DTCC calls for collaboration on blockchain
26 January 2016 London
Image: Shutterstock
Industry-wide collaboration is required to get the best out of distributed ledger, or blockchain, technology, and necessary for modernising and simplifying the financial industry infrastructure, according to the Depository Trust & Clearing Corporation (DTCC).
In a white paper, Embracing Disruption–Tapping the Potential of Distributed Ledgers to Improve the Post-Trade Landscape, DTCC called for collaboration in order to address the limitations of current post-trade processing and to move away from a siloed back-office model.
The paper suggested that, although current market infrastructure has a track record of stability and reliability, they are facing several challenges.
Siloed systems mean multiple versions of the same information and a lack of transparency, and these legacy systems were not built to protect against technology threats that exist today, such as cyber crime.
Evolution over a period of time has also led to overly complex systems, without many widely used standards, and they were typically built before the industry was required to operate all day every day, and so are not suited to 24-hour processing, seven days a week.
According to DTCC, a secure distributed ledger could provide a full, traceable transaction history for shared assets, which could be shared between trusted parties. This could improve operations, mitigate risk and reduce post-trade costs.
The paper recommends exploring opportunities for improving existing infrastructure in areas where automation is either limited or non-existent, and where technology can provide clear benefits.
These areas include master data management, asset issuance and servicing, contract validation, and recording and matching for complex asset types that don’t currently have a strong solution. The technology could also be used for netting and clearing, collateral management and, in the longer term, settlement.
However, the paper also identified several limitations to distributed ledger technology as it currently stands. It does not improve on data retrieval, inquiry, reporting or analytics tools, and it doesn’t currently allow for data searching or high-speed access to data.
The paper said: “While talk of the next big disruption suggests wide-scale adoption is imminent, the facts suggest otherwise.”
There are also remaining issues with integration with current data management tools, and there are unknowns surrounding scalability, the latency, performance and security of blockchain technology.
Currently, use of the technology is mostly experimental – not many well-established technology vendors are operating in this area. On top of this, there is currently no way to reverse or cancel transactions made through blockchain.
As the technology is still immature and unproven, and still has limited scalability, the paper warns that it may not provide the solution to all of the industry’s problems. It suggested that alternative, lower cost solutions should also be considered, such as standardised industry workflows and increased use of cloud technologies.
According to DTCC, the industry should collectively consider whether using blockchain would be more cost-effective than improving existing technology, and this discussion should include regulatory and policymaker engagement.
Michael Bodson, DTCC president and CEO, said: “The industry has a once-in-a-generation opportunity to reimagine and modernise its infrastructure to resolve long-standing operational challenges.”
He added: “To realise the potential of distributed ledger technology in a responsible manner and to avoid a disconnected maze of siloed solutions, the industry must work together in a coordinated fashion.”
The report suggests that, so far, research efforts in to distributed ledger technology has been uncoordinated, and so the industry runs the risk of creating new siloed solutions, each based on different standards.
Bodson said: “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.”
The paper puts forward that the most logical step forward is for regulated and trusted central authorities to lead the way in introducing standards, governance and technology for supporting blockchain innovations, while working in partnership with industry participants.
This way, central authorities can ensure that new opportunities are in the best interests of post-trade processing, and consistent with the long-term goals of risk mitigation, enhancing efficiencies and driving cost efficiency for market participants.
The report said: “The industry should seize the emergence of this technology as an opportunity to assess how to modernise and significantly lower risk and cost.”
It concluded: “This is the opportunity to create an industry-wide initiative to develop the right architecture, prioritise the infrastructure building blocks and support focused and collaborative experiments to help the technology mature.”
In a white paper, Embracing Disruption–Tapping the Potential of Distributed Ledgers to Improve the Post-Trade Landscape, DTCC called for collaboration in order to address the limitations of current post-trade processing and to move away from a siloed back-office model.
The paper suggested that, although current market infrastructure has a track record of stability and reliability, they are facing several challenges.
Siloed systems mean multiple versions of the same information and a lack of transparency, and these legacy systems were not built to protect against technology threats that exist today, such as cyber crime.
Evolution over a period of time has also led to overly complex systems, without many widely used standards, and they were typically built before the industry was required to operate all day every day, and so are not suited to 24-hour processing, seven days a week.
According to DTCC, a secure distributed ledger could provide a full, traceable transaction history for shared assets, which could be shared between trusted parties. This could improve operations, mitigate risk and reduce post-trade costs.
The paper recommends exploring opportunities for improving existing infrastructure in areas where automation is either limited or non-existent, and where technology can provide clear benefits.
These areas include master data management, asset issuance and servicing, contract validation, and recording and matching for complex asset types that don’t currently have a strong solution. The technology could also be used for netting and clearing, collateral management and, in the longer term, settlement.
However, the paper also identified several limitations to distributed ledger technology as it currently stands. It does not improve on data retrieval, inquiry, reporting or analytics tools, and it doesn’t currently allow for data searching or high-speed access to data.
The paper said: “While talk of the next big disruption suggests wide-scale adoption is imminent, the facts suggest otherwise.”
There are also remaining issues with integration with current data management tools, and there are unknowns surrounding scalability, the latency, performance and security of blockchain technology.
Currently, use of the technology is mostly experimental – not many well-established technology vendors are operating in this area. On top of this, there is currently no way to reverse or cancel transactions made through blockchain.
As the technology is still immature and unproven, and still has limited scalability, the paper warns that it may not provide the solution to all of the industry’s problems. It suggested that alternative, lower cost solutions should also be considered, such as standardised industry workflows and increased use of cloud technologies.
According to DTCC, the industry should collectively consider whether using blockchain would be more cost-effective than improving existing technology, and this discussion should include regulatory and policymaker engagement.
Michael Bodson, DTCC president and CEO, said: “The industry has a once-in-a-generation opportunity to reimagine and modernise its infrastructure to resolve long-standing operational challenges.”
He added: “To realise the potential of distributed ledger technology in a responsible manner and to avoid a disconnected maze of siloed solutions, the industry must work together in a coordinated fashion.”
The report suggests that, so far, research efforts in to distributed ledger technology has been uncoordinated, and so the industry runs the risk of creating new siloed solutions, each based on different standards.
Bodson said: “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.”
The paper puts forward that the most logical step forward is for regulated and trusted central authorities to lead the way in introducing standards, governance and technology for supporting blockchain innovations, while working in partnership with industry participants.
This way, central authorities can ensure that new opportunities are in the best interests of post-trade processing, and consistent with the long-term goals of risk mitigation, enhancing efficiencies and driving cost efficiency for market participants.
The report said: “The industry should seize the emergence of this technology as an opportunity to assess how to modernise and significantly lower risk and cost.”
It concluded: “This is the opportunity to create an industry-wide initiative to develop the right architecture, prioritise the infrastructure building blocks and support focused and collaborative experiments to help the technology mature.”
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