viable product we had, so we kept the one fund on there live and purposely didn’t add new funds as we were building out these capabilities,” he said. Unigestion has not done many deals on the ledger yet, Cherecwich acknowledged.

Over the past year, the bank has added the ability to automate some of the life-cycle events that tend to occur in private equity, like the forging of partnership agreements and distributions of funds, to its distributed ledger. It’s also added document management capability.

What’s new as of Monday is audit firms can be given access to the distributed ledger and obtain a “golden copy” of the data and documents they need to complete the audit process.

“If you think about how an audit happens today, they have to go somewhere, get the data access, download the data, they would have to look at the look at the pieces of paper,” Cherecwich said. “Now they have a node on the blockchain in the cloud. Because of the automation they can automatically do all the audit work in real time as it’s happening. They can do it daily, and that brings efficiencies for everybody involved.”

Why are they doing this in Guernsey, a small island of beaches, cliff walks and cows? Like Delaware and the Cayman Islands, the Channel island attracts private equity business with favorable taxes and regulation.

The bank plans to roll out more clients on the platform by midyear.

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Distributed ledger technology Blockchain Northern Trust IBM