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Clash or Convergence: Can Traditional and Digital Assets Settlement Coexist?

By DTCC Connection Staff | June 7, 2022

DTCC recently sponsored a webinar with Financial Technologies Forum (FTF) on the topic, “Clash or Convergence: Can Traditional and Digital Assets Settlement Coexist?”

Moderated by Robert Walley, Principal, Deloitte, the panelists discussing the clash – or convergence – between old school clearing and settlement and digital assets and blockchain technologies included Michele Hillery, DTCC General Manager, Equity Clearing and DTC Settlement; Thomas Sullivan, Managing Director in the Global Business Services Unit at Société General; and Barnaby Nelson, CEO of The Value Exchange. Some highlights of the panel discussion are below.

Related: Transforming Infrastructure for Private Markets

Business Models That Support Digital Assets
At the end of the day, it’s all about creating and maintaining processing efficiencies through streamlined operations. “What we don’t want to lose – in any model we adopt – are the efficiencies that we presently have in the marketplace,” Hillery said. In the U.S. equity business, for example, DTCC manages more than 200 million sides of trading activity that must be processed every day, with a 98% netting opportunity and risk reduction.

“The potential model that resonates with me is how do we take the existing securities set and get the technology and benefit of reconciliation by using something like DLT,” Hillery noted. I don’t think it’s clash or convergence, I think it’s exploring the creation of a digital space that potentially can offer reconciliation and operational efficiencies, embracing the value of the technology.”

As DLT continues to emerge and evolve, ongoing questions around scalability and security must be resolved to determine if the technology can handle the magnitude of the U.S. markets. “These are not insurmountable issues,” Hillery said, “and our launch and expansion of a private, permissioned blockchain will be done in a very deliberate and incremental way to ensure the safety and soundness of the U.S. markets.”

Sullivan noted the “evolutionary aspect” to it: “When you look on these models, there is work that needs to be done to integrate with trading and back-office systems. Allowing for the seamless integration of a digital currency will allow more flexibility, especially if we’re ever going to enable T+0.”

“What we don’t want to lose – in any model we adopt – are the efficiencies that we presently have in the marketplace.” – DTCC’s Michele Hillery

Tokenized Securities and Traditional Equities
For the foreseeable future, Hillery sees several operational variations could coexist: physical securities with people delivering paper certificates into a vault daily, traditional Cede & Co. depository services, which operates very well but is not on a blockchain, and the possibility of a blockchain with natively-issued securities.

“As an industry, we’re going to have to manage the operations of all three – and how we do that is the most relevant question,” she said. “There are counterparties and participants who are very eager to take this step forward. And then there are others who are still writing checks. We have two sets of variables on the client side and their willingness to participate, and then we have the technology and the pace of maturity.”

Next Steps for Firms
A top priority is to invest educational resources to incorporate DLT into common knowledge and everyday vernacular. “There is a tremendous opportunity for us to make this less mysterious,” Hillery said. “We need to take the mystery out, grow the internal talent so they can develop on these platforms, and also put the appropriate governance structures in place to integrate DLT into our systems. We play with things in a prototype environment, we learn a lot, and then we integrate them as a private, permissioned blockchain into production.”

Walley, who in his role with Deloitte has been a part of the T+1 Industry Steering Committee with DTCC, SIFMA and ICI, concluded the webinar with a reflection on accelerated settlement. “Most firms are on a journey over the next two years to T+1, and it is a tremendous opportunity to look at how DLT and other technology can enable processes and take the friction out,” he said. “It is an ecosystem and will be driven by the broad breadth of adoption, but also how firms are working with their counterparties to develop solutions to fit the marketplace.”

To view the full webinar replay click here.

Michele Hillery
Michele Hillery DTCC General Manager of Equity Clearing and DTC Settlement Service