Blockchain technology is playing a disruptive role in the future operations of various industries and trades; securities and asset markets are no exception.
The technology works around blocks of data that are continuously updated across millions of nodes using a predetermined protocol for verification and distribution. In sectors where intermediaries such as clearinghouses have provided support and coordination services, well-designed blockchain protocols can lead to a re-thinking of the structures that define this sectors in their current state.
For several decades, Central Securities Depositories (CSD) served as middlemen (intermediaries) crucial to the functioning of financial markets. The expanding regulation, the acquired frameworks and cost pressures are serving as main drivers for such depositories to evaluate the impact of blockchain technology and it’s possible use in the securities market. Today, blockchain technology is progressively observed by many critics as an instrument for effective treatment of an otherwise stagnant infrastructure, as opposed to a threat to the existence of CSD’s.
DTCC & The Blockchain
The Depository Trust & Clearing Corporation (DTCC) is a subsidiary of National Security Corporation; the primary role of the company is to resolve and settle transactions between the buyers and the sellers of securities.
The DTCC maintains an enormous share of Wall Street’s valuation. It is the biggest monetary exchange processor in the world; handling 120,000 to 150,000 transactions every day. In 2017, DTCC announced the use of blockchain technology to build a platform to facilitate the exchange of securities.
In November 2018, the company began the test run of the blockchain after it’s early research revealed that the technology is more efficient and cost-efficient protocol for settlement of repurchase and agreement transactions in the future. 15 banks have already signed up to participate in this phase; including Barclays – one of the largest financial entities in the world.
Challenges & Questions
There are some areas where regulators need to ask questions before blockchain technology is formally implemented within the current DTCC infrastructure, which handles USD 11 trillion in assets annually. Some of the core issues include:
- The use of computer code in the shape of smart contracts is a territory that requires a significant amount of research and development of failsafes before complex securities and assets are attached to them.
- Information maintenance rules, client information spread and responsibility for cyber security will require talk, illumination and direction.
- The jobs of custodians, exchange operators, reporter banks, clearing houses, and resource administrators may become redundant.
The craze around blockchain and distributed ledgers is extraordinary; holding immense potential to run parallel to and eventually replace legacy infrastructures. The DTCC has accepted that blockchains are not to be ignored; however, the successful implementation of any such technology requires years of risk evaluation and further technological breakthroughs. This also goes for the help for investors in studying the counterparty’s risks, which in turn organizes the information which is further aggregated. The most natural first step, as the DTCC has recognised, will be to utilise the technology to upgrade certain functionalities of the existing system for the years to come; rather than seek a revisionist takeover from the onset.