Michael Bodson, DTCC President & CEO
In the 224 years since the Buttonwood Agreement in Lower Manhattan created the New York Stock & Exchange Board, the investment world has evolved into a highly complex but orchestrated global marketplace in which thousands of financial transactions can be executed across borders and geographic regions in microseconds. As trading technology has advanced, so too has the post-trade infrastructure that underpins the system. While today’s market infrastructures are highly efficient, relatively low cost and, most importantly, provide the necessary stability, reliability and certainty to protect the integrity of today’s global markets, the reality is that many parts of the system were not created through intentional architecture and design and, in some cases, have become unnecessarily complex.
But just as technology has transformed the trading process, distributed ledger technology has the potential to do the very same to the post-trade environment, creating a new ecosystem that is more efficient and cost-effective and that further reduces risk for trading parties and, ultimately, the end investor.
When you look at the challenging regulatory and economic environments, it’s clear that the emergence of this technology could not have come at a better time. There is genuine excitement among industry participants to explore opportunities for leveraging the technology to modernize the post-trade process. At the recent DTCC Blockchain Symposium in New York, a diverse audience of nearly 500 people representing a cross-section of the industry, including regulators, end users, investors, infrastructure providers, technologists, academics, fin-tech as well as large global banks and smaller firms, shared a wide range of opinions on the topic, but three themes to long-term success dominated the conversation.
"By its very nature, blockchain requires open source, neutral protocols and standards to encourage widespread industry acceptance and implementation."
First, many of the speakers agreed that the industry should engage in a collaborative re-architecture of core processes and practices to ensure standardization. Despite consensus on this point, what we have seen over the past year is a frenzy of activity – mostly uncoordinated – in research and development efforts. Today, most banks and service providers are exploring how to leverage this consensus technology individually – an ironic twist that may help spark innovation but will also likely create a new and disconnected maze of distributed ledger silos based on different standards and with significant reconciliation challenges. The end result may be a system with essentially the same challenges we have with today’s infrastructure.
A wiser approach is for the industry to coordinate efforts to develop the right architecture, prioritize the infrastructure building blocks and support focused and collaborative experiments to help the technology mature.
Standards and Governance
Second, there is a need for the existing, regulated and trusted central authorities to play a leading role in introducing the standards, governance and technology to support distributed ledger implementations. These organizations, working in partnership with a wide range of the industry, can help ensure that new opportunities truly enhance post-trade processing and are consistent with long-standing goals of mitigating risk, enhancing efficiencies and driving cost savings for market participants. The critical role of governing and managing the standards, rules and trust boundaries must be managed with indisputable integrity and accountability, independent of any commercial conflicts.
By its very nature, blockchain requires open source, neutral protocols and standards to encourage widespread industry acceptance and implementation. The Linux Foundation’s Hyperledger Project represents the type of collaborative effort needed to establish, build and sustain an open, distributed ledger platform that will satisfy a variety of use cases across multiple industries.
Defining White Spaces
Third, the industry needs to forge consensus on identifying opportunities where implementing distributed ledger solutions are more cost effective than enhancing current processes using cloud computing technology or standardizing workflows. Many speakers at the Symposium agreed that the industry should explore targeted areas to improve upon the existing infrastructure where automation is limited or non-existent and where the technology provides a clear benefit over existing processes. It is only after that the industry should the focus shift to larger-scale opportunities.
In many ways, this reflects the approach we are taking at DTCC. For example, we are working with Digital Asset to create and test a distributed ledger-based solution to manage the clearing and settlement of repo transactions. We have also teamed up with Axoni, four major banks and Markit to test using a distributed ledger to manage post-trade processes in the credit default swaps market.
While the hype around blockchain will likely continue to grow, especially as new experiments come to market, there appears to be growing understanding that wide-scale adoption of distributed ledger technology is still years from becoming reality. Despite this, there is no denying that this technology has the potential to transform the future of financial services and create a more efficient and cost-effective post-trade landscape.
This article first appeared in Coin Desk on April 19.