[ U P D AT E ]
Technology
revamp a
balancing act for
custodians
WHILE PROVIDERS ARE CON-
SCIOUS EXISTING SYSTEMS
ARE IN NEED OF REFORM,
THERE IS TREPIDATION ABOUT
DEVELOPING TECHNOLOGY
WHICH COULD BE DISRUPTED
BEFORE IT EVEN GOES LIVE.
F
or global custodians, technology – be
it distributed ledger (DLT), artificial
intelligence (AI) or big data analytics – is
widely viewed as being the lifeline that will
propel the industry into the 21st century,
helping it gradually transition away from its
core product offering of asset safekeeping,
settlement, corporate action processing and
tax advisory.
The conversion process, however, from
legacy infrastructure to new systems is a
very delicate balancing act.
“Deploying innovative technology must be
done in a way that allows for flexibility. A
16
Global Custodian
Fall 2018
number of custodians are using legacy tech-
nology which is 20-30 years old, and it is
crucial any new technology can interoperate
with those systems,” said Justin Chapman,
senior vice president and global head of
market advocacy at Northern Trust.
“At the same time, banks need to be
extremely assured that the disruptive tech-
nologies they are incorporating into their
businesses are future-proofed.”
While providers are conscious existing
systems are in need of sweeping reform,
there is trepidation in some quarters about
developing technology which could be dis-
rupted before it even goes live.
DLT is a primary example of an innovation
which could eliminate many inefficiencies in
securities services, but one which is looking
quite vulnerable to disruption itself through
quantum computing and mounting criticism
about its high energy usage at a time when
organisations are trying to scale back their
carbon footprints.
Quantum computing – which is still a
theoretical conception – is a threat because
its processing power could potentially
decrypt blockchain’s cryptographic encryp-
tions opening it up to data breaches and
cyber-attacks.
Chapman said that custodians are moni-
toring the development of quantum com-
puting, although some industry-watchers
believe blockchain could simply incorporate
quantum computing’s applications into its
cryptography to offset any future threats
the technology may pose to security.
In terms of blockchain’s well-documented
energy inefficiencies, custodians have also
woken up to the problem.
Chapman acknowledged that providers
are starting to reduce the amount of data
which is shared on blockchains, conscious
that most of the information does not need
to be distributed to unlock transactions. “By
putting less data on blockchains, it gives the
technology greater velocity and a much-im-
proved carbon footprint,” he said.
Despite these concerns, organisations
are pushing through with DLT initiatives,
although Australian Securities Exchange
(ASX) recently delayed the commencement
date for its blockchain-based post-trade
equities platform from Q4 2020 until March-
April 2021. “We are going to see a wider
market adoption of blockchain over the next
12-18 months extending across multiple
asset classes,” said Chapman.