Blockchain technology could slash costs for asset managers but concerns over security have slowed its adoption. New technology could finally propel it into the mainstream.
It should be a no-brainer decision. Distributed ledger technology has the potential to save the asset management industry billions, or even trillions of dollars over decades, by making transactions faster, cheaper and (in theory) tamper proof.
Blockchain revolutionizes the buying and selling of funds by doing away the need for the army of intermediaries (banks, broker-dealers and individual investors) that asset managers rely on to record and check transactions and the ownership of digital assets.
Fans of the technology have even described it as the most significant development in record keeping since double-entry accounting in the late fifteenth century.
So far, despite the boom in crypto-currencies, and a growing number of investment banks investing in blockchain teams and trading platforms, distributed ledger technology has not lived up to its hype.
Why? Risk and trust.
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Hackers have found ever more ingenious ways to pickpocket digital wallets containing financial assets and get hold of the private keys to control these wallets to steal the underlying assets.
We get it. Fund managers are right to be cautious about using distributed ledger technology.
Despite digital signatures now being recognized as legally binding worldwide, the technology underpinning the signatures still needs to be immutable, transparent and easy to use. There must always be an electronic audit trail for asset managers, investors, law enforcement and regulators.
How can we guarantee this? One way is by improving the way financial assets are stored electronically.
Securing digital assets
Today’s cybersecurity isn’t suited for decentralized systems. Hackers routinely steal digital financial assets from “hot” online wallets.
The other main type of wallet, “cold storage” (typically when digital assets are stored on a hard drive not connected to the Internet), also have their drawbacks (as recently shown when the founder of a case of a cryptocurrency company, Quadriga, died, without appearing to leave the encrypted access keys account holders need to recover about C$190 million ($143 million) of cryptocurrencies held by the exchange in offline storage).
Storing financial assets in a single location (as happens in traditional asset management with a financial organization becoming the custodian of an asset), or (precariously) in a digital wallet, with easy to steal digital keys, is neither secure nor cost-effective.
We need a new approach.
Qredo has developed a decentralized custody network which will guarantee security, account segregation and proof of reserves.
Qredo eliminates digital asset theft by creating “keyless” custodial accounts or wallets which are immune to the hacking and theft of private keys. The keys never exist the entire time assets are in a custodial wallet. If the keys don’t exist, the assets can’t be stolen.
Any endpoint running Qredo software can reassemble the just-in-time private key and securely export the key to a wallet for immediate (milliseconds) liquidity.
Blockchain has enormous potential in the asset management industry. Flaws in the security of distributed networks mean it isn’t widely used by asset managers. Fortunately, we have the technology to address these concerns and bring blockchain into the mainstream.
What are you waiting for?