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DLT Pushes Ahead Amidst Evolving Challenges

By Melanie Best | April 10, 2018

DLT Pushes Ahead Amidst Evolving Challenges

As financial services firms seek to improve productivity and add value for clients, distributed ledger technology (DLT) continues to advance as the industry implements several pioneering projects. DTCC dedicated two sessions of its 2018 Fintech Symposium to discussion of DLT’s prospects for remaking the financial transactions and post-trade processing ecosystem:

The panel discussion entitled “2020 Foresight,” moderated by Jennifer Peve, DTCC Managing Director of Solutions Business Development and the Office of Fintech Strategy, fostered a discussion on the promise of blockchain between industry participants Wynn Davies, Managing Director, Accenture Capital Markets, Todd McDonald, Co-Founder and Head of Partnerships, R3, and Rob Palatnick, DTCC Managing Director and Chief Technology Architect.

Robert Garrison, DTCC Managing Director and Chief Information Officer, also facilitated an informal discussion entitled “Propelling DLT Past All the Hype to Maximize Value” with Blythe Masters, CEO of Digital Asset, addressing the role of market infrastructures in future DLT-based solutions.

Interoperational needs

The 2020 Foresight panelists concurred on interoperability’s importance and called out additional priorities to enable interoperability: developing digital identity and the security around identity, and creating standards to allow communication between networks.

As recently as 2016, said Palatnick, interoperability was not an issue because upstart fintech players threatened to displace incumbent market participants. Today’s consensus is that market infrastructures will play an important role in DLT-based systems. He foresees a DLT model resembling the internet, with common standards and protocols and many different private networks.

For infrastructure providers like DTCC, these networks will need to be secure while enabling interoperability between custodians, central securities depositories and other users.

Governance gatekeepers

The importance of establishing governance rules for blockchain networks and the critical role trusted intermediaries should play as gatekeepers was another theme of the symposium’s DLT sessions.

DLT’s early-stage fallacy, that intermediaries like DTCC would disappear, was driven by a vision of market participants interacting directly with one another, said Masters during her chat with Garrison. That vision is not playing out because intermediaries’ “plumbing” is too valuable and their status as heavily regulated entities provides the security the industry needs as it moves into uncharted territory.

“It’s easy to say digital ledger technology provides a framework where we can all trust each other. Sorry, that’s not how we work,” Davies said during the 2020 Foresight discussion. “We need neutral parties who act in everybody’s best interests.”

In a DLT ecosystem, DTCC is positioned to be a governing node for key processing functions. Accordingly, through initiatives like Hyperledger, DTCC has collaborated with other market participants to create governance standards, noted Peve.

In Masters’ view, the extraordinary promise of DLT to deliver straight-through processing stems from the ability DLT gives firms to “much more deeply integrate their businesses with that of their infrastructure provider,” a trusted and regulated entity that provides the umbrella of governance over the post-trade processing chain.

Projects in the pipeline

As McDonald asserted, DLT’s “experiment phase is over” and the symposium gave speakers a chance to share progress reports on various real-world projects.

The High Quality Liquid Asset Exchange recently performed a live securities lending transaction, facilitated by R3, involving a digital asset held at a custodian—the first delivery versus delivery of a tokenized asset.

DTCC’s re-platforming, from mainframe to DLT, of its Trade Information Warehouse (TIW) for servicing credit default swaps is one of two infrastructure-scale initiatives underway. DTCC expects the future TIW to incorporate additional asset classes and envisions it as a network of ledgers to which users will connect through individual nodes, enabling real-time updates of users’ transactions.

In the second large-scale initiative, the Australian Stock Exchange (ASX) has partnered with Digital Asset to re-platform ASX’s settlement system for equities. Due to ASX’s role as a heavily regulated market infrastructure, the solution physically segregates private, confidential information and shares only data fingerprints rather than the data itself.

Despite the risks of predicting the future, symposium speakers expressed confidence that DLT will remake many financial services processes in the coming years.