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Diary of an Investor: What chain?

Last year, if anyone had mentioned blockchain my first associations would have been Bitcoin, the dark web and cybercrime. But such new concepts have a habit of shifting shape. At one point, everyone rejects them. Then comes quiet acceptance and after that, mainstream adoption. From what I am hearing, blockchain is following a similar course in financial services firms and it is the topic of the day at conferences and seminars. 

‘Pieter, can you tell me anything about all this blockchain stuff?’ Rolf, our chairman of trustees, asked me recently. ‘You know I like to stay abreast of technology and this is something I feel I should know about.’ Indeed, Rolf is what you call an early adopter of technology, having recently embraced wearable tech and other gadgets, which he likes to demonstrate.

I suggest we fix a meeting with our IT department so they can explain it to us.

So Rolf and Geert from our investment department join me in a meeting with Dr Ioannis, the Wasserdicht group director of IT. Dr Ioannis is ahead of the curve. ‘So what do you need to know about blockchain?’ he asks.

‘It’s simple’, says Geert. ‘We’ve been reading about how blockchain could revolutionise financial services. Previously we thought it was something shady. You can forgive us for being somewhat confused.’

‘In essence, blockchain can be explained in simple terms’, says Dr Ioannis. ‘Don’t be alarmed by the association with Bitcoin. It’s all about ledgers. If we all had real-time access to the same data ledger entries through what is called a distributed ledger then this could change the way we do transactions. Distributed ledgers is not a shady concept, but Bitcoin was the first application to make use of it on a large scale.’

Geert asks: ‘My friends in the banking world say distributed ledger theory could revolutionise the trade settlement process. Perhaps it could do away with the traditional custodian banks?’

Dr Ioannis replies: ‘What is more likely is that the custodian banks adopt this technology so they are not disintermediated. I have heard that the banks all have tech teams working on this and they are collaborating on blockchain.

‘One area that blockchain or distributed ledger technology could change is the way secondary market transactions in illiquid assets are conducted,’ Dr Ioannis continues. 

‘Imagine how powerful it would be if everyone had real-time access to all the documentation and the entire transaction process at once and in one place? You could speed up the transactions enormously and even create new types of market.’

Rolf thanks Dr Ioannis for the briefing as we file out. ‘There’s one thing you should know about distributed ledger before you go,’ the IT director tells us. ‘It’s not new. In fact, the first research efforts date back to the mid-1970s.’ 

Pieter Mullen is investment director at Wasserdicht Pension Funds

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