Vanguard, the largest provider of mutual funds in the world, has recently finalized the completion of a noteworthy implementation. They are now starting to use blockchain technology as a way to power their entire enterprise in the form of a Vanguard index fund. This distributed ledger software will play a part in their business model and protect consumers. Moreover, the company will proceed with its incessant drive to preserve low costs.
This titan in the world of investments is noteworthy for popularizing not just mutual funds, but also ETFs for investors. An ETF (exchange-traded fund) is a collection of securities – like stocks – that actively track an underlying index. They typically consist of an array of investment types, including stocks, commodities, bonds, or a complete mixture of investment types
There are several other financial institutions that are experimenting with blockchain projects. Likewise, they are implementing blockchain programs, though on an admittedly limited scale. Be that as it may, Vanguard is taking the bold chance of proverbially jumping in with both feet.
Vanguard Index Funds Raking in Trillions
Since February of this year, Vanguard has been using blockchain as a means to manage financial data. It is essentially a tool for ingesting data for $1.3 trillion worth of funds. Alternatively, ingesting 25% of its total $5.2 trillion in assets under management.
One can claim that it goes beyond being a one-off trial. This is primarily due to the service’s operation being live for over a million customer accounts. How is this the case? Well, Vanguard index funds clients have been unwittingly using a blockchain service throughout a good chunk of the year. Furthermore, the company declares that its implementation is predominantly proving to be a total success.
In essence, there’s a strong possibility that it’s the first major financial institution to employ blockchain for a core service.
The Vanguard index funds and blockchain implementation include the forerunner $800 billion Total Stock Market Index Fund. It is also indicative of arguably the largest uses for distributed ledgers at this point in time.
The company responsible for Vanguard’s blockchain is Symbiont. This is a New York startup that is six years old and has a total of 75 employees. The primary goal of Symbiont’s products is to serve different functions for various financial institutions. These range from tracking a mortgage security’s life cycle to resolving securities trades. For the time being, Vanguard utilizes Symbiont as a way to simply deal with index data.
The ledger software draws its basic structure from the same blockchain technology that Bitcoin introduced to the world. This effectively grants a sense of assurance for the security of operating in the crypto field.
The state before the implementation
Vanguard reports that by using blockchain, there has been a complete overhaul of their system; specifically for the better.
The head of Vanguard’s fintech strategies team, Warren Pennington, alleges that a requirement of the company’s previous system was the manual syncing of data. On top of that, it was mandatory for employees to make updates all day.
“All day long, throughout the day, we had data team members making sure they could keep data in sync with what CRSP had in mind.”
With the use of blockchain technology, streamlining the process is possible, and it is also automatic.
With all that’s changing, the data source that Vanguard uses for its mutual fund indexes isn’t one of them. What is new, however, is the procedure it operates on for obtaining data. Since 2012, Vanguard has been using the Center for Research in Security Prices (CRSP) for this purpose. It is a University of Chicago research center that provides support for an array of indexes. CRSP Indexes are basically security baskets that intend to reflect a market’s value. The research deriving from this governs what stocks should go into a given index. Moreover, it dictates what exactly their concentration should be fixating on.
Prior to working with Symbiont, Vanguard’s primary procedure for updating its CRSP indexes was a manual process. It would receive individual files along with ‘point in time’ securities data. Following this, it would essentially disinfect that data, load it into another database, and perform checks ensuring accuracy.
Effects of the blockchain
The project, which began in mid-2017, originally employed a team of fewer than ten people. Pennington explained that lack of familiarity with the software was a major barrier of entry.
“One of the challenges in a highly regulated industry is just lack of familiarity. That’s what takes time—letting people get familiar.”
Pennington goes on to say that with Symbiont’s blockchain platform, Assembly, Vanguard now has a harmonious database. One that experiences a frequent update whenever CRSP carries out a modify to the index.
“No more manual updates or manual pulling of data. No more manual reconciliations.”
It’s important to note that you don’t technically need a blockchain to receive instant updates to a shared database. Such a thing can easily be done with technology that is comparatively older. However, Symbiont pursues a blockchain architecture in order to expand on the trust of clientele.
The goal of its blockchain is to act as an independent third-party that securely accommodates information across multiple computers. To elaborate, a network of computers that Symbiont does not own, as they are under the ownership of organizations participating in the blockchain ledger. It will effectively restrict Vanguard from needing to rely on the startup to make sure that the data is intact.
In the meantime, Vanguard, Symbiont, and CRSP are probably the only organizations that can access the Vangard index fund data. With that in mind, the managing director at Symbiont, Ron Papanek, provides a counter-argument. He claims that half a dozen of other asset managers are running test versions of the software. On top of that, they are thinking about potentially participating.
A gamble that’s worth it?
Since the project’s birth in 2017 at the hands of a team of fewer than ten people, it took two years for it to get off the ground. Pennington says:
“One of the challenges in a highly regulated industry is just lack of familiarity … That’s what takes time—letting people get familiar.”
There is quite a lot being put on the line. An error of any kind can result in Vanguard index funds falling out of sync with the markets they’re attempting to track. Subsequently, this would diminish the quality of its products and what’s worse, scare off potential investors.
For Vanguard index funds that utilize CRSP indexes, Symbiont’s software is a full replacement for Vanguard’s earlier system of manual updates. Pennington is of the belief that Symbiont’s software saves time for Vanguard. Even still, that is not necessarily the key goal.
“It’s more like an R&D investment with an actual deployment as a result, which truly improved the way we run our fund.”
There is an important factor that plays into this development of Vanguard’s blockchain implementation. One that ties into blockchain technology as a whole. That is the nagging reminder that most are not familiar with how blockchain works. Indeed, that is something that can potentially snowball into a bigger issue on account of Vanguard employing this technology.
Blockchain education is gradually becoming a desirable thing at a scholastic level. Despite this, the industry is experiencing hardship from a noticeable lack of developers with experience in this particular technology. Regardless, crypto is putting distributed ledgers center stage. Because of this, the industry may garner an incredible expansion from the rising adoption of both Bitcoin and GlobalCoin.
German central bank trial run
Vanguard index funds marks the the giant company joining the likes of other financial institutions in employing blockchain as the primary source of innovation. Other institutions following this path include Fidelity and JP Morgan Chase. However, not everyone is open to the idea of using blockchain as a way to develop and improve financial institutions.
The Deutsche Bundesbank is the central bank of Germany and is part of the European System of Central Banks (ESCB). Because of its resilience and former size, the Bundesbank is one of the most influential members of the ESCB. Oftentimes, it is referred to as “Buba” (Bundesbank) and its official abbreviation being “BBk.”
Not too long ago, Jens Weidmann, the president of the Bundesbank, made some unfavorable comments regarding blockchain. He ridicules the technology by stating it wasn’t fast or cheap enough during an unsuccessful trial run. The bank leader believes that blockchain was not a “breakthrough,” further claiming that other banks were subject to similar outcomes.
According to statements made in Frankfurt, Weidmann reports that the trial project attempting to fully integrate blockchain was ineffective. Rather than improving the bank’s general operations, blockchain proved to be slower and more costly. Consequently, Weidmann came to the conclusion that this technology did not bring an advance to banking. The president says:
“The blockchain solutions did not fare better in every way: the process took a bit longer and resulted in relatively high computational costs … Similar experiences have been made elsewhere in the financial sector. Despite numerous tests of blockchain-based prototypes, a real breakthrough in application is missing so far.”
The number of global central banks that are exploring blockchain technology for their respective financial systems is growing continuously. Yves Mersch, a European Central Bank Executive Board member, says that it’s crucial for one to differentiate between “assets.” These include Bitcoin and the technology that exists behind them.
On this distinction, he writes:
“The single distinguishing feature of crypto-assets such as bitcoin is the absence of an underlying claim, which makes it difficult for them to maintain price stability. Crucially, crypto-assets aren’t backed by any sovereign authority and, unlike financial instruments, they don’t give their holders ownership or contractual rights. Central banks provide confidence in money – as a store of value, unit of account and means of payment – by safeguarding the stability of the currency. By contrast with traditional currencies, bitcoin has been highly volatile over the past two years. Bitcoin’s average volatility in that period was close to 80%, while many other crypto-assets showed even higher levels of volatility. This makes it impossible to use crypto-assets for anything but outright speculation.”
Banks that are in the middle
Many investors are supportive of cryptocurrency, especially when taking the recent Bitcoin price gains into account. Be that as it may, there are others who want to prevent the integration of the technology into the banking industry. Crypto critics state that distributed ledgers – which naturally includes blockchains – establish the chief innovation underlying cryptocurrency. This is a concept that a good amount of financial specialists greatly revile.
Weidmann, the main operator of the German counterpart of the US Federal Reserve, appears to be the leading distributor of doubt. He and several others are quite wary of the cryptocurrency integration that is gradually representing the economic policy of Europe.
Pauline Kalfon is a cryptocurrency and blockchain executive for PwC France. She warns the public that the central bank of France is very unlikely to utilize digital currencies in its practices. Kalfon also says that the initiation of this decision is at the hands of the European Central Bank. The likelihood of this particular prospect appears to be very low, especially following the emergence of Weidmann’s recent comments.
Regardless of Weidmann’s hostile outlook on blockchain, there are still various global central banks that are adopting blockchain technology. Alternatively, they are singing their praises for its admirable potential.
On the matter of blockchain value, Mersch advises against policies that could possibly put restraints on innovation. In lieu of this, he views the European Central Bank as a new development evaluator instead of an inciter.
“Some of the technology is worth exploring and could also be of interest to central banks … That said, our role is not to drive technological adoption by the industry and the general public, but to ensure that changing preferences can be satisfied in a secure way.”
What lies ahead
While the German blockchain project maintains pessimistic views on blockchain technology, there are still plenty of supporters who believe otherwise. Those who are in favour of distributed ledgers think that the technology will inevitably prove itself in the coming years.
In regards to Vanguard, partners and clientele can look forward to the continuation of the company’s technology innovations. The company itself claims that it will continue to seek out new ways of making capital markets more beneficial for all investors. At this point in time, this sentiment means to keep on exploring brand new opportunities.
Pennington states the following:
“It really does come down to the network effect. And blockchain is a network technology. I think this is why we’re seeing so much interest in our fintech initiatives among some of our largest, most sophisticated clients.”
Despite the huge steps forward, Pennington says that he is not quite ready to utilize blockchain as a replacement for a higher-stakes process. Such processes of this type include clearing trades.
With that said, he is not completely ruling it out for the future.
“This project isn’t the end. It’s a step where we thought we could get more comfortable.”
So, what does the future hold for blockchain and Vanguard index funds development? Pennington imagines a wide variety of possibilities await in the future. Probably the most notable example being the improvement of market areas that are considerably less efficient; one of which being over-the-counter (OTC) markets.