Technology revamp a balancing act for custodians

While providers are conscious existing systems are in need of reform, there is trepidation about developing technology which could be disrupted before it even goes live.

By Charles Gubert

For 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 number of custodians are using legacy technology 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 technologies 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 disrupted 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 encryptions opening it up to data breaches and cyber-attacks.

Chapman said that custodians are monitoring the development of quantum computing, 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 blockchain’s 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-improved 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