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DTCC Sharpens Distributed Ledger Focus with White Paper

By Joseph King | February 3, 2016

Distributed ledger technology represents a unique opportunity to re-imagine and modernize the industry’s infrastructure to address long-standing operational challenges. However, there are a number of key limitations the technology must overcome before it can be integrated into existing legacy systems.

An in-depth analysis of the potential and limitations of distributed ledger technology is the topic of a new white paper, Embracing Disruption: Tapping the Potential of Distributed Ledgers to Improve the Post-Trade Landscape, published by The Depository Trust & Clearing Corporation (DTCC).

DTCC believes the best path forward is for existing, regulated and trusted infrastructure organizations to work with the industry to introduce the standards, governance and technology to support implementing distributed ledger technology. Industry collaboration presents the best opportunity to integrate a financial industry distributed ledger ecosystem with the existing market infrastructures to further lower risks and costs for all market participants.

Specifically, DTCC believes its role as an industry-owned and governed infrastructure positions the firm to help push forward efforts to leverage the technology to improve upon certain post-trade processes. DTCC believes it has the experience and capabilities to enable the integration of a financial services distributed ledger ecosystem into existing market infrastructures – a role that is consistent with its mission to increase transparency and reduce risks and costs for the industry.

“We’ve been researching distributed ledgers since early last year, and we believe this emerging technology offers tremendous potential to modernize the post-trade process and resolve long-standing operational challenges,” said Michael Bodson, DTCC President and CEO. “We believe the existing, regulated and trusted central authorities can help play a leading role in introducing the standards, governance and technology to support distributed ledger implementations. Furthermore, we believe these organizations, working in partnership with a wide range of the industry, can help ensure that new opportunities are in the best interests of post-trade processing and consistent with long-standing goals of mitigating risk, enhancing efficiencies and driving cost efficiencies for market participants.”

Industry Collaboration

An integral part of DTCC’s blockchain strategy will be working with the industry as standards are developed and to ensure the ultimate solutions/offerings live up to best practices. Industry-wide collaboration will be the key to any re-architecture of core processes to ensure standardization and avoid creating a new post-trade environment with the same integration and reconciliation problems that companies face today.

From a partnership perspective, DTCC has joined the Linux Foundation, the world’s largest open source non-profit, to support a new open source venture known as the Hyperledger project. This positions DTCC to contribute to the governance of end user requirements, technical oversight and intellectual property working groups that will define the industry standards for blockchain.

Further demonstrating DTCC’s commitment to helping lead the industry as the technology evolves and becomes more standardized, DTCC has taken an investment position in Digital Asset Holdings (DAH). Bodson has joined the DAH Board of Directors.

Opportunities to Leverage Distributed Ledgers

The paper notes that the current financial industry infrastructure has operated seamlessly for decades, processing through periods of extreme volumes and market stress. Still, DTCC embraces change that improves upon certain limitations of the current post-trade process.

For example, distributed ledgers could address current business challenges in certain defined areas, such as master data management; asset/securities issuance and servicing; confirmed asset trades; trade/contract validation; recording and matching for the more complex asset types that currently do not have strong existent solutions; collateral management; and longer term, netting, clearing and settlement.

Limitations of Distributed Ledger Technology

Is distributed ledger technology ready to be incorporated into current post-trade framework? Not yet, in DTCC’s opinion. In assessing the applicability of distributed ledgers for post-trade processing, DTCC describes distributed ledger technology as immature and unproven with inherent scale limitations in its current form. Current technology is lacking in areas such as scale and performance challenges, integration issues and whether moving processes to the platform is more cost effective than improving existing technology.

A critical limitation in today’s distributed ledger platform is that all transactions are considered immutable and never to be modified, cancelled or revoked. The ability for clients to correct/cancel/adjust transactions is a common occurrence and well managed by today’s financial institutions. It’s not clear today how the platform could evolve to support such a function.

The blockchain technology operates in a decentralized fashion in that there is no central database, rather all participants in the group share all the same information. This peer-to-peer technology is contrary to today’s post-trade processing environment, which is centralized and siloed. It is likely that both alternatives will be needed in the future, as each can be used to address different business challenges.

“Distributed ledger technology is still emerging, and its development for use in the post-trade environment is even less mature,” said Rob Palatnick, DTCC Managing Director of IT Architecture. “There are hurdles that need to be overcome to make this technology workable in today’s securities markets.”

To read the white paper in its entirety or for additional information, visit the DTCC blockchain web site.