Long-term disruption: How blockchain startups are reshaping DTCC

Rage Comment : As a centralized transaction processing company, if DTCC can immediately use blockchain technology to modernize the current infrastructure, then with its advantages in risk management, it will still be invincible in the blockchain world. DTCC is also actively cooperating with blockchain startups to use the technology of various companies to improve efficiency, which provides a precedent for other traditional institutions. The way to avoid being disrupted is to use this disruptive technology.

Translation: Nicole

Robert Palatnick isn’t surprised by the changing role of DTCC, a centralized transaction processing firm that has been caught up in a wave of blockchain disruptors.

However, the chief technical architect for the post-trade services giant, which processes $1.5 billion in trades annually, told CoinDesk that DTCC’s strengths in risk management are equally important in the blockchain world. He now believes that what will change is the technology the firm uses.

While some startups using distributed ledger technology are disrupting centralized transaction processing firms, others have joined the fight to modernize the current infrastructure.

In the interview, Palatnick explained how by working with these startups, the DTCC can better ensure that what is being created can handle the enormous pressure of financial regulations.

Palatnick said:

“To build a pyramid that is flexible, renewable and reusable, these systems that contain assets that allow the market to work, these assets can be liquid and financed, and ultimately companies can go public. That’s our role.”

So far, DTCC has publicly announced partnerships with two Wall Street startups, Axoni and Digital Asset.

In March, DTCC announced its first collaboration with a digital asset startup. The private blockchain trial was designed to demonstrate how distributed ledgers could improve efficiency in the repurchase agreement market, which trades about $2.3 trillion a day.

But the merging of expertise and experience between the two companies is about more than just getting products to market quickly, said Chris Church, Digital Asset’s chief business development officer.

Chris Church

He said:

“We hope the end result will provide lower costs while also providing long-term strategic benefits to DTCC.”

After the initial testing of DA, Palatnick said that DTCC has been in conversations with other potential partners to create solutions for other asset classes. According to DTCC, in the following month, through cooperation with Axoni, it has successfully tested 85 structured use cases of blockchain applications in credit default swaps.

Currently, Palatnick said he is working with more startups than ever before at the DTCC.

Calling for startups

Palatnik said DTCC is not trying to become an expert in cryptography, but rather wants to leverage its existing risk management strengths.

As a result, he said he focuses primarily on companies with a strong background in the technical aspects of blockchain.

That said, he said, startups should understand it as “both a tool and a transaction” in an increasingly competitive space.

This strategy of focusing on startup strengths without overextending DTCC’s original mission has led to some surprising turns of events.

Palatnick said:

“Once they realize we have people to deal with regulators and handle regulation of our code, and that’s what it means to be in this business, all of a sudden they want to be our software vendor as well.”

dilemma

But not every blockchain startup wants to work with the DTCC.

Founded in 1999 following the merger of the Depository Trust Company (DTC) and the National Securities Clearing Corporation (NSCC), the company helps financial institutions process trades, with an average settlement time of three days.

But the company also faces several lawsuits alleging it sold shares without first procuring collateral, a controversial process known as “naked short selling.”

For example, Utah-based retailer Overstock, which launched its Medici blockchain unit in 2014, now features DTCC Square on its website.

Medici not only wants to reduce settlement time from three days to zero, but also wants to prevent “naked short selling” by confirming that firms like the DTCC actually own the stocks they are trading.

A recent CoinDesk opinion piece proposed that Medici’s service could “return shares to shareholders without the need for DTCC.”

A tough battle

In a sense, DTCC is not the only company at a crossroads.

Like many companies, it has chosen to join the long list of financial intermediaries that have responded to pressure to innovate on blockchain by forming partnerships with startups.

However, Palatnick wants to embrace the disruptive nature of blockchain in many ways, as he wrote earlier this year. Therefore, in addition to increasing DTCC’s work with startups, interest in open source collaboration is a prerequisite for ideal cooperation.

Robert Palatnick

Palatnick said every company he has consulted with is already a member of the open-source blockchain project Hyperledger, or they have committed to joining.

He also said:

"That's very important to us."

Selling goods

This strategy seems to be working.

The company’s trade information warehouse blockchain prototype is now “past the proof-of-concept stage” and is also “close to completion.”

Palatnick said his team is currently “in discussions with various vendors” interested in building buyback products using digital assets (DA).

However, the chief technical architect acknowledged that the changes extend beyond technology.

He summarized the development of DTCC, adding:

“It seems counterintuitive that the trajectory of history is moving in this direction, but technology is developing along this curve because many people are giving feedback, and we can continue to improve when we encounter problems.”