This article summarises Mainspring’s research findings for blockchain’s suitability as a replacement for traditional SQL based systems for fund management and administration. The full findings are available for download here.
Blockchain has the potential to shape industry in profound ways, so much so its introduction has been likened to the invention of the Internet. To become more informed and determine the company’s position with respect to blockchain, earlier this year Mainspring undertook a practical proof-of-concept project as well as initiating a research project as to the applicability and risks associated with using blockchain technologies for fund administration and accounting of private equity and custodian managed accounts funds.
Blockchain is defined as a ledger documenting a chronological series of immutable records that has been distributed to all parties within the defined network. This definition gives blockchain a wide range of potential applications, from transactional documentation to facilitation of contractual obligations. Blockchain leverages this adaptable structure to potentially facilitate many benefits.
Blockchain is an immutable source of the truth and as such give’s users a confidence in the transparency of the chain. Assuming an appropriate level of authentication users can view not only the current documentation of the information, but the historical chain of changes associated with the information. From a transparency point of view the user can trust their current information is the sole source of the truth. Furthermore, the use of smart contracts, pieces of automated scripts embedded in the blockchain to represent contractual obligations, offer the potential for enhanced efficiency and profitability gains such as limitation of duplication of efforts or taking advantage of fleeting arbitrage opportunities. Leveraging the blockchain infrastructure to fulfil mundane administrative and communicatory functions an organisation’s resources can be freed to focus on those areas that maximise their value add. This benefit will be enhanced the more widespread the participation along supply chain from parties such as lawyers, auditors, regulators, and managers. Notwithstanding the benefits associated with the implementation of the blockchain mentioned, there are however some major drawbacks that could pose obstacles to its wide scaled adoption.
One of the most commonly associated drawbacks associated with blockchain is the cost, both financial and reputational. The financial cost comes from the sheer power needed to necessitate the blockchain. Some public blockchains have been estimated to consume energy equitable to the entirety of countries such as Ireland. Furthermore, presently blockchain has been unable to prevent serious breaches into the chain. Some of these hacks have in some cases resulted in millions of pounds of losses. Although the financial losses can be huge, the reputational damage of such a breach may be even more detrimental. These issues have led to possible avenues of additional research focused on cryptographical or other enhancements, including ZKPs and off-chain storage as discussed more thoroughly in the detailed report.
Avenues of research must be explored in greater detail if an industry shift from current legacy systems to a blockchain based approach is to be accepted. In the future, a blockchain based solution will offer an alternative solution to current more traditional solution offerings, but for such a solution to be a lasting success collaboration throughout the supply chain is required.
For the full findings of Mainspring’s analysis for the potential blockchain for fund management and administration please download here.