Blockchain, and the application of such, has over the past couple of years been a headline maker. However, there is still a lot of uncertainty over exactly what blockchain is and how this will transfer into everyday life.
Blockchain, in its simplest form, can be thought of as a distributed ledger technology (“DLT”) containing the relevant details for every transaction that has ever been processed. The validity and authenticity of each transaction is protected by digital signatures.
Potential benefits of blockchain technology in asset management and audit
The primary benefits of blockchain in this context are data security, operational efficiency and, most interestingly, smart contracts.
Combining transactions into blocks of data makes the ledger extremely strong. Each block is linked to all other blocks prior and subsequent. This makes data tampering very difficult in any singular block as you would be required to make the same change in every block in the chain at the same time.
Smart contracts & efficiencies
In simple terms, smart contracts can be summed up as contracts which contain an element of inbuilt automation. For example, if a contract has set criteria to enable payment, the payment would be automatically completed once the criteria are met. Simultaneously, the information on the blockchain will be automatically updated to reflect the two sides of the transaction. This is just one example of how smart contracts could be used, but one that could potentially save asset managers a lot of time and money, while simultaneously making the process more secure and transparent.
An example of blockchain use in asset management
Smart contracts can be used in distribution allowing individuals to invest into a fund without utilising an intermediary. The necessary data to complete the transaction will be detailed in the distributed ledger. Transaction events are stored in the blockchain in a permanent, unchanged, and timestamped format. The stakeholder submits the subscription request directly to the Smart Contract which in turn authenticates that appropriate conditions have been achieved and so executes the transaction once the NAV has been calculated.
Given blockchain’s verifiable history, DLT’s could be used by auditors as verification of transaction authorisation and settlement.
Taking this further, instead of asking clients for bank statements or sending confirmation requests to third parties, auditors can easily verify the transactions on the available blockchain ledger.
The days of sample based substantive testing may become a thing of the past as auditors will resort to blockchain technology to test the whole population of transactions within the period. The ability to test whole populations at speed could in time lead to continuous real time audit and enable the audit of daily dealing NAVs – essentially creating a “plug and play audit”.
Whilst the technology is still unknown the speed of change is great and the funds sector alongside auditors need to be aware of the opportunities that blockchain presents. Asset managers need to be continually focussing on new technologies so not to be left behind by disruptors.
From an audit point, in the short-term traditional audit methodologies will remain. Even into the longer term, the key judgements around the audit of funds, reasonable assurance they are free from material misstatement, will still be made by the Audit Director responsible for signing the financial statements.
This article was originally published in The Guernsey Press.