U.S. Markets

Vanguard looks to blockchain for index data

BOSTON (Reuters) - Vanguard Group Inc is moving to use blockchain to simplify how it updates index data underlying mutual funds, executives said on Monday, an important sign of confidence for the new financial technology.

Closely-held Vanguard, the top mutual fund firm with nearly $5 trillion under management, has successfully tested blockchain to automatically update data like the names and share prices of companies in index funds, processes that must currently be closely overseen by individuals, said Warren Pennington, a principal in Vanguard’s investment management group, in Pennsylvania.

Blockchain, the technology underpinning cryptocurrencies like bitcoin, is a shared and immutable database maintained by a network of computers on the internet. Banks and other large financial institutions have ramped up their investments in the technology, aiming for it to simplify and cut the cost of back-office processes.

Pennington declined to give a specific date as to when fund updates would chiefly rely on blockchain, saying the goal is not to replace human workers but instead to free them for other tasks.

Blockchain’s potential, he said, is to serve as “a real-time automated index process.”

Vanguard funds tested with blockchain were built on indexes from the Center for Research in Security Prices, at the University of Chicago’s Booth School of Business. Vanguard manages 17 funds on those indexes including its largest, the $650 billion Total Stock Market Index Fund.

Cryptocurrency enthusiasts have hoped big institutional investors could start offering mainstream products based on blockchain, which would spur its popularity. Fund firms, however, seem more interested in making the technology part of their operations.

BlackRock Inc, for example, has tested uses of blockchain with custodian bank clients, and CEO Larry Fink told analysts in October that the effort should reduce errors and could be expanded.

Fink told Reuters in November: “Distributed ledger, lets be clear, is a real thing. I would love to see a blockchain for the whole financial system that’s legitimate, that is monitored, that is systematically monitored. I don’t see that day anytime soon.”

For its blockchain effort, Vanguard partnered with New York-based technology firm Symbiont. Its CEO Mark Smith said in an interview the firm could license the technology to other firms, including additional asset managers and index providers.

“This can be used to automate all sorts of financial processes,” he said.

Reporting by Ross Kerber in Boston; additional reporting by Trevor Hunnicutt in New York, editing by G Crosse