The evolution of blockchain and other digital ledger technologies (DLT) to serve the financial industry’s post-trade processing needs is proceeding rapidly. But uncertainties abound: for what applications are DLT most feasible, how quickly can the infrastructure be transformed, can competing institutions collaborate sufficiently to usher in industry-wide innovations?
Nearly 150 representatives from the banking, asset management, consulting and regulatory communities discussed these issues and more on November 29 at the Disruptive Technologies Forum 2016 held at the Banking Hall in London. The event, co-sponsored by The Depository Trust & Clearing Corporation (DTCC) and the Centre for the Study of Financial Innovation (CSFI), provided a reality check on DLT’s potential to transform post-trade processing in the global financial sector.
Collaboration…Standards Are Key
The Forum capped a year in which DTCC continued to help drive industry attention to DLT. In March, DTCC sponsored a similar gathering in New York City, the 2016 DTCC Blockchain Symposium, which drew nearly 500 financial industry professionals to discuss the business applications of DLT for financial market infrastructures.
In his opening remarks, Michael Bodson, DTCC President & CEO, acknowledged "limitations to the technology that must be overcome before it can be integrated into existing legacy systems.” He said blockchain holds enormous potential but cautioned that “the industry needs to identify the areas where it would provide the greatest value in terms of risk and cost reduction."
DTCC is exploring a variety of blockchain applications, Bodson noted. Converting DTCC’s Trade Information Warehouse (TIW) repository for credit default swap contracts from a mainframe application to a DLT network is under consideration. DTCC is working with Digital Asset Holdings (DAH), a blockchain developer for financial services, to develop a DLT-based system for clearing and settlement of repos.
The opportunities for DLT in the post-trade sector will be maximized, Bodson said, when there is “industry-wide collaboration and strong standards and governance.”
Blythe Masters, CEO of DAH, also addressed the forum, emphasizing how quickly the industry has progressed from over-hyping DLT’s potential to developing feasible applications.
Masters pointed to "signs of a tipping point" for DLT, including the formation of new consortia in the financial industry to pursue blockchain applications, the fact that most investment is coming from long-term strategic investors rather than short-term venture capitalists, and the growing engagement of regulators in seeking ways to implement DLT safely. All of these conditions set the stage for this technology to become mainstream in five to 10 years, Masters said.
A Tipping Point
Forum speakers agreed that, because of its legacy architecture, the financial services industry is now at an inflection point that requires significant disruption in its technology but that a variety of challenges will nevertheless constrain its adoption of DLT. The conference program’s three panel discussions addressed these challenges from different perspectives.
CSFI Director Andrew Hilton led a discussion of internal and external factors that temper firms’ speedy adoption of technology innovations. Managing the costs and time horizons of new technologies is one key challenge, panel members said, along with the need to promote an institutional culture that welcomes innovation and to engage regulators in evaluating the benefits of new technologies.
The panel featured Rob Palatnick, DTCC Managing Director and Chief Technology Architect, Justin Chapman, Global Head of Market Advocacy and Innovation at Northern Trust, and Simon Taylor, Co-founder of London-based FinTech consultancy 11:FS. Financial Times journalist Izabella Kamenska led a discussion of DLT implementation challenges with panelists Jennifer Peve, DTCC Executive Director of FinTech Strategy, Richard Gendal Brown, Chief Technology Officer of R3, Thorsten Peisl, CEO of RISE Financial Technologies, and Paul Vine, partner at global law firm Norton Rose Fulbright.
Panelists recommended the use of open-source coding to facilitate interoperability between platforms and the development of discrete applications that address “mini-markets” rather than the entire post-trade ecosystem. They said they expect the market will end up being served by multiple blockchain providers and acknowledged that ongoing attention to security issues will be essential.
Andrew Douglas, DTCC Managing Director, Government Relations, and CEO of DTCC’s European Trade Repository, moderated the discussion on the risks that disruptive technology can generate and how regulators are responding. Klaus Loeber, Senior Advisor, European Central Bank, and Dirk Schrade, Deutsche Bundesbank’s Deputy Head of Department Payments & Settlement Systems participated on this panel.