Wall Street Urged by Key Utility to Mull Upgrade to Blockchain
DTCC sees `once-in-a-generation opportunity' to modernize
Research follows DTCC's investment in blockchain startup
Depository Trust & Clearing Corp., the organization that processes all trades in the $22 trillion U.S. stock market, said the financial industry should collaborate to modernize its systems with the blockchain software that powers bitcoin.
It’s another significant endorsement for the technology, which promises to radically speed up and simplify trade clearing and settlement -- the process of swapping assets between buyers and sellers. Last week, DTCC was among a group of investors that bought stakes in Digital Asset Holdings, which is developing financial applications for blockchain, at the same time the startup won a contract to handle stock settlement in the Australian stock market.
Blockchain could help DTCC leapfrog the industry’s current best-case scenario for speeding up U.S. stock and bond trades. The present target is shifting to two days from three. Reducing settlement times frees up capital at brokerages and ensures investors get their money faster after a sale. DTCC said Monday that while the technology has its limitations, Wall Street should its explore its application to markets.
“The industry should seize the emergence of this technology as an opportunity to assess how to modernize and significantly lower risk and cost,” DTCC, which also clears bond transactions in the U.S., said in a research paper. “DTCC strongly believes that the financial services industry has a once-in-a-generation opportunity to reimagine and modernize its infrastructure to address long-standing operational challenges.”
DTCC got a board seat at Digital Asset as it invested in the startup, which is run by former JPMorgan Chase & Co. banker Blythe Masters. Digital Asset’s deal last week with the Australian Stock Exchange is the biggest announcement yet concerning the use of blockchain in financial markets, following more than a year of enthusiastic talk about how distributed ledgers, which are sometimes referred to as blockchains, can transform finance.
DTCC is instrumental in the process of exchanging cash for securities such as stocks or bonds. It said it’s identified several areas where distributed ledgers could improve efficiency, including data management, confirming trades, netting and clearing, collateral management and settlement. According to DTCC, current techniques are vulnerable to cyber attack, susceptible to duplicate records and unnecessarily complex. They also aren’t available 24 hours a day.
“The premise of the Bitcoin platform -- a decentralized, trustless, replicated ledger of transactions -- is the virtual opposite of the centralized, trusted, guarded, model of modern securities processing, which has long relied upon DTCC, among others, as a central authority,” DTCC said.
Distributed ledgers face obstacles to success. Fierce competitors will need to collaborate. Regulatory hurdles could kill or significantly slow progress. And although cross-border payment networks could save banks money, it would also drain revenue away from other parts of their business.
The state of distributed ledger technology needs to improve to be able to handle the scale of modern financial markets, DTCC said. “It is immature, unproven, has inherent scale limitations in its current form and lacks underlying infrastructure to cleanly integrate it into the existing financial market environment,” the firm said. But the positives appear to outweigh the negatives.
“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 organization said.