Yesterday, Jennifer Peve, the DTCC‘s Global Head of Strategy & Innovation, said that she doesn’t believe blockchain is a solution to help with the U.S. transition to one day (T1) settlement that will happen in May of this year. She was talking at a symposium on the tokenization of real-world assets (RWA) and liabilities held by the Office of the Comptroller of the Currency (OCC). For those less familiar with the DTCC, it processed $2.5 quadrillion in securities transactions in 2022.
“If you’re speaking about U.S. public equities markets, there is a disconnect because of the performance and scale component,” she said.
One of the key advantages of blockchain is the ability to have atomic settlement in which the asset and payment exchange simultaneously, delivery versus payment (DvP). That doesn’t have to be instant. It can happen one day after a trade.
However, other sectors, such as private stocks, are a different story. She referred to “other markets that are probably not as high volume, low value, then I think you’ve got opportunities to really explore this concept of on chain, real time settlement, which I think is very interesting.” In 2021 the DTCC explored something similar as part of Project Whitney.
Ms Peve believes these sorts of use cases will help “demonstrate confidence and credibility” before tackling entrenched businesses.
Markets where the infrastructure is less developed make strong tokenization candidates. She mentioned the alternatives sector and ETFs. “ETFs continue to be an interesting place for this technology simply because of the operational efficiencies you can get through the create-redeem processes, data distribution, and things of that nature,” said Ms Peve.
During the last couple of years, the DTCC has introduced several blockchain initiatives. In 2022 it launched a DLT-based stock settlement system for bilateral transactions that uses R3’s Corda DLT. It went live with the Trade Information Warehouse system for derivatives, which had a blockchain and conventional version.
What else is the DTCC currently exploring?
Last year the DTCC launched an industry Testnet infrastructure based on Hyperledger Besu, an enterprise version of Ethereum. The aim is to provide an industry sandbox environment. It also acquired digital asset solution provider Securrency.
Peve briefly shared details of a recent experiment. The DTCC conducted a simple proof of concept with asset managers, fund administrators and custodians to explore the possibilities in the wealth management space. It involved putting net asset value (NAV) data on a public blockchain. “They were able to see whether or not this technology from a data distribution standpoint was going to add incremental value,” said Ms. Peve. “And then how would they consider building on top of that.”
However, overall her tone was cautionary. There’s the challenge of interoperability with legacy systems. And slow adoption by financial institutions. “we’re talking about a technology that has not been proven at scale in our markets for the assets that we serve,” she reiterated, saying it will take time.
The future of CSDs and the DTCC
One key takeaway was that the DTCC will only address opportunities that can work within the current regulatory framework. And current regulatory requirements reinforce the role of the DTCC.
If tokenization achieves its potential, there are questions about the roles of central securities depositories (CSDs) and central counterparties (CCPs). The blockchain takes on the role of the registry, and smart contracts can automate much of the servicing functionality.
At best, CSDs will evolve or alternatively be disrupted. Last year three of the world’s largest CSDs, the DTCC, Clearstream and Euroclear, published a paper arguing for their role in this tokenized future, which we explored.
Ms Peve sort of addressed the elephant in the room.
“This technology helps you compress the value chain and take friction out of that value chain,” she said.
Adding that we need to have “people that are willing to stand up and take the risk to say, I recognize that by changing this, I might lose out here. But if I lose out here, perhaps I can build something else over here that actually generates replacement revenue or brings other opportunities.”
She continued, “If we don’t have those conversations and we aren’t honest about it upfront, we can talk about use cases all day long. We can talk about how it complies with the regulatory requirements. We can talk about the scalability and performance. But if we can’t get people to say, ‘I’m willing to take this shot’, it still won’t happen.”