DTCC Connection

Apr 19, 2016 • DTCC Connection

Bodson and Masters Discuss Roadmap for Blockchain

By Jim Binder

Bodson and Masters Discuss Roadmap for Blockchain
From left to right: Michael Bodson, DTCC President and CEO and Blythe Masters, CEO, Digital Asset.

Discussion of disruption was replaced by talk of transition as the 2016 DTCC Blockchain Symposium came to a close.

In one of the main events of the day, Michael Bodson, DTCC President and CEO, shared the stage with Blythe Masters, CEO, Digital Asset, for a conversation on the long-term potential of blockchain technology.

Earlier that day, DTCC and Digital Asset announced plans to develop a distributed ledger solution for repo clearing. This effort would streamline the processing of repo transactions, where trades occur in real-time but settlement, clearing and netting require multiple manual steps.

DTCC is an investor in Digital Asset and participated in a $60 million fundraising the tech company completed in January. Bodson is also a member of the company’s board of directors.

Bodson opened the discussion by directly addressing the disruptive technology aspect of blockchain and its potential impact on the industry, jokingly asking if executives at financial intermediaries like DTCC should be concerned about job security in the future. Masters said that with trillions of dollars in existing assets, financial services incumbents would continue to have an important role in the future.

“The reality is that there are existing entities and infrastructure providers that have responsibility, which in many cases is actually enshrined in the law, over maintaining clean title and custody to those assets,” Masters said. “Building bridges and tunnels to connect existing assets into a digital rendition is important. Those bridges and tunnels into and out of the new digital world have to link to the world of the status quo, or we will end up with exactly the situation where you have fragmentation of markets and even more complexity.”

Industry fragmentation and the need for collaboration were common themes throughout the Symposium. Bodson referenced Digital Assets’ efforts to bring blockchain to the Australian Securities Exchange (ASX) and the Australian marketplace, asking Masters whether she thought the U.S. could generate a similar level of partnership to successfully implement solutions.

“You said one of the advantages of Australia is that it is not a fragmented infrastructure, somewhat implying we have a more fragmented infrastructure,” Bodson said. “But all day long, we have talked about the need for cooperation and how this is a technology that will work if the industry bands together around it. Do we have a chance?”

Regardless of the good intentions of industry participants, Masters said, getting started is always difficult—just setting the standards—until people actually begin trying to use a technology.

“Everybody correctly cites lack of standardization, or the challenge of reaching standards, as an obstacle, and that’s correct. But I believe that without trying, you don’t have the ingredients that will propel organizations to create forums to reach standards,” Masters said. “We’ve seen during the course of the last year to 18 months the first serious undertakings in terms of multi-party trials of this technology, albeit in a mostly experimental context.”

Masters cited the creation of both DTCC and SWIFT as past examples of industry collaboration and noted the Linux Hyperledger Foundation—the open source effort to advance blockchain—as a key aspect of cooperation today.

“Only a couple of years ago, if you used the words ‘open source’ to the chief information officer of a financial institution, they’d react as if you’d just said ‘open bank vault.’ ‘What? This is proprietary to us,’” Masters said. “The reason why that collaboration is happening now is people are actually trying to do real things with this technology.

“For example, consider replacing the 20-year-old market-wide infrastructure that the entire Australian stock market runs on. That’s a real motivation toward the identification of areas of disagreement, areas of dysfunctionality or inadequacy, and areas for compromise,” she said. “I think there are plenty of signs of collaboration that reinforce that impression that we absolutely do have a very real chance.”

Bodson and Masters discussed how the lackluster return on equity at major financial institutions has created an environment that provides fertile ground for adopting new technology that reduces costs for the industry. Bodson asked whether blockchain would truly be disruptive or simply bring changes that make the system cheaper, faster and easier to use.

Masters replied that it would likely be both because, much like the Internet, there would be big winners and big losers, but the vast majority of people would simply adapt and adopt.

“I think probably the most important event will be the first deployment of this technology in a real commercial setting, dealing with real meaningful volumes of something, whether it’s a cash equities use or something else. By definition, this will involve multiple parties because these ecosystems have centralized providers but dispersed customers,” Masters said. “Getting just one in play will have the knock-on effect of exposing a number of customers to different degrees.

“There have to be certain parts of that end-customer base that need to feel nothing at all, there’s no change. They just need to have an interface that is as easy to communicate with as the old interface because you can’t impose wholesale change on everybody’s processes simultaneously,” Masters continued. “But there will also be those who hope to take advantage of the opportunity of the technology to fundamentally reengineer their cost space at the same time. And getting that done once will be, I think, the tipping point.”

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