Block chain and equities

The private equity market, while attractive to investors and businesses, has seen little technological investment or innovation in recent years. However, as calls for greater transparency, efficiency and security are made - especially in a world where cyber-attacks are a common occurrence - private equity funds and services need to address the lack. To tackle the problem, IBM and Northern Trust have turned towards the Block chain.

To take the hassle out of regulatory and legal compliance, the technology has also been designed to support current rules and was created by working with government officials and regulators during the process. Ownership stakes can be transferred and managed through the ledger, and the companies say the service offers "one version of the truth" to users on the platform. Current legal and administrative processes that support private equity are time consuming and expensive and a lack of transparency and efficient market practices almost always leads to lengthy, redundant and fragmented investment and administration processes. This solution is designed to deliver a significantly enhanced and efficient approach to private equity administration.

GFT, a fintech specialist, claims it is now possible to individually track and manage multiple physical commodities assets through the use of its block chain business model. With a number of high profile cases of fraud within the commodities market – typically the result of a failure to tightly control physical inventories, the distributed ledger’s ability to create a full audit trail for each and every participant in the movement of physical commodities will be a game changer and will be of particular interest where proof of ownership and location of the physical commodity are essential for market participants.

Warehouse receipt financing, is another example, where there may be a number of duplicate and therefore confusing receipts created for a bank’s financing of a commodities deal, may well be de-risked by this type of technology. This will be done by digitally tracking an underlying physical asset by features such as origination, current location, beneficial owner, certain attributes of its quality or grading, and its provenance. Tracking is enabled by capturing data held by a unique identifier for each commodity ‘parcel’ (a consignment of iron ore or wheat, for example). Because a bar code or QR (quick response) code can be more easily separated from the asset or even replicated, GFT is planning to test with an RFID (radio-frequency identification) tag. This technology has been chosen because the tags can easily be embedded into the physical asset (perhaps a sealed container or even a single package or item). The data contained in the unique identifier is written into a block chain record to ensure a clean audit trail.

GFT is using a private block chain, on the Ethereum platform. A digital ‘smart contract’ model embedded within this platform captures and enforces the stored data. The prototype includes a basic permission model for different user-types including logistics, warehouse and end-user. The concept of this model looks to improve transparency across a very early stage component of the supply chain but this could have applications in other functions, particularly when interacting with the trade finance function. Most likely to benefit from this in the first phase of its release will be industry or asset verticals. For example, a global agri-business might seek a reduction in the paperwork required to administer but certain quality attributes (such as whether a consignment of grain is genetically modified or not, its moisture content, country of origin, or whether or not it has been sourced sustainable) must be captured and locked-down at the point of origination, then each parcel identifier can be tracked and verified at any stage in the life cycle of that trade. It would be possible to transfer the parcel ID through the value chain, literally to the ingredients on the packaging of the finished goods.

The payback of this for the tracking of raw materials in terms of quality control are manifold, as indeed are they for the intervention of the finance function. For treasurers with a group risk function the increased transparency and visibility into the supply chain is clear; such a solution also has the potential to support the associated cash flow management around the status of different parcels and their asset ownership throughout their life cycle. Although this model has potential to benefit many different functions along the supply chain, the current multiple platform/multiple system technology landscape is complex. A further issue might be the regulatory constraints around the cross-border movement of data.

A payments solution launched recently by Citi, in partnership with its client Nasdaq, facilitates straight through processing and automated reconciliation by using a distributed ledger to record and transmit payment instructions. The solution tightly integrates Citi’s core financial infrastructure with a block chain system, Nasdaq’s Linq in this instance. The result is greater operational efficiency in Nasdaq’s private securities business.

In the months prior to this, Nasdaq had already applied the distributed ledger to create their Linq platform for private markets securities. And whilst this enabled a more transparent and efficient transfer of stock certificates, there remained a dislocation between the new and old world, especially in regard to how the block chain interacted with financial systems to initiate and receive payments based on these transactions. To solve this, Citi came out with CitiConnect® ,which tightly integrates distributed ledger technology with Citi’s global financial network.

For example, if an investor buys a private market security through Linq Platform, funds deposited in Nasdaq’s account will be auto-reconciled and reflected on Linq’s digital sub-ledger through the CitiConnect® for Block chain connectivity channel. For Nasdaq, the solution will bring a number of potential benefits. Firstly, because it offers direct access to global payments from Nasdaq’s Linq platform using CitiConnect for Block chain, there can be a seamless end-to-end transactional process for sales of private company securities. For private market securities purchases the solution helps match exactly who has bought the security with their payment, enabling auto-reconciliation for Nasdaq.

With so many critical business functions and industries lining up to transform their mode of verification and operation into block chain, it all rounds back to the basic and very important question - how secure is block chain and what are the risks involved?

To understand the inherent security risks in block chain technology, it’s important to understand the difference between public and private block chains. Will try to deliberate on it a bit on subsequent post.