As we approach the time of year for retrospectives and predictions, I find myself thinking a lot about the evolution of distributed ledgers in financial services. The past year has been instructive in shedding light on the future trajectory of the technology.
It was just about two years ago that we issued our white paper on DLT – one of the first of its kind to highlight both the enormous potential and current limitations of the technology as well as future uses in the post-trade environment. This occurred around the same time that incumbent infrastructures were being dismissed as relics of the past and on the express line to disintermediation and near-certain irrelevancy.
Things have changed quite a bit since then. For one, DTCC and many of our post-trade colleagues are now recognized as integral to developing, executing and managing distributed ledger solutions. The new entrants that wanted to eat our lunch are instead joining us at the table to collaborate on use cases. In addition, many in the industry are looking to these same trusted central authorities to create the governance and standards around future DLT applications.
This past year also brought more rational expectations over the technology’s current capacity to achieve the scale and processing power needed for large-scale solutions. In fact, the move to a shorter settlement cycle in the US this past September was achieved with current technology – and that same technology can be used today to move to real-time settlement if the industry is inclined to go in that direction.
Despite this, we continue to have great optimism over the future of DLT and are actively experimenting with use cases. It’s clear we’re not the only ones. Deloitte recently reported that in 2016 there were nearly 27,000 blockchain projects started on the GitHub platform alone. However, Deloitte also found only 8% of those projects are actively maintained.
So what gives? One way to read the numbers is that, as the industry has come to the realization that blockchain’s potential isn’t limitless and as companies focus on the nuts-and-bolts of development, applications need to demonstrate sufficient ROI and client value to get new rounds of funding.
We’ve wrestled with these same issues at DTCC because, in some cases, our original hypotheses haven’t proved out. That’s fine because innovation requires learning and experimentation. In other instances, however, we’ve been very pleased with the results. For example, our initiative to re-platform our Trade Information Warehouse for credit derivatives using DLT and the cloud continues to advance, and we expect to launch the next generation of the service in late 2018.
This project has given us a great deal of real-world experience in developing a replacement for a critical, industry-wide mainframe application. We’ve learned what works and what doesn’t. We’ve seen the technology’s limitations. And we understand that it is still very much a work in progress.
I mention this not because blockchain has slid down the Gartner Hype Cycle from “Peak Inflated Expectations” to the “Trough of Disillusionment” – though it has – but because it reflects the industry’s increased rigor around ensuring that DLT initiatives need to align with and support business goals and objectives and deliver client value. As with any technology solution, the key to success will be identifying problems align with the benefits it delivers. The financial markets have many such issues, but that doesn’t mean all of them will be solved by distributed ledgers.
This question of value comes to mind in light of the recent move by the state of Delaware to allow companies to register shares on a blockchain. It’s an exciting example of the power of the technology, but the lack of adoption and listing of shares on the ledger to date suggests that the value isn’t there just yet. This is certainly true in terms of scale as well as speed of settlement.
As I mentioned earlier, the US markets can settle trades today on a T+1 and T+0 schedule, but it’s mostly just a very small number of non-standard transactions that take advantage of this. You don’t need a blockchain to settle those trades. In addition, the technology simply doesn’t have the scale or capacity to match the robust processing engines that underpin the US capital markets today, which handle in excess of 50 million daily transactions and as many as 25,000 or more transactions per second during peak processing. In the future, any enterprise-ready distributed ledger solution for a mature, high-volume marketplace will need to achieve or surpass that processing power. Today’s distributed ledgers simply can’t come close to matching that scale or speed.
Caitlin Long, president and chairman of Symbiont, who is working with Delaware of this initiative, recently noted that a DLT solution will likely come quicker to private markets than public ones. “This is not a short-term transition," she said. "It may take twenty years for publicly traded companies to fully transition over. But it's coming."
We agree that DLT represents the future. It’s the reason why we’ve been actively experimenting with the technology. But we also recognize that there will likely be many blockchain applications in use before it is ready to become the standard in a market as big as the US equities markets. Looking back on 2017, that may be the most instructive lesson we learned this year.