The Depository Trust & Clearing Corporation, or DTCC, is integrally involved with settlement of trades in public company stocks. It has issued a white paper examining the use of blockchain technology to settle securities trades.
As we noted in the Minneapolis Star Tribune, blockchain technology underpins bitcoin transactions in the form of an algorithm that allows bitcoin to be traded without a centralized ledger. The potentially disruptive nature of the technology is that it can also track the exchange of stocks, bonds and other financial securities, and almost anything else of value. Currently, securities are settled using a “closed ledger.” Blockchain technology is based on a distributed “open ledger.” Distributed ledgers use open, decentralized, consensus-based authentication methods unlike the current settlement process. The technology allows parties who do not know one another to work together to facilitate nearly instantaneous settlement, which eliminates costs, errors and systematic risk.
DTCC believes that distributed ledger technologies have the potential to address certain limitations of the current post-trade process by modernizing, streamlining and simplifying the siloed design of the financial industry infrastructure with a shared fabric of common information. The white paper notes that while distributed ledger technology has captured the imagination of the industry, key challenges with the platform will need to be overcome before it can be widely adopted or considered enterprise-ready. In addition, the industry itself needs to determine whether using the platform is more cost effective than improving existing technology and whether it can overcome its inherent scale and performance challenges.
The white paper states the industry hype and research into this new platform has been unprecedented but also generally uncoordinated up to this point. As a result, DTCC believes the industry is at risk of repeating the past and creating countless new siloed solutions based on different standards and with significant reconciliation challenges – essentially a new system with the same challenges we face today. DTCC advocates that the industry should engage in a collaborative rearchitecture of core processes and practices to ensure standardization. DTCC believes it is best positioned to support and coordinate the evaluation and standardization of the distributed ledger platform, help address industry challenges and determine whether it is a better solution than existing technology.