Putting blockchain to the test

November 27, 2018

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Spend a little time with Vanguard's Warren Pennington and you'll understand why blockchain technology appeals to so many financial services firms, banks, and a range of other industries. He believes "it's an amazing opportunity to invent a better set of capital markets that are more efficient for everyone." It's a lofty goal, but he and his team believe in blockchain's potential.

Warren is a principal in Vanguard Investment Management Group, where, in addition to his many other duties, he leads the financial technology (fintech) team. His team is charged with exploring new technologies that have the potential to improve the way Vanguard and the markets function. Ultimately their work ties back to Vanguard's broader mission to give every investor the best chance for success.

Blockchain isn't Bitcoin

A simple way of looking at blockchain technology is to think of it as a shared database, or a shared source of data that can be accessed through a secure network. The fintech industry likes to describe blockchain as "a shared source of truth."

The truth is a good place to start. Especially when you consider the headlines and hype surrounding the rise of cryptocurrencies and the blockchain technology that powers them. It's important to draw the distinction between the technology itself and applications like Bitcoin.

When Bitcoin first came on the scene several years ago, Warren's team was intrigued. On the surface, it may seem ironic that Vanguard would consider a technology so closely linked to speculative cryptocurrencies like Bitcoin. But it makes sense when you hear Warren's side of the story.

"When we first started learning about Bitcoin and zeroed in on its characteristics, the idea behind the technology appealed to us," he noted. Among some of the most promising attributes were the open network, the lack of an intermediary, the highly secure nature of the network, and the ability for a user to transact with another party anywhere in the world.

From there, Warren and his team tried a number of experiments around trading and processing, ultimately deciding to abandon the effort. That avenue turned out to be a digital recordkeeping exercise. And while what they learned was useful, the team concluded it was not the best use of this kind of technology.

Undeterred, the fintech team moved on, taking a completely different approach. They turned their attention to the idea of a data ecosystem. It was the classic "aha!" moment when the team conceived of a new application: the combination of blockchain and index data.

The business problem they set out to solve was that multiple parties needed a copy of the exact same data all the time. But how do you do that efficiently and instantaneously, and get the data correct every time? Blockchain might hold the answer.

Vanguard and blockchain

In December 2017, Vanguard announced its first blockchain partnership with the Center for Research in Security Prices (CRSP) and technology provider Symbiont. While the pilot project continues to evolve, the fintech team has shown how investment managers can instantly distribute, receive, and process index data. The result is better benchmark tracking and significant cost savings that have the potential to provide better returns for our clients.

"By automating this process with blockchain technology, we've reduced lag times and eliminated errors. And we're really just getting started," Warren said. That makes sense when you consider the fintech team motto: Build it small and fast, and then scale.

Blockchain

The future is wide open

Clients and partners can look for Vanguard's technology innovations to continue. It's in our DNA to constantly look for new ways to make the capital markets work better for all investors. Right now that means continuing to explore the opportunities.

"It really does come down to the network effect. And blockchain is a network technology," Warren stated. "I think this is why we're seeing so much interest in our fintech initiatives among some of our largest, most sophisticated clients."

Given this, it's interesting to think that blockchain is often hailed as a disruptive force. For Warren's fintech team, that's something of a misnomer. While blockchain may disrupt in some use cases, it also represents a process for constant improvement. Viewed in this way, it speaks to the power of Vanguard's partnerships and strong client relationships.

What does the future hold for blockchain? Warren can imagine an array of exciting possibilities on the horizon. A good example might be improving less efficient areas of the markets, like the over-the-counter markets, in general. "Streamlining the index data ecosystem is a great start, but reinventing the capital markets is how Vanguard can build on our legacy of putting investors first."

About CRSP

The Center for Research in Security Prices, at the University of Chicago's Booth School of Business, has been an integral part of the academic and commercial world of financial and economic research since 1960. CRSP's portfolio of historical databases for common stocks, mutual funds, U.S. Treasuries, REITs, and research indexes is relied on by almost 600 leading academic and commercial institutions in 35 countries. CRSP's investable capitalization-based, industry sector, and value/growth style indexes are a logical extension of these core products. These indexes blend advancements in academic research with industry practice in a fundamentally sound manner under the premise that an index must reflect the way that money managers actually invest. For more information, please visit www.crsp.com.

About Symbiont

Symbiont is the market-leading smart contracts platform for institutional applications of blockchain technology. Disclosed users of its platform include nineteen financial institutions for Smart Loans, arranged by Credit Suisse and executed via Synaps, its syndicated loans joint venture with Ipreo; the State of Delaware for Smart Records; a major European insurance company for Smart Swaps in the catastrophe insurance market; Orebits, a provider of asset digitization services; PrivateMarket.io, an alternative assets platform; and Medici Ventures, a blockchain-focused venture firm. For more information, visit symbiont.io.

Note:

  • The Center for Research in Security Prices (CRSP®) is a registered trademark of the University of Chicago Booth School of Business.