by Nuno Menezes
On February 22, IBM announced it was signing a partnership with Northern Trust to start the research and development of a blockchain-based technology tool that will improve the management of private equity funds and services.
Even though the private equity market is quite attractive to investors and businesses, it has not seen any new developments or innovation recently. Therefore, the industry has fallen behind with technological advances, but now security and efficiency concerns and calls for greater transparency are demanding the industry to take action and develop new solutions.
To address these and other issues, the two partners, believe the Blockchain technology can provide the best answer. IBM understands that the "digital ledger" which records virtual currency transactions from wallets, creating a chain to show where these assets have been traded, is the cheapest and most efficient answer to solve the issues the industry is facing right now.
According To Bridget Van Kralingen, the Senior Vice President, IBM Industry Platforms, the companies have already created a "security-rich" blockchain which is based on the Hyperledger Fabric; a Linux Foundation open-source distributed ledger project designed with business and IoT applications in mind.
Van Kralingen stated:
“Blockchain is an ideal technology to bring innovation to the private equity market, allowing Northern Trust to improve traditional business processes at each stage to deliver greater transparency and efficiency. Based on the Hyperledger Fabric and secured by IBM Blockchain’s high-security business network, IBM collaborated with Northern Trust to build a powerful new enterprise solution using blockchain for the private equity industry.”
The technology utilizes IBM's cryptography and key management technology to improve the security of the ledger, and scalability is kept in mind due to support from IBM Cloud. The blockchain solution, made available through Northern Trust, will grant investors and fund manager’s greater transparency, and will also give regulators access for auditing when required. 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.
The administration of a private equity fund operated by Swiss asset manager Unigestion is presently being managed by the blockchain solution pioneered by IBM and Northern Trust.
The two partners also tried to avoid regulatory pressures, and by creating the technology along with government officials and regulators, the two companies were able to take the hassle out of regulatory and legal compliance.
Even though blockchain technology is closely tied to digital currencies which in turn can be used for money laundering and other obscure trades, IBM and Northern Trust considers the technology itself to have a lot of useful applications, such as enabling a secure way of deploying and managing financial systems and records. Since the blockchain allows a completely open and transparent method of making transactions and recordkeeping through networking that is immutable, it makes it nearly impossible to fiddle the numbers or disguise fraud.
The President of Corporate & Institutional Services at Northern Trust, Peter Cherecwich commented:
"Current legal and administrative processes that support private equity are time consuming and expensive. A lack of transparency and efficient market practices leads to lengthy, duplicative and fragmented investment and administration processes. Northern Trust's solution is designed to deliver a significantly enhanced and efficient approach to private equity administration."
IBM is actively working with companies to make blockchain ready for business. Financial services, supply chains, IoT, risk management, digital rights management and healthcare are some of the areas that are poised for dramatic change using blockchain networks, and it seems the company wants to stay one step ahead in these areas.
By targeting the low-hanging fruit, since private equity is an industry that is very manual even to this day, IBM will now seek to prove clearly the benefits of the blockchain with a real-world implementation, addressing whether the technology lives up to the hype.