Blockchain and its potential in the Family Office

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Blockchain and the family office

Since its capabilities were first demonstrated in supporting the cryptocurrency Bitcoin over a decade ago, the hype surrounding blockchain technology and its potential has grown. Billions have been invested, and both the PwC 2018 and Deloitte Global Blockchain 2019 surveys suggest that the technology is increasingly becoming an area of organizational attention and focus.

While the fintech industry remains the blockchain leader, organizations in other sectors including healthcare, technology, media and telecommunications are expanding their blockchain initiatives.

The Deloitte 2019 survey which polled 1,386 senior executives across the globe, indicates that 53% of respondents identified blockchain technology as a significant priority for their organization in 2019. Despite its prioritization, adoption remains in its infancy, with just 23% of the respondents reporting the initiation of blockchain deployments.

Still, the Deloitte survey shows that there seems to have been a shift in organizational and executive attitudes towards this technology. The question is no longer whether blockchain will work, but how companies can potentially make blockchain work for them.

This uncertainty is an issue that’s becoming increasingly relevant in the family office space. There are several areas of interest and potential benefit when it comes to blockchain implementation within family offices.

Blockchain enabled due diligence

Family office interest in direct investment opportunities is growing. These types of investments require a greater focus on due diligence which is often costly and time-consuming, slowing deal flow. Blockchain has the potential to provide a robust solution.

While it will probably never replace due diligence in its entirety, it can be used to automate and even share the burden amongst the investor and investee.

Companies who offer blockchain software as a service are already harnessing its potenital. The software which employs smart contracts and identity technology built on the blockchain framework allows startups and companies seeking funding to automate their document-based due diligence.

This means that they’re able to securely record their financial and growth data and share this with investors. Investors can then efficiently assess the credibility and potential of the company seeking investment, cutting closure times, and increasing the number of successfully closed deals.

Blockchain’s role in risk management

Immutability, automation and transparency are vital characteristics of blockchain technology. Given these, the technology’s potential is not only limited to applications within financial risk management but in many other non-financial risk areas.

According to Paolo Tasca, Executive Director, UCL Centre for Blockchain Technologies, blockchain has applications in various areas of preventable, strategy-related and external risk management. Some of which include:

1. People, processes and systems related risks

When it comes to people, processes and systems, Tasca states that blockchain is “fit and proper to perform monitoring and risk assessment.” Data loss and tampering are key risk factors within any organization. The use of smart contracts and automated procedures employed by blockchain technology helps to reduce the necessity for human intervention in routine processes, helping to mitigate these risks.

When humans must perform certain functions, blockchain can be implemented to assess and monitor the integrity of these transactions. This is achieved by capturing and securely storing information on various tasks and operations performed by both staff and management, affording a higher level of accountability and reducing operational risk.

2. Strategy risk management

Strategy-related risks are unavoidable in the general course of business and investment. While blockchain cannot prevent these risks, when intelligently implemented, it has the potential to reduce the probability of risk materialization. It may also assist in improving the company’s ability to mitigate risk events, should they arise.

3. Compliance risk

Blockchain may also be employed to reduce compliance risk. Thanks to its real-time recordkeeping abilities and the use of smart contracts, rules can be embedded into the blockchain database to monitor organizational transactions and create real-time alerts. As a result, those involved in compliance and auditing can monitor all transactions that occur and receive any alerts for events when they occur. The implications of this are significant.

Not only can this technology increase compliance efficiencies by reducing the delay in compliance satisfaction, but it also has the potential to stop unsanctioned transactions or those with incomplete due diligence, while notifying the relevant parties of these actions. This transparency enables compliance to address any issues that arise quickly and effectively.

From a financial point-of-view, real-time rules and audits enable the rapid identification of irregularities, offering internal auditors a more efficient way not only to detect possible fraud but also investigate transactions by employing surveillance based on predetermined rules. All of which reduce compliance risk.

Blockchain’s relevance in impact investing

Increasingly family offices are seeking to generate environmental and social impact along with financial returns. Using blockchain to manage assets has numerous possible advantages that could benefit impact investing. These include enhanced security and traceability, greater transparency, efficiency, increased speed of transactions and reduced costs, all of which add real value when it comes to impact investing.

Many impact investments involve startups and companies in developing countries. This often equates to low institutional capacity and environments which are not always conducive to trust. Blockchain, with its inherent trust-generating features, reduces the need for trust and lowers reputational risk exposure.

In terms of impact investment due diligence, measurement and verification, blockchain technology can be employed to automate and accelerate the process, which, with current models and methods is slow and expensive. The increased speed and reliability that blockchain affords means that impact creation can be used as a performance measure when managing impact investments.

The blockchain journey has only just begun, yet it is evident that this technology has numerous applications for family offices. Still, its success or failure within these organizations will come down to its implementation. Defining business objectives and then looking at ways that blockchain can assist with these remains the differentiating factor.

This article originally appeared on Forbes.

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