By Luke Parker (@coinosphere)
Headquartered in New York City, the Depository Trust & Clearing Corporation (DTCC) is an industry-owned, post-trade market infrastructure for the global financial services industry. DTCC has operating facilities, data centers, and offices in 16 countries, providing clearing and settlement services to the financial markets worldwide.
In 2014, DTCC’s subsidiaries processed securities transactions valued at approximately $1.6 quadrillion with an average daily value of equity trades cleared reaching $924.9 billion. Its depository provides custody and asset servicing for securities issues from over 130 countries and territories valued at $64 trillion.
This week DTCC released a white paper titled ‘Embracing Disruption — Tapping the Potential of Distributed Ledgers to Improve the Post-Trade Landscape’. The paper outlines limitations of the current financial market infrastructures and proposes improvements for them using blockchain technology, positioning DTCC to lead the effort.
DTCC asserts that distributed ledger technology has the potential to address many existing problems directly, however, implementations to date have several problems, such as being “immature, unproven, have inherent scale limitations in its current form and lacks underlying infrastructure.”
The paper followed DTCC’s investment in Blythe Master’s Digital Asset Holdings, LLC., announced last week, simultaneously placing DTCC’s CEO and President Mike Bodson on the company’s Board of Directors. “This investment positions DTCC to play a leading role in fostering industry-wide adoption and helping to introduce the standards, governance and technology to support distributed ledger implementations,” Bodson said.
Last year, DTCC joined the Linux Foundation in support of the Hyperledger project, a collaborative effort “to create governance, standards and ensure the core technology is open source and based on collaboration,” according to Bodson.
“DTCC strongly believes that the financial services industry has a once-in-a-generation opportunity to reimagine and modernize its infrastructure to address long-standing operational challenges.” — DTCC
Improving the current financial market infrastructures
DTCC conveyed how the legacy system is quite antiquated, unnecessarily complex and has minimal transparency. It is incapable of processing orders around the clock and is vulnerable to modern security threats such as cyberattacks and viruses. In addition, each bank maintains their own large and costly databases which, when reconciled, generate “multiple versions of the truth.”
Halfway through the 21-page report, DTCC expresses how a secure, distributed ledger could provide “significant improvement” in a number of areas of today’s infrastructure, citing “complete, traceable, transaction history for a set of assets that is shared and accessible only between trusted parties.” However, DTCC considers distributed ledger today an emerging technology and currently having “fundamental technology challenges related to scale, latency, performance, and security.”
One of the seven areas in which DTCC recommends exploring distributed ledger initiatives concerns settlement. Other areas include asset/securities issuance and servicing, netting and clearing, and collateral management.
The report explains that the current U.S. equity market is bound by regulation to operate on a T+3 cycle, where the settlement occurs three business days after trade date. A shorter settlement time such as T+2 has many benefits, including reconciliation and simplification. However, implementation is challenging as outlined in a white paper prepared by PricewaterhouseCoopers (PwC) highlighting the cost, complexity and time needed to migrate to T+2. Nevertheless, DTCC believes that “distributed ledgers may be the catalyst to further shorten the settlement cycle to T-0 and create mechanisms and pricing to meet the needs of different players in the financial markets.”
Absent from any specific mention within the paper was the already-deployed, complete solution offered by the asset exchange T0. Overstock CEO Patrick Byrne has already created an exchange that uses the bitcoin blockchain to ensure instant settlement of all assets traded on T0’s platform. While the two might, at first, seem to be in competition to offer the quickest settlement time, there is a world of difference between a single exchange and the global financial market’s existing infrastructure.
In a search for better financial market infrastructures, DTCC eventually suggests testing a distributed ledger to ultimately create an industry-owned, shared, but centralized and permissioned blockchain for global settlements. Proposing for “the technology and ledger should be industry-owned so that there is strong alignment with industry-wide needs,” DTCC reiterates that it is industry-owned and governed infrastructure, and is, therefore, well-positioned to “enable the integration of a financial industry distributed ledger ecosystem with the existing financial market infrastructures.”
“DTCC believes it is best positioned to support and coordinate the evaluation and standardization of the distributed ledger platform, help address industry challenges and determine whether it is a better solution than existing technology.” — DTCC
Potential benefits of distributed ledgers
According to the report, distributed ledgers could, in theory, help alleviate all of the problems on the DTCC’s list of seven areas to improve and they could eventually be the catalyst that allows DTCC to bypass the current regulations, shortening trade settlement time from three days down to instant settlement.
DTCC believes that a private and secure distributed ledger, with its traceable transaction history for a shared set of assets, could provide significant improvements to today’s existing infrastructure. These improvements would ensure an always-on, 24/7/365 active processing environment, a common, shared, version of the truth, security from cyberattacks, corruption resistance, and a simplified, consistent way to manage assets across all platforms.
“The industry has a once-in-a-generation opportunity to reimagine and modernize its infrastructure to resolve long-standing operational challenges. To realize the potential of distributed ledger technology in a responsible manner and to avoid a disconnected maze of siloed solutions, the industry must work together in a coordinated fashion.” — Michael Bodson, DTCC President and CEO
Criticisms of private blockchains
As is often the case in the legacy financial industry today, DTCC focuses on benefits of a private, permissioned blockchain. The concept of private blockchains or a central control over any blockchain is a point of much contention between the greater Bitcoin community and the legacy financial institutions.
For instance, Venture Capitalist Marc Andresseen, who sees both worlds from his job each day, has tweeted on more than one occasion his discouraging views about private blockchains.
Those with years of experience working with, or investing in, the bitcoin ecosystem are quick to make the point that private and centralized blockchains are no more useful than existing database formats such as SQL or Oracle.
Bitcoin researcher and Director of Research at Satoshi Nakamoto Institute, Daniel Krawisz, calls permissioned blockchains “an oxymoron,” stating that “the very concept of a permissioned blockchain invalidates the need for a blockchain.”
Although very few private blockchains have been deployed in a business setting to date, developers, bitcoin researchers and Venture Capitalists, such as Andreesen and Krawisz, agree that there is little to gain from such a blockchain, if any. The argument follows that any time you deploy a blockchain into the hands of only a select few or a centralized authority, the data in it cannot be immutable. Without immutable data, such a ledger would have little to offer over a commercially available Oracle or SQL database, and in fact, may even perform significantly slower.
It has yet to be seen if any of this technology will be commercially viable in the long run. At least now that DTCC evidently wants to take the lead in improving financial market infrastructures using blockchains, we could expect increased efficiencies and faster trade times in the future, no matter who provides the settlement system and on what platform.
