The Low-down on the DTCC’s Distributed-Ledger Technology Initiative

Much has already been published by WatersTechnology about blockchain and other distributed-ledger technologies (DLTs) and the potential such initiatives hold for the capital markets. However, the industry is yet to see such technologies in live, production environments. Victor Anderson sits down with Rob Palatnick, managing director and chief technology architect at the Depository Trust and Clearing Corp. (DTCC) to establish where the DTCC is with respect to its DLT initiative, the likely use-cases for the capital markets, and why the technology is primed to revolutionize certain mission-critical business processes.

Q: Where does the DTCC's distributed-ledger technology (DLT) initiative currently stand?

Rob Palatnick, managing director and chief technology architect, the DTCC: The DTCC is currently involved in a number of distributed ledger proof of concepts (POCs), including a repo POC with Digital Asset Holdings and an industry-led CDS initiative. We're also an active participant in the Hyperledger project.
Specifically, the repo project seeks to reduce risk and capital requirements for this growing market. If the POC progresses successfully, we will begin to engage additional industry members who are active in the repo markets later this summer. Our work also continues on the next phase of the industry-led Trade Information Warehouse/CDS project, which began at the start of this year. After a successful POC, we are in the process of developing an RFP to advance this project. In addition, we are participating in the Linux Foundation Hyperledger project. We are leading a working open source team as part of that project, which is a first for the DTCC.

Q: Which current capital markets business processes are most likely to be affected by DLT and why?

Palatnick: It is too early to speculate on a nascent technology. That said, we see most opportunity in financial processes that are complex, largely manual, involve many counterparties and have a supportable business case of risk reduction and/or cost and operational efficiencies. Based on this assessment, the DTCC focused on initiatives in the repo and CDS space. We continue to evaluate where DLT might make sense, particularly those post-trade processes that are expensive and that can be further automated. Processes that are low cost and already highly automated are not under consideration at this time.

Q: What specifically about DLT makes it so suitable/advantageous to be applied to those business processes?

Palatnick: We believe that DLT has the potential to address certain limitations of the current post-trade process by modernizing, streamlining and simplifying the siloed design of the current financial markets infrastructure. DLT is an interesting technology for some post-trade processes because it provides a distributed platform that leverages standard rules for securities transaction validation and replication as well as an immutable linkage to transaction history and auditability.

Q: How long does the DTCC think it'll take before the "tipping point" is reached in terms of industry uptake of DLT-enabled business processes?

Palatnick: It is too early to predict when a tipping point will be reached. There are a number of challenges which must be addressed, including securing industry buy-in and regulatory implications, before it will achieve critical mass. As a result, we believe the tipping point is well beyond our visible horizon.

Q: Why is adoption moving at such a glacial pace, given that the technology appears to be tried and tested?

Palatnick: The opposite is actually the case. Adoption of DLT is moving at an incredibly fast pace, given that the technology is quite immature and continuing to evolve. At similar points in the evolution of databases, client servers, the internet and mobile technologies, the amount of publicity and experiments active in the financial industry was almost none.
As it currently stands, DLT exists as a complete implementation with meaningful scale and use for only one application: Bitcoin. All of the new uses which are currently being piloted, evaluated, assessed, and in some cases, marketed, are untested in a production environment.
Organizations that are working with DLT realize that it is early days. The architecture and design of the technology are constantly evolving and there are no commonly accepted standards or certifications for any aspect of enterprise-wide use. These issues are critical to the success of DLT, and also why the implementation phase will take time.

Q: Are there elements of risk that might be introduced to certain business processes if DLT technology is used to underpin those processes? If so, why?

Palatnick: The creation of risk is one of the many aspects of DLT that are being discussed. On the one hand, there are theoretical mechanisms in DLT that can reduce risks and isolate bad actors. On the other hand, various scenarios of contagion and how they could be contained, given the inherent autonomy of a DLT platform, have yet to be fully vetted.

Q: What are the tangible business benefits accruing to capital markets firms on the back of the introduction of DLT underpinning certain business processes?

Palatnick: Firms that leverage DLT should ultimately benefit from the development of standards, the creation of greater efficiencies and the achievement of faster transaction processing. In theory, we expect DLT to reduce the number of different systems, hand-offs, translations, manual processes and exceptions across appropriate processes, resulting in lower costs, reduced risk, fewer errors, faster responsiveness, and increased client satisfaction. That said, at the moment, we can only say what the benefits could be, because we are still at the POC stage.

Q: Other than clearing and settlement functions, what other business processes does the DTCC believe will benefit from the introduction of DLT?

Palatnick: The DTCC believes that DLT will provide benefits including faster processing and secure, simplified, information sharing ─ advantages which we believe will be delivered by our repo and CDS Trade Information Warehouse projects. We currently do not see near-term benefits within the US clearing and settlement space. In fact, DLT could potentially add costs and complexities to an already highly efficient, low-cost process.
It should be understood that there is no such thing as "one DLT," even for one asset class. Many vendors and enterprises are building their own ledgers for different securities, and each are creating separate connection points away from existing markets and processes.

Q: Why does the industry need a critical mass for DLT to become viable? Can the technology not be "drip fed into the system" and co-exist alongside existing frameworks?

Palatnick: The DTCC believes that DLT can be implemented in phases for certain financial transactions that are complex, are not well automated, and are costly. As a result, we do not believe that the technology needs to be implemented via critical mass. The DTCC has a successful track record of collaborating with the industry to introduce innovative, new processes to the markets in a safe manner, and with the knowledge that the new processes are robust, as well as tried and tested.

Q: What, if any, might be the competitive advantages accruing to capital markets participants by implementing DLT to support existing business processes?

Palatnick: The DTCC believes that success will come to those firms that can provide the best client experiences to their users. Ultimately, it will be the DLT solution that lowers costs, improves efficiencies, and eliminates errors, which will be adopted and embraced by the industry.

DLT is an interesting technology for some post-trade processes because it provides a distributed platform that leverages standard rules for securities transaction validation and replication as well as an immutable linkage to transaction history and auditability.