Video Transcription

Des O'Donohoe: So I'm Des from Fund Recs, and today I am joined by Mr Pete Townsend from Norio Ventures. Pete, what are we going to talk about today?

Pete Townsend: Today we're going to talk about the future of asset servicing.

Des O'Donohoe: Lovely. Let's go.

Pete Townsend: Okay, great. Now, first asset servicing, what is it? It's a term that's used out there in the industry, but in terms of the audience, we're looking at fund administration, middle and back-office outsourcing, global custody, investor servicing, some of what prime brokers do, some of what asset managers do in-house.

Des O'Donohoe: Okay.

Pete Townsend: So I've been doing this for 21 years in the industry one year now as an advisor and my first interest in thinking about where this was all going came up about three years ago, I was in a client meeting, talking to them about the future of technology and all things emerging technologies, and had the head of innovation by my side to deliver what was going to be an excellent pitch, turned out to be a pretty good pitch. This guy knew what he was talking about. One of the things in his deck was blockchain.

Des O'Donohoe: Oh the B word, lovely.

Pete Townsend: Yes. And that was my first encounter with it. So I set myself down the rabbit hole of Google with blockchain to figure out everything I could about it and what the relevance of it was to asset servicing and the way things were going to look in the future,. Where I found myself was learning about a consortium called R3. That started a few years ago with their high water point. There were up to about 60 banks and actually closer to 70. And what they did was develop a distributed ledger platform called Corda and distributed ledger is the umbrella term for blockchains. So not all distributed ledgers are blockchains, all blockchains are distributed ledgers.

Des O'Donohoe: OK.

Pete Townsend: So the idea is that removing the amount of duplication around the industry in terms of record keeping is a good thing...

Des O'Donohoe: OK.

Pete Townsend: And that you don't need that many different versions of the truth. And the way that it all works is to basically imagine a big Excel spreadsheet in the sky. That lists what everybody holds across their funds in terms of positions and in terms of transactions that they've run through and that every few minutes - or every 14 seconds, if it's the Ethereum blockchain, every 10 minutes, if it's a Bitcoin blockchain, which people haven't quite settled on what it's going to be yet - that gets propagated around to all the different participants, but you can only see what you hold and what you have access to.

Des O'Donohoe: Yes.

Pete Townsend: So that would simplify things quite a bit and remove the need to do record keeping across all the different providers, now where this all came from was that if that was kind of the original thought a few years ago, then we saw what R3 is doing.

Pete Townsend: I thought, wait a second, can we actually do something about this and practice, roundabout the time that R3 really started to hit the ground and make some progress with everyone collaborating on it, across a number of the big global banks. I met a guy called Joe Gardenia, who is an ex Intel product builder, and he was great in terms of trying to understand the problem in the industry of the duplication across all the different providers and what we could possibly do about it. He just wanted to solve problems. He didn't necessarily want to use blockchain. I wanted to use blockchain, but when it came down to it, applying blockchain to reconciling records is kind of unnecessary. It's lipstick on a pig and instead of doing that, which is a problem at the end of the value chain, which is duplication of record-keeping, go ahead to the front of the value chain, where it all begins, but that's what R3 was doing anyway.

Pete Townsend: So the wonderful, great idea of a $600 million business to be sold in three years time that we were going to call Fun, clear, evaporated into thin air, but-

Des O'Donohoe: It's a good name though, good name.

Pete Townsend: Thank you, the process of doing all that and going through the exercise of creating the business, sent me down an entrepreneurial path that I'm still on. So when you think about what will happen, 50% of the activity in asset servicing from my perspective is manual, and it may not be all reconciliations. It's comparing this number to that number and coming up with a result and deciding what to do about it. All that can be automated. You guys are doing a fantastic job of automating a great chunk of the reconciliations in a very easy way that will continue, but there's other things that can be removed from the process as well.

Pete Townsend: And there is a leap of faith that the players need to take with regards to collaborating with their competitors. Not always an easy thing to do. You're trying to think about, my infrastructure, my technology, is it really a differentiator or is it just utility? And once you kind of come to terms with that, that's where things open up for you to collaborate with your competitors, get a number of folks around the table, such as what Clearmatics have done with The Universal Settlement Coin, where they've got a number of banks now that have just said, listen, we've gone to R3. We see what court is doing. That's a great thing, but let's try to simplify that even more and just create this token that reflects Fiat currencies that can be used to settle trades. So lots of great signals on where this is all going, our friend, Colin Platt, who is working on a number of different projects along with the guys in the blockchain insiders from 11:FS, there is a lot of activity on the Australian Stock Exchange.

Pete Townsend: That's happening around blockchain with digital asset holdings. There is obviously R3 still going, Clearmatics as I mentioned, the place to find what things will look like. Oliver Wyman did a great white paper about a year and a half ago called the future of capital markets. And there's a one page description in there, depiction of what it will all look like, what it could all look like. And that's probably a topic for another video, right? Because it can get quite complicated, but it looks like a very good future ahead of us. Hard work to get there four to five years, probably for critical mass, I'd say the illiquids will go first. So they've already started to go. Private equity has a proof of concept in the industry that's working, trade finance. That's a proof of industry, proof of concept of the industry that's working, and there will be more to come and illiquids where there's the biggest opportunity to gain because there's the most paper involved in those.

Pete Townsend: Your plain vanilla equity markets. There's a bigger opportunity to gain there, but that's more on the asset servicing side than it is on the overall global market side. So that will probably go last, but all of the framework that needs to be built infrastructure across competitors through collaboration will be a critical part of the story. And hopefully we can, we can help to influence that. So I think, like I said, four to five years, we'll see a critical mass. It'll take another four to five years after that to get to the point where you will see bigger global custodian banks decommissioning some of this architecture that has been providing the record-keeping solutions for the last 30 to 40 years.

Des O'Donohoe: Okay, Pete. Thanks very much for taking the time.

Pete Townsend: My pleasure Des. Thanks for having me.

Des O'Donohoe: Cheers.