Vanguard will use blockchain to share index data

Technology is expected to improve speed, accuracy while lowering costs—and advisers might benefit, too

Dec 12, 2017 @ 2:04 pm

By Ryan W. Neal

The meteoric rise of bitcoin may be dominating headlines, but cryptocurrencies are just the tip of the blockchain iceberg.

Some say the technology's real opportunity is in revolutionizing the way information of all kinds is stored and shared.

Vanguard Group announced Tuesday that it is looking to capitalize on this idea by using blockchain to simplify and automate the process of sharing index data. The $4.8 trillion asset manager said its blockchain—developed in partnership with the Center for Research in Security Prices (CRSP) and Symbiont, a technology company focused on institutional applications of blockchain—will enable index data to move instantly between index providers and market participants.

(More: Blockchain will change the advisory business—someday.)

Warren Pennington, a principle at Vanguard's investment management group, said this reduces tracking error of Vanguard's index funds, eventually resulting in lower costs and improved performance for advisers and their clients.


After a successful pilot, Vanguard said it will begin automatic delivery of CRSP index data and intraday updates over its private blockchain sometime in 2018.

"There are so many things that happen in the market that rely on this index data," Mr. Pennington said. Currently, this data must travel through multiple parties and distribution channels before it reaches investment professionals.

With the blockchain, any update to the index data is made instantly and is available to all parties involved, reducing time, the need for manual work, and changes for errors. Mr. Pennington said it will allow Vanguard to cut its own costs while improving how accurately its funds track an index.

Mr. Pennington said Vanguard began working on this project several months ago, but has examined blockchain's potential for much longer.

(More: Bitcoin futures debut with 26% rally.)

"We looked at the distributed ledger as an interesting technology that could make infrastructures more efficient and keep security as a primary factor," Mr. Pennington told InvestmentNews. "The more processes you can automate, the better."

He added that Vanguard is exploring other use cases for blockchain that it isn't yet ready to reveal, and that it will let Vanguard "do things a different way."


Technology vendors say private blockchains like the one developed by Vanguard will improve technology products for advisers. Lowell Putnam, co-founder and CEO of data aggregation provider Quovo, said a blockchain would help ensure that data is accurate and give advisers real-time updates of client holdings.

"From that standpoint, advisers would have a much clearer portal into what's actually in a client's account," Mr. Putnam said.

David Drake, who is on the board of several cryptocurrency funds and is the chairman of LDJ Capital, a family office launching its own cryptocurrency fund, said he isn't surprised by the Vanguard news and that it will happening a lot more in the coming months.

"We knew that everybody was going to be going after this space," Mr. Drake said, adding that blockchain it's a no-brainer for the "tremendous work" involved in managing and settling millions of transactions per day. "It's inevitable; it's the future."


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