Investment News

DTCC proposes tokenizing private securities on public Ethereum blockchain

tokenized stocks

Today the DTCC, the world’s largest securities settlement organization, made two significant proposals to tokenize and digitize securities using distributed ledger technology (DLT). The first project aims to offer accelerated settlement and the second to enable the tokenization of private market securities and support secondary trading, including using the public Ethereum blockchain. In 2019 the DTCC’s subsidiaries processed securities transactions valued at $2.15 quadrillion.   

The DTCC already has significant experience with DLT. Its Trade Information Warehouse targets the settlement of credit derivatives to the tune of more than $10 trillion. It’s getting ready to launch an upgraded version based on Axoni DLT technology.

The two projects proposed today were published to consult the market. Proofs of Concept (PoCs) have already been conducted.

Tokenizing private securities

Project Whitney is the edgier of the two proposals and aims to tokenize private securities and enable secondary trading. This would initially target Regulation D (SEC Exemption) equities. 

The tokens would be minted on the public Ethereum blockchain, but there is a compliance oracle that can approve or reject transactions. Additionally, there would be a centralized stock record of the security’s ownership that uses the AWS Quantum Ledger Database.

However, Ethereum is not an exclusive platform. The DTCC has already done another prototype for enterprise blockchain Hyperledger Fabric and the R3 Corda version is underway. Others could be added based on demand.

“Project Whitney presents an exciting opportunity to leverage emerging technologies and develop completely new solutions from the ground up,” said Jennifer Peve, Managing Director, Business Innovation at DTCC.

The DTCC stated one of the reasons for selecting private markets is it believes in the promise of tokenization but that “digitalization can best be applied to opportunities in new markets or under- serviced assets with limited existing automation, such as the U.S. private markets.”

Shortening settlement times

Project Ion aims to shorten the settlement cycle for the DTCC’s core settlement systems. (This Project Ion is unrelated to other Ion DLT projects from other organizations). Stock market volatility in March resulted in far higher margin requirements as well as significant risk as a result of the current two day (T+2) settlement requirement.

The DTCC commented that its systems currently support one day and same day settlement, but “legacy operational industry processes and other factors have prevented the industry from moving beyond T+2.”

In 2017 when the market moved from T+3 to T+2 it was estimated to save the industry $1.36 billion in margin requirements.

Additional benefits anticipated include optimizing capital, reducing risk, improving workflows, and automation efficiencies. 

The aim is to combine same day or optionally intraday settlement with a newly-designed centralized netting service that supports real-time netting. Both cash and securities would be digitized and the settlement service would be compatible with the current one.

The PoC used the DAML smart contract language, but the underlying ledger was not mentioned but would certainly be permissioned. By using DAML it’s possible to swap out the ledger. 

The DTCC has previously published papers on the tradeoffs between instant settlement and nettingDLT security, and DLT governance