How Blockchain Is Transforming Fund Servicing

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How Blockchain Is Transforming Fund Servicing

December 2020

 

As speculators followed the decade-long boom and bust of cryptocurrencies since Bitcoin’s debut, other trusted institutions began to leverage blockchain – the technology behind cryptocurrencies – on its own.

 

Institutions like BNY Mellon are at the forefront of moving the adoption of blockchain forward by exploring how this technology can be used to improve custody and asset servicing for our clients. Blockchain’s ability to lend transparency and speed to once cumbersome and opaque workflows can revolutionize the way custody banks serve their clients.

Consider the shipping industry, which has been able to optimize the end-to-end life cycle of physical goods using blockchain technology. By tracking produce, for example, from the time it is grown on a farm through the distribution process and eventual sale, the vast network of fruits and vegetables can be tracked all the way down to the end customer. This means that not only can the data be used to identify more effective ways of doing business, but if there is risk with the product, this complete transparency and traceability enables quick and effective issue resolution.  

 

Operational and Distribution Transparency

 

In the same way that blockchain has enabled transparency for companies to ship goods around the world, financial services institutions can apply these principles to dematerialized assets as well. For example, the benefits of transparency and traceability can be leveraged by a fund manager that distributes a mutual or money market fund through a broker-dealer. Currently, the fund manager may not necessarily know that a broker-dealer has sold shares until the trades have moved through the trading systems, been transmitted to and ultimately settled with the transfer agent.  

 

The issue comes down to transparency into operations and distribution. The fund manager knows that clients are asking to buy or sell, but not how much. Similarly, the fund’s sponsor doesn’t immediately know how much money people are investing. That piece of information would be particularly helpful to money market funds because the institutional traders are putting money in bulk for short-term liquidity and funding for their short-term liabilities.  


A blockchain solution would greatly benefit fund managers during stressed market events. For example, in March of this year, investors poured money into Treasury and government money market funds, which are safe havens during a crisis. Blockchain would give real-time transparency into the fund trading, further enabling the fund manager to fully understand their trading positions and needs. 

Courtesy of Investment Company Institute and Crane Data. 

While investors were putting money into Treasury and government money market funds, they were also pulling money out of Prime money market funds during the same period earlier this year. Real-time knowledge of incoming trades would have been particularly helpful for fund managers during this time of extreme market volatility. If money managers have immediate transparency into the creation and redemption of funds, they would be able to more quickly react to the market.

 

A Network Like No Other


Building a network that would enable true transparency for stakeholders across the life cycle of a trade is no small task. Doing so will require a trusted institution like BNY Mellon to develop an evolutionary approach to the revolutionary future state. Digitizing legacy systems will enable controls of real-time, transparent workflows in order to radically improve the client experience by removing as much friction from workflows to become more operationally efficient. Standardizing data thus eliminating reconciliation and creating a more straight-through process will allow all participants from the ultimate beneficial owner to the fund manager and custodian.

 

Think of how Starbucks taught their customers how to speak their language so everyone orders coffee the same way. It’s all about efficiency. Now think about something as simple as a date field in a transaction that maintains integrity and consistency as the trade flows through the fund servicing value chain and gets settled at the transfer agent. This will significantly improve the data quality throughout the fund servicing life cycle and will eliminate the need for reconciliation.

 

BNY Mellon is determined to remain a leader in this space. We’re out front not only because blockchain is part of a technological revolution, but because applying it to functions like digital asset custody and token issuance will add true value for our clients-- we’re providing a service to clients who are looking to issue digital assets across the value chain.

 

Distributed Ledger Networks can remove friction and standardize data across the value chain. Risk reduction is key, but so are the bigger benefits that come through tokenization of the fund units. Additional benefits, like increasing liquidity and transferability of mutual fund units will lead to many more opportunities including the possibility of using fund tokens as collateral in other financial transactions.

 

In the second part of this two-part series, we’ll delve deeper into how we believe our role in the functions of digital asset custody and tokenization will further transform the capital markets.

 

Subhankar Sinha is Head of Blockchain at BNY Mellon. He is responsible for setting the overall strategy relating to the adoption of Distributed Ledger Technology (DLT) and digital assets. In this role, Sinha prioritizes opportunities and identifies possibilities to collaborate with clients, startups, accelerators, incubators and other business partners to drive enterprise innovation and build a DLT ecosystem. He is particularly focused on the impact of DLT and tokenization on fund servicing and currency.

Subhankar Sinha

Head of Blockchain at BNY Mellon


BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may be used to reference the corporation as a whole and/or its various subsidiaries generally. This material does not constitute a recommendation by BNY Mellon of any kind. The information herein is not intended to provide tax, legal, investment, accounting, financial or other professional advice on any matter, and should not be used or relied upon as such. The views expressed within this material are those of the contributors and not necessarily those of BNY Mellon. BNY Mellon has not independently verified the information contained in this material and makes no representation as to the accuracy, completeness, timeliness, merchantability or fitness for a specific purpose of the information provided in this material. BNY Mellon assumes no direct or consequential liability for any errors in or reliance upon this material.

 

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