DTCC says go long-term on distributed ledger technology similar to Bitcoin’s blockchain
The banking industry is responding to the technology developments behind the Bitcoin electronic currency, and calling for collaboration to develop “distributed ledger” technologies similar to the blockchain which underlies Bitcoin.
The Depository Trust & Clearing Corporation (DTCC), a post-trade market infrastructure body for the global financial services industry, today called for industry-wide collaboration in developing distributed ledger technologies to modernize, streamline and simplify the flawed design of the financial industrys’ infrastructure and address limitations of the current post-trade process.
“The industry has a once-in-a-generation opportunity to reimagine and modernize its infrastructure to resolve long-standing operational challenges,” said Michael Bodson, President and CEO at DTCC. “To realize the potential of distributed ledger technology in a responsible manner and to avoid a disconnected maze of ‘solutions, the industry must work together in a coordinated fashion.”
Bitcoin has followed an erratic and volatile path recently. This erratic behavior, combined with its reputation as an enabler for criminal activity, means that serious investors may not consider digital currencies to be worth having. The aspect of Bitcoin that finance bodies such as the DTCC find interesting is its distributed ledger, the Bitcoin blockchain. The finance industry is still built on ledgers, albeit now digital ones.
Ledgers guarantee and track assets as they move from one ledger to another. Bitcoin’s public ledger is distributed across millions of computers, recording every Bitcoin transaction at little cost. There is growing interest in treating Bitcoin not as a currency but as a digital equivalent to a notary’s stamp: using the blockchain as a method of authenticating digital transactions, offering irrefutable proof of ownership and a traceable history.
Michael Bodson, CEO, DTCC
The industry silo by silo
The paper notes that while today’s financial market infrastructures have a proven track record of providing stability, reliability and certainty, they are often quite complex, work independently of each other and are not equipped for 24x7 processing.
DTCC believes a secure, distributed ledger, with complete and traceable transaction history for a set of assets that is shared and accessible only between trusted parties, could provide significant operational improvements as well as further mitigate risk and reduce post-trade costs.
Distributed ledger technology is still immature
Based on its research and analysis, DTCC recommends exploring targeted opportunities to improve upon the existing infrastructure in certain defined areas where automation is limited or non-existent and where the technology provides a clear benefit over existing processes.
Opportunities to explore include: master data management; asset/securities issuance and servicing; confirmed asset trades; trade/contract validation, recording and matching for the more complex asset types that currently do not have strong existent solutions; netting and clearing; collateral management; and, longer term, settlement.
However, the white paper cautions that distributed ledger technology is still immature and unproven, has inherent scale limitations in its current form, and lacks underlying infrastructure to cleanly integrate the technology into the existing financial market environment. As a result, it may not be the solution to every problem and alternative solutions should also be considered in evaluating opportunities to lower the costs and risks of current infrastructure through standardized industry workflows and expanded use of cloud technologies.
Money - everywhere in chains
Industry-Wide Coordination and Collaboration
The paper also notes that research efforts thus far have been generally uncoordinated and, as a result, the industry is at risk of repeating previous mistakes.
The most logical way forward is for the existing, regulated and trusted central authorities to help play a leading role in introducing the standards, governance and technology to support distributed ledger implementations. Furthermore, the DTCC believes that these organizations, working in partnership with a wide range of the industry, can help ensure that new opportunities are in the best interests of post-trade processing and consistent with long-standing goals of mitigating risk, enhancing efficiencies and driving cost efficiencies for market participants.
“The current approach of many firms experimenting in private with a technology that uses consensus protocols to provide transparency could lead to a new post-trade environment with the same integration and reconciliation problems that companies face today,” Bodson said. “As an industry-owned and governed financial market utility with more than 40 years of service, DTCC is uniquely positioned to help lead the effort in exploring how distributed ledger technology can simplify or replace legacy post-trade systemc