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Tech-Savvy Attorney Sees Blockchain Still in Early Stages for Retirement Industry Applications

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Blockchain is among the most hyped technologies at the moment, nearly up there with machine learning and other forms of artificial intelligence.

Just don’t expect it to become commonplace in the wealth management or retirement industries anytime soon, says attorney Andrew Ray, a tech-savvy partner in the law firm of Morgan, Lewis & Bockius LLP, where he leads the firm’s interdisciplinary corporate practice.

Describing blockchain during a presentation at the 2018 SVIA Fall Forum, Ray likened it to “double-entry bookkeeping on steroids.” Rather than having two entries confirm each other and balance out, blockchain relies on a digital ledger of transactions, or “blocks” of data, shared among a distributed network of computers. To add to the chain of transactions, a majority of the participants in the network must agree, after subjecting it to rigorous review, that it is valid. Once approved, the new block of data is added, and it becomes very difficult to change or remove it. This allows for the blockchain to be secure without the need for a central authority overseeing it.

Blockchain first caught the public eye for its use in creating cryptocurrencies, such as Bitcoin. Today, many industries, particularly the financial services industry, are looking to adapt it to other applications. Their hope is that it can make transaction processing and recordkeeping faster, more efficient, more secure, and, as a result, cheaper.

This past summer, the World Bank launched the first publicly traded bond that was sold, registered and run exclusively on a blockchain platform. The deal featured the issuance of $73 million of a two-year “smart security” dubbed a Bondi (Blockchain Operated New Debt Instrument).

Elsewhere, consortiums of big banks are working on using blockchain to, among other things, automate how their systems interact with one another, Ray said. For those attending the SVIA forum, however, he said the arrival of blockchain technology in their daily activities may be quite some way off.

“One of the questions I often get,” he said, “is ‘What inning are we in with respect to blockchain technologies?’ I think with respect to traditional wealth management or retirement management, we are probably just in batting practice.”

By contrast, he said, efforts by major banks to develop blockchain platforms for the custody of currencies for high net worth customers, or by startups looking to trade cryptocurrencies, are probably in the “first or second inning.”

Even so, he said, regulators are even further behind. But that’s to be expected. “Regulation lags innovation,” he said. “It’s a normal thing for regulators to have to play catch up.”

Responding to a question from the audience, Ray said he hadn’t personally seen any use of blockchain-enabled “smart contracts” in the insurance industry. He said he’s given thought, though, to its application with master swap contracts. “It seems like more of a natural use case, and I think people are working on that,” he said. “But the more variables there are, the harder it’s going to be to put a smart contract on blockchain, for two reasons. First, you’ve got to get some consensus about what the right variables are, and then you’ve got to get people to agree to use the same blockchain.”

Ray also cautioned his SVIA audience that the cost of adopting and using blockchain technology is not zero. For one thing, it requires a lot of computing horsepower, and a lot of electricity to drive that computing power. That means it might not be particularly useful for applications where there isn’t room to absorb those costs. On the other hand, Ray said, “if you want to think about what it might disrupt, think about the processes in your business that are highly manual and therefore have a high expense associated with them. If you have something that costs 50 basis points in servicing or administrative fees, you could probably find a blockchain application that is significantly cheaper than that.”