03 September 2018 by Simon Osborne
Trusts stand to benefit from the security and transparency of blockchain
Blockchain has been hailed as a breakthrough technology for those seeking a secure environment in which to access or enter data. The cloud-based ledger offers new business opportunities through digital identity assurance, secure document exchange, funds transfers and smart insurance contracts.
Northern Trust in Guernsey has developed a private equity distributed ledger to improve the efficiency of the private equity market and Santander bank has launched a blockchain-based cross-border payments system. Santander also recently demonstrated its use in a governance context, working with technology company Broadridge Financial Solutions to become the first company in the world to use blockchain to make it easier for investors to vote at an annual meeting. Similarly, Cygnetise is using the technology to manage, audit and distribute signatory lists.
Trustees too have the potential to benefit from the efficiency and transparency that blockchain might bring to their administration of worldwide trusts. With scandals like the Panama Papers raising important questions as to whether trusts should be more open to public scrutiny, blockchain offers a ledger of trust that could transform the way trustees do business.
“Trustees have the potential to benefit from the efficiency and transparency that blockchain might bring”
Under the shared ledger model, data is created once and synchronised; encryption is used to secure data permanently; smart contracts automate processing and trust is based on fact. Paperless documentation of transactions would reduce the cost and burden of compliance and allow trustees to more easily complete due diligence on their clients. As blockchain can validate a client’s identity in a simple click, new business processes could be completed faster.
Other efficiencies can be gained by using blockchain’s shared infrastructure, such as removing the need for institutions to provide independent, third-party verification, which would speed up the transaction settlement process. Trustees managing a high volume of transactions can transact on a paperless basis using smart contracts, saving both time and also creating a full audit trail.
Not only that, but all participants have access to the blockchain so settlors and protectors could see transactions in real time. Processing is entirely transparent as transactions cannot be manipulated, which creates additional comfort for all parties. Increased security and transparency would also enable closer collaboration with regulators, auditors and the tax authorities.
“There is a key role for the trust administrator or company secretary to play in mitigating the complex area of risk related to blockchain”
Blockchain is also useful for verifying the authenticity of assets. Trustees holding real assets, such as a piece of art, could use blockchain to verify the authenticity of assets they are purchasing and their ownership. This would save the trustee art consultancy costs, making it much easier to transact in real assets. Full traceability throughout the lifecycle of an asset enables ownership to be easily proved.
Ongoing transaction verification allows information to be authenticated, so using blockchain as a register of legal title to property and beneficial interests would allow trusts to be more efficient, while also ensuring the security of their holdings.
The upfront investment in blockchain is fairly substantial, so until such time as multiple global trustees utilise the technology as an everyday tool, it is difficult to quantify the realms to which the blockchain technology will enhance the trust world. The most impactful distributed ledger technology applications will require deep collaboration between incumbents, innovators and regulators, adding complexity and delaying implementation.
It is not as simple as dropping a piece of software into an existing process. Blockchain’s impact is potentially wide-reaching and companies will not be able to just pause operations while they move from a centralised to a decentralised infrastructure.
There is a key role for the trust administrator or company secretary to play in mitigating the complex area of risk related to blockchain and ensuring that all bases are covered so that implementation runs smoothly. With emerging technologies such as this needing to be recognised as a board-level business risk, company secretaries will have to look at internal controls around cybersecurity to ensure IT and operational systems are protected.
The company secretary can also assist in identifying sensitive data, user compliance training and ensuring IT operations are in line with government regulations.
Board members may need training or assistance to fully understand blockchain. Company secretaries should find ways to introduce a technology expert to the boardroom to show how it can properly be aligned with the business and to support more meaningful discussions. Having a collaborative platform that drives increased efficiency, security and transparency ticks all the right boxes in terms of improving governance.
ICSA’s Technology Conference on 28 September includes a session on blockchain.