While big banks debate how blockchain technology might be used to improve financial services and join consortiums to launch pilot projects, one of the world's largest asset managers is leading by example.
Vanguard is preparing to launch a blockchain network, in partnership with the Center for Research in Security Prices and the smart-contracts startup Symbiont, which aims to improve the speed and accuracy of the capital markets. The dedicated network, created by Symbiont, will allow investment managers to receive and process data from CRSP instantly.
A few large banks are also taking matters into their own hands. State Street, JPMorgan Chase and Bank of New York Mellon are all developing blockchain projects, drawn to the technology's promise of more transparent custody and faster transactions.
The idea behind Vanguard’s effort is similar: By automatically ingesting index data being shared on a decentralized database, the mutual fund provider, which manages $4.8 trillion in assets, will obtain a more complete and up-to-date picture of the market, an improvement that could yield better returns for clients.
As it stands, the process is distressingly manual. Once a day, providers such as CRSP send asset managers and trading shops a set of files that tell them the state of various indexes. As the trading day progresses, data providers push out further updates to their own websites.
"We have to have people who sit and watch those websites and look for the updates and then interpret them and process them manually into our systems," said Warren Pennington, a principal in Vanguard's investment management group.
Once Symbiont's network launches in early 2018, the blockchain-powered process Vanguard envisions will be "completely streamlined," Pennington said. "The index provider makes their updates all the time onto the blockchain. We and other subscribers have an exact copy of that at the same time that they make the changes, and it's instantly recognized by our systems."
Caitlin Long, Symbiont's president and chairman, portrayed the joint project as a sign that Vanguard, which until now had made no public announcements related to blockchain technology, has major faith in it.
"Index data is about as mission-critical for Vanguard as a technology can get," said Long. "It is critical that portfolio managers have accurate and timely index data, and this technology will allow them to do that."
Pennington said the Valley Forge, Pa.-based asset manager had chosen Symbiont because of its proven expertise in the capital markets. The startup is also behind a Delaware initiative to put publicly traded stock on the blockchain.
Symbiont launched a test version of the network in September, just in time for an index rebalancing. During the rebalancing period, the network successfully processed 5,415 validated transactions, Long said.
The network requires at least four nodes to be secure and stable. Right now it has seven — one being run by Vanguard and one by CRSP, with the other five being managed by Symbiont. The network could potentially grow to hundreds of participants, including hedge funds and investment banks, according to Long, who said Symbiont ultimately wants to hand off its nodes to other market participants.
Vanguard's approach to blockchain technology — taking the initiative itself, apart from its peers — is the opposite of that taken by many banks, which have joined large consortiums such as R3 to investigate the technology.
"Instead of going out and building a consortium, [Vanguard] reached out to a close counterparty and said, 'Let's do this together and then let's open it up for others to come in,'" said Long.
Some multibank efforts have admittedly borne fruit. On Monday, Barclays, UBS and Credit Suisse announced a pilot project to use Ethereum-powered smart contracts to simplify and share the responsibility for certain compliance tasks. The pilot is due to be completed by the end of January.
UBS CEO Sergio Ermotti told CNBC "there is a future for blockchain technology, and [that] technology will play a big role in changing and reshaping our industry."
Echoing his positive appraisal was Emmanuel Aidoo, head of blockchain strategy at Credit Suisse. “This is an important project as it establishes blockchain benefits in a broader context than clearing and settlement," Aidoo said in a news release. "The use of blockchain to solve real-world regulatory requirements in a cost-effective way is very appealing."
Vanguard, too, expects its blockchain platform to help it cut costs. But the company won't be letting anyone go as a result.
"We have a lot of work to be done, and this will free up our resources to do other things that might even have more value," Pennington said.