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The Benefits of Blockchain Technology for Institutional Investors

By Mark Smith

Blockchain technology is not just a platform, it’s a solution. And for institutional investors, the number of problems blockchain technology can solve cannot be overstated. For starters, it can mean faster settlement, cheaper banking costs, and better corporate governance.

Symbiont was founded in 2013, largely in response to regulatory overreach in the wake of the 2008 financial crisis that doubled down on the centralization of risk. Where regulations fell short and stymied growth, technology offered a more effective solution. My co-founders and I recognized blockchain technology had the power to create transparency and accountability while still empowering investors. By removing centralized intermediaries, blockchain technology returns most financial markets to their natural state, which is peer-to-peer. It also empowers investors to take greater control of the instruments they own.

Take cash equities trading, which suggests real time clearing and settlement. Currently, cash trading isn’t really immediate; it’s T+2 —that is, settlement occurs two days after the day that the trade occurs. The delay stems from the use of third parties, such as the DTCC, transfer agents, custodians, brokers, etc. to process the payment, settle the trade, and transfer ownership rights of the security. A blockchain platform removes the need for intermediaries by introducing direct trading between investors. With no third parties required to settle the transaction, the trade can be settled immediately, reducing costs and potentially providing a more liquid market that operates 24/7, almost entirely removing counterparty risk.

Another area where blockchain technology can help is international payments. In traditional banking, international payments can take up to four days to settle because of the need for centralized authorities to verify transactions. For banks, this is a time-consuming and expensive wait. But with blockchain technology’s decentralized, distributed ledger, all parties can reach an agreement instantly on the validity of a transaction, without the need for a trusted third party. Because each bank has its own copy of the shared ledger, costs are trimmed and efficiency is gained.

Then there’s proxy voting. It's hardly a secret that the corporate voting process is deeply flawed. It’s rife with middlemen. Companies tabulate votes through an antiquated process that involves compiling ledgers that are separately maintained by the many stakeholders involved in governance. The result? All too often, there are inaccurate voter lists, a half-finished distribution of ballots, and unruly vote tabulation. Broadly speaking, these issues deal with transparency, verification, and identification—all of which are central to the advantages offered by blockchain technology.

Here, the technology’s promise lies in its ability to provide an accurate shareholder registry along with an immutable, auditable and accurate record of shareholder voting. With blockchain technology, communicating with shareholders, and soliciting and tabulating votes gets easier and regulatory costs fall. In the context of proxy voting, blockchain technology makes determining who owns what shares and how those votes should be tabulated, incontrovertible. 

In addition, with blockchain technology, issuers can interact with their shareholders directly and without friction. As a result, shareholders may choose to exercise their voting power more often, both because it’s easier and because the election results will have more integrity.

Blockchain technology offers corporate information that is immediately accessible, true, and mathematically deterministic. That means no more concerns about the accuracy of a proxy contest. With blockchain technology, provenance is 100% certain—the Holy Grail of confirmation.

Blockchain technology has the potential to transform market infrastructure and the global economic system’s foundation. But, like other innovative technologies, a big hurdle is the widespread adoption by issuers and investors. The challenge with blockchain technology comes down to one fundamental question: Do organizations have the will to take the leap?

To delve deeper into the benefits of blockchain technology for institutional investors, tune into my discussion with Amy Borrus, Deputy Director of the Council of Institutional Investors (CII) at CII’s Spring 2019 conference. Watch the video here.

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