Our review of DTCC’s paper on blockchain in post-trade services (Premium)

The Depository Trust and Clearing Corp (DTCC) has taken a major step in positioning itself as a leader in the growth of blockchain. Following its investment in Digital Asset Holdings along with a group of investment banks, DTCC also issued a white paper on its views on blockchain’s evolution. In the US market, DTCC’s thoughts and plans are a center point for industry participants’ long term strategy, which makes what they have to say very important.

Here are DTCC’s key takeaways from the white paper and our responses:
“While the platform has the potential to transform certain post trade process, the technology is still emerging and its development for use in post-trade is even less mature than it is for Bitcoin.”
“There are significant hurdles that need to be overcome to make distributed ledger technology workable in today’s securities markets, such as scale and performance challenges… [and] whether moving processes to the platform is more cost effective than improving existing technology.”
This is safely covered ground. In Finadium September 2015 research report, “Can the Blockchain Work for Securities Finance, OTC Derivatives and Other Collateralized Transactions?” and on our subsequent client webinar, we found that there may be some performance concerns regarding blockchain, some of which have already arisen within the Bitcoin network itself. While a 20 minute delay in confirmation of a transaction may work in the public Bitcoin blockchain, capital markets is accustomed to automated systems providing near instantaneous results. Resolving these issues will be an important focus for technologists. It is also agreed that blockchain needs to be applied intelligently, not create new processes for existing systems that work well. There is not much bang to the buck in solving problems that have already been solved.
Another key takeaway is:
“… DTCC believes the industry should focus [first] on the most manual asset classes, which would give them the opportunity to learn the advantages and limitations of the technology.”
“Distributed ledger technology presents a once-in-a-generation opportunity to re-imagine and modernize market infrastructure to address long-standing operational challenges.”
Conversations with blockchain proponents and our own analysis point towards implementations for products that do not have the benefit of good existing infrastructure: private placement and private market securities settlements (like NASDAQ’s venture) are two examples. These should prove good sandboxes for the industry to become familiar with the technology. DTCC’s publication highlighted several areas where common infrastructure and a common network would be beneficial, including two we found as well: collateral management and asset/securities issuance (a superset of our hypothetical corporate actions/entitlements network).
We agree with DTCC’s statements that:
“The most logical way forward is for the existing, regulated and trusted central authorities to help play a leading role in introducing the standards, governance and technology to support distributed ledger implementations…”
“Industry-wide collaboration will be the key to any re-architecture of the post trade environment. If firms continue to work separately and independently, we risk creating siloed solutions based on different standards with significant reconciliation challenges.”
DTCC appears to be making a strong case for themselves as a central player in the marketplace, and taking positive and definitive steps to position themselves that way. We find very little to disagree with in what they are saying and a great deal to support. It will be interesting to see if, in partnering with Digital Asset Holdings, DTCC will be able to drive and/or lead the way for large scale deployment of the technology.
For the full press release, with a DTCC members’ link to the full whitepaper, click: “Embracing Disruption: Tapping the Potential of Distributed Ledgers to Improve the Post Trade Landscape.”
For more on blockchain from the CSD community with many overlapping points, see Euroclear’s recent paper, “Blockchain in Capital Markets.”

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