Institutional Money not ready for Crypto?

How about Blockchain Instead?

Institutional money is the harbinger for world wide adoption of Cryptoassets. We’ve already heard “Bitcoin headed to $100,000 in 2018” based on Institutional money pouring in. Now investors can get ready for “crypto project X will really take off and be worth Y $ amount once Institutional Investors start investing in it?”

Institutional Investor offices, however, don’t need to invest Cryptoassets or crypto hedge funds to immediately realize the benefits of the blockchain. As listed in a previous post, institutional investors face hurdles and uncertainty surrounding investments based on Cryptoassets, at the moment. But they can also benefit in ways that don’t require the risk.

Excitement about the blockchain was once a cypherpunk movement meant to advance technology for the sake of privacy. Now excitement is centered around an alternative economics movement meant to advance technology for the sake of adoption. Insofar as people are investing their time, research and money in different blockchain projects around the world, they are looking to larger allocators of capital to legitimize everyday use of the blockchain. Crypto adoption will just happen to be a consequence of this tech upgrade.

Till then, blockchain services are currently finding ways to make allocation more efficient, trustless, and cheaper than present. This includes cutting down on the work done by controllers, valuation analysts, operations officers, legal counsel, due diligence members, cybersecurity vendors, etc. This also means cutting costs by coordinating the efforts of a numerous external vendors that have each have administrative costs of their own. Allocating money on a large-scale in a diverse set of funds requires a back office just to fulfill compliance, compile a board report, and close the books at the end of the financial year, even if you are just keeping track of the outsourcing of the work.

One way blockchain is making a difference in this process is by organizing private equity valuations. For anyone who has worked in an Institutional Investor office, one pain point may be private equity fund valuations. Whenever there is a capital call, distribution, or residual value calculation, you have to update valuations. These emails, letters, or reports hidden behind a portal get delivered irregularly and are subject to change at various points. Simply keeping up with the physical and digital paperwork is half the task when organizing investments. This administrative morass is before you even have to consider the more challenging math involved with valuation methodology.

Blockchain is in the early stages of building the exact solution for this, but it is still in the works. The U.S. asset custodian, Northern Trust launched its own private blockchain and have granted PricewaterhouseCoopers access to it for blockchain-based audits. Given that they administer over $78 billion dollars in PE assets and are running on IBM’s Hyperledger Blockchain, this is a large-scale experiment in the blockchain services for Institutional Investors who stand to gain from the efficiency.

Another way blockchain technology offers benefits can be found on the manager’s side. There are reports of an experiment in-house by AQR to bring blockchain to their trading systems in the name of efficiency. When it comes to equities trading, the threat vectors posed by spreadsheets and databases could be greatly mitigated by immutable records. This access to the blockchain can be shared with Institutional Investors who can also repurpose the data for reporting, monitoring, due diligence, etc.

Blockchain probably has the most to offer passive managers right now. There are reports of an experiment for Vanguard to index their funds using blockchain technology. The application here appears to be sheer efficiency as it relates to real-time reflection of indexes. Cybersecurity lessons learned from this blockchain experiment can be used as blockchains prove their value on large scale of institutional monies.

It has been well documented how companies in various industries can use it for upgrades in the coming decades. The entire IoT (internet of things) industry could be redesigned to the blockchain and it would only be scratching the surface of blockchain’s full potential. As it relates to crypto projects, the use of public blockchains is changing how the foundation of financial markets is being redesigned (decentralized exchanges, crypto collateral, curated registry tokens come to mind as some of the most current trends). For the moment, financial services providers are running experiments to improve the institutional investor experience and their applications have real benefits.

We are tracking the evolution of these blockchain projects as we talk to financial service vendors and Institutional Investors who are preparing for the eventual crypto upgrade.

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