One area that has been often cited as a natural home for blockchain has been the clearing and settlement process in equity markets. Proponents have argued that the process could be made more efficient and provide a golden record of a transaction, helping the audit trail process as well as providing regulators with a real-time view of market forces and trends.
Part of this vision includes the emergence of “decentralized exchanges,” essentially eliminating the need for third parties such as the Depository Trust & Clearing Corporation, which provides clearing and settlement for securities and other markets.
Mark Wetjen, head of global policy at DTCC, questioned the notion of decentralized exchanges at the SEC forum, calling them perhaps “the most difficult from a policy standpoint.” Wetjen, a former CFTC commissioner, also wondered what the benefits would be of moving traditional exchanges onto a DLT, or blockchain platform.
A major sticking point, in his view, is the notion of what constitutes “settlement finality.” Currently, securities transactions have a two-day settlement period, and blockchain advocates argue that transactions could be settled on the same day. But others argue that the two-day settlement owes more to industry convention and preference rather than a technological bottleneck.
The “settlement finality” issue involves knowing precisely when a security has settled – a specific date and time. This is critical for the investors, particularly institutional money managers.
“In the case of institutional money management, finality is tremendously important,” said Wetjen, adding that one needed to have a very clear idea of what finality means in a blockchain world before one could see it displacing current processes.
“I don’t think finality translates very well in this space,” added Neha Narula of MIT’s Media Lab.