After the wave of hype that surround distributed ledger technology five years ago, DLT today might best be described as a red-pill, blue-pill situation: Either you’re in or you’re out—there is no in-between.

A few years ago, it seemed that every couple of weeks there were new DLT proofs of concept popping up left, right, and center. Experimentation is good; it’s how you learn if a new technology is applicable to the high volumes, complexity and regulation of the capital markets. But using DLT like a hammer looking for a nail isn’t going to work. And it’s this hammer-looking-for-a-nail mentality that has led to doubt amongst some top executives in the industry.

Hype will always succumb to practicality, and 2021 saw some laser-focused DLT projects. Below are a few examples:

DLT-as-a-service

The Australian Securities Exchange’s work with DLT is well-known, as it officially embraced this emerging technology back in 2017 to replace its clearing and settlement system—the Clearing House Electronic Subregister System, aka Chess. That project, though, has experienced some hiccups along the way, which is understandable given the scale of the project and the newness of the technology.

Still, the exchange hasn’t wavered in its support of DLT. On November 30, ASX opened the first integrated industry test environments (ITE1) for the new platform being built to replace the exchange’s decades-old, Cobol-built system. The ITE1 allows software providers, including third-party vendors and organizations that develop in-house systems, to perform functional and non-functional testing.

The environment uses Digital Asset’s Daml smart contract programming language, VMware’s DLT platform, and other infrastructure tools that underpin the new Chess replacement system.  

The ASX also built a DLT-as-a-service platform, Synfini, which it launched in November. The platform gives customers access to the exchange’s DLT infrastructure, data hosting, ledger services, and support, removing the need to build, run, and support their own environments and to address challenges around cost, complexity and risk.

Dan Chesterman, group executive for technology and data, and chief information officer at ASX, told WatersTechnology that Synfini is a “step further” into the introduction of the VMware DLT, and allows customers to have different nodes with permissioned access to the data that relates to them.

“When we go live with customers, they can define who their parties are within their ecosystem and what rights those parties have in a way that’s taking advantage of the VMware blockchain capability—but as a service, so we don’t have to have them managing their own infrastructure,” he says.

Synfini is the next phase of ASX’s Daml sandpit, which it launched in January. The sandpit allows individuals and firms to familiarize themselves with Daml and develop applications.  

Several firms have already begun coding or testing applications in the sandpit and Synfini. One example is Broadridge, which is developing an application that automates and eliminates paper for off-market transfers in the equities market.

Benjamin Quinlan, CEO and managing partner at Hong Kong-based strategic consulting firm Quinlan and Associates, says if Synfini can provide a more scalable service applicable to financial markets players like Broadridge, it would open the door for wider industry participation.

A home in repo

Speaking of Broadridge, the tech giant has made further advancements in this space.

As such, Broadridge has a few blockchain projects under its belt. The latest is its blockchain-based repo transaction platform, which it rolled out in June. The platform uses Daml smart contracts to simplify complex multiparty workflows in the repo market. It also uses the VMware enterprise blockchain platform to provide the underlying cryptology to ensure the network is secure.

Horacio Barakat, head of digital innovation in capital markets and head of Broadridge’s DLT repo platform, said that blockchains simplify complex workflows with multiple counterparties. At its core, the technology improves the availability and mobility of collateral, operationally-intensive matching, and reconciliation of data throughout the trade lifecycle.

In its first week, the DLT repo platform executed $31 billion in its average daily volume with two entities onboarded.

Private markets

At the beginning of 2017, the Depository Trust and Clearing Corporation unveiled an ambitious project to replace its Trade Information Warehouse (TIW), which processes most credit derivatives trades, with a new system using DLT. That project, much like ASX’s Chess replacement project, has been met with delays, and is now aimed to launch in late 2022.

There is another DLT project that the DTCC has been working on that could provide a quicker win. In November, the post-trade market infrastructure firm announced its Digital Securities Management (DSM) platform, aimed at streamlining the issuance, transfer, and servicing of private market securities.

Although the platform is subject to regulatory approval, once launched, it will provide access to participants through both a central and distributed infrastructure, leveraging a cloud-based architecture to allow for book-entry record-keeping of securities. It will also provide the option to create tokenized representations of a security.

Jennifer Peve, head of strategy and business development at the DTCC, who spoke on the Waters Wavelength Podcast recently about the project, says as private markets have been on the rise and US companies are staying private longer, they accrued larger shareholder bases—both investors and employees—who needed exit opportunities, and usually through secondary liquidity means.

While there were certain technology solutions to help those stakeholders across the value chain, the solutions are fragmented and siloed, or they address the needs of late-stage pre-IPO companies. The DTCC wanted to dive deeper into the private markets to look at the areas where there is room for improvement and how tokenization could drive added value.  

“We determined that a digital platform that would support multiple digital assets to address the manual processing that occurs in private markets, the market fragmentation that exists, and effectively this reactive compliance enforcement of secondary trades could really solve for those target areas and pain points,” she says.

That was the basis for DSM, which evolved from the DTCC’s research into private markets.

The DSM platform builds on the DTCC’s Project Whitney case study and will initially support pre-IPO equity securities. In the future, it will be extended to other markets, potentially for funds, debt, real estate, loans, and other private instruments. While it has been built to be blockchain-agnostic, DSM will initially interface with the Public Ethereum Network, but will later incorporate additional public and private blockchain support based on client and market demand.

It’s now in the production build phase, and subject to final regulatory approval. It is expected to launch in the first half of 2022.

Settlement acceleration in Asia

Before Charles Li, the former CEO of Hong Kong Exchanges and Clearing (HKEx), retired, during a virtual discussion with Nasdaq CEO Adena Friedman, he agreed that blockchain was overhyped. But he also said at the time that the technology showed potential in non-core operations and processes. Indeed, HKEx began experimenting with blockchain within its Stock Connect programs.

The result is HKEx Synapse, a new settlement acceleration platform for its Stock Connect program. It aims to standardize and streamline the post-trade workflows of Northbound Stock Connect.

It will use smart contracts based on Daml. HKEx also partnered with the DTCC to link Synapse to the DTCC’s institutional trade processing services.

One of the challenges for Northbound flows is that for China A-shares, the stock settlement is done on a T+0 basis, cash settlement is done on a T+1 basis, and stocks on the HKEx-owned Stock Exchange of Hong Kong function on a T+2 settlement cycle.

That means post-trade participants have less time to deal with any trade errors that could occur in the trade workflow. Nine times out of 10, there are no issues, said a head of broker strategy at a tier-one European investment bank. But that one blip could be an error in the commission, or value data, or counterparty ID. 

While this issue is not unique to Stock Connect, the challenge is that there are about four hours in which to iron it out. So the head of broker strategy said the only option is to allocate two to three times as many people to Stock Connect as the Hong Kong market. “From a unit cost perspective, it’s probably two to three times more expensive,” they said.

In June, the exchange announced that it had started the pilot program, which included asset managers, brokers, custodians, and clearing participants, which would attend workshops and undergo testing of Synapse to familiarize themselves with the platform.

The pilot program will help enhance the design and features of the platform ahead of its 2022 launch.  

An open network

Digital Asset is in the background of most of the above-mentioned projects. While the company wears the builder hat for both ASX’s Chess replacement project and HKEx’s Synapse rollout, it also designs products that allow people and organizations to build applications for their networks.

Shaul Kfir, co-founder and chief architect at Digital Asset, said any company using the Daml network can create workflows that can connect across markets and have it feel like a local connection, similar to how a browser “points” to the internet and connects to the site a user wants.  

People and organizations can understand this network through the Daml Hub, its test application system. It is also the system that the ASX uses as its Daml sandpit.

“We think Daml Hub is the easiest way to access the network,” said Eric Saraniecki, co-founder and head of strategic initiatives at Digital Asset. “And there are two key stakeholders there. There is someone that would deploy an application into this network, so think ASX, Broadridge, or anyone that has this data and wants to connect other people to the data. And then there are the users of this network—think the buy-side and sell-side firms that are connecting all these different applications and their positions that they’re trying to interact with. And both of them have to deploy infrastructure to participate in the network.”

ASX is Digital Asset’s first enterprise Daml Hub licensee within the region, but Saraniecki said the vendor would like to have partners like ASX in every major region. 

“That would be really great, because they would all be connected together. So if Hong Kong Stock Exchange did that, their customers would have access to ASX customers and it starts to turn into a really interesting network,” he said.