Why Russia's Central Securities Depository Believes Blockchain Is a Blue Ocean Opportunity

Rage Comment : Some experts have pointed out that there is no essential conflict between blockchain and financial institutions, so the practice of securities depositories in the United States, Russia and other countries welcoming blockchain technology actually has a practical basis. The Russian National Settlement Depository announced that it would introduce blockchain technology into the electronic voting system, using NXT blockchain technology, and cooperate with DSX Technologies to improve the voting quality to increase the voting enthusiasm of shareholders. Despite various controversies in Russia and the rapid progress of international blockchain exploration, the NSD project will continue, and the domestic industry environment in Russia is also slowly improving.

Translation: Annie_Xu

In 2016, support for blockchain technology among financial practitioners has become commonplace, but the warm embrace of blockchain technology by central securities depositories (CSDs), which serve as intermediaries in securities transactions, is quite surprising.

Because these companies often serve as the sole arbiters of domestic and international markets, there has been speculation that they might be threatened by distributed ledgers, or that blockchain-based data systems might replace CSDs, making corporate transactions simpler and more direct.

However, the Depository Trust & Clearing Corporation (DTCC) and the National Settlement Depository (NSD) of Russia have expressed their willingness to use blockchain technology to expand and improve CSD operations. At the end of April, NSD announced that it would explore ways to introduce blockchain technology into the electronic shareholder voting system.

The prototype system, based on blockchain platform NXT, was developed in partnership with DSX Technologies and is designed to help reduce the pain points that discourage shareholders from attending meetings.

However, Alex Yakovlev, head of decentralized solutions at the NSD, believes the project has only scratched the surface of what blockchain-based systems can do.

He believes that the opportunities currently brought by blockchain can be divided into two categories: first, those who are seeking to reduce costs and "blue ocean" opportunities; second, those who are reflecting on the overall operation of the financial industry.

Perhaps surprisingly, the NSD’s current interest is in the uncharted territory of cryptocurrencies such as Bitcoin and Ethereum.

“From the beginning, we believed that if the global situation remained unchanged, blockchain would not be able to provide the most perfect operating model within the context of existing business processes and relationships between companies. Blockchain can provide business models that cannot be supported by centralized application paradigms.”

Yakovlev said the NSD believes that blockchain may not be the most suitable replacement for traditional database systems, but financial institutions should use it to expand into new customers, new markets and new digital assets.

However, he noted that NSD differs from its peers in that it uses more experimental or novel applications.

“Traditional financial institutions tend to explore the first use case, although many are beginning to realize that blockchain may well enable them to cross ‘blue oceans’, such as creating new asset classes.”

Theoretical Exploration

NSD representatives said that the company had begun paying attention to blockchain in April 2015, and more large financial institutions began to publicly test similar technologies, further increasing the company's confidence in exploration.

Yakovlev said that the company quickly created an interdisciplinary working group, combining NSD leaders and IT experts to form a blockchain team; this practice is now being emulated by many large financial companies.

The blockchain team came up with five or six proof-of-concept mechanisms, and proxy voting began to become a pilot project for the company because this function could not be implemented in a centralized system.

“A common problem with all electronic voting solutions is that voters cannot verify that their votes have not been altered or that they were counted correctly. The transparency of blockchain and its distributed nature allow us to create new voting processes where voters have access to tools that address both of these issues.”

NSD is not the only one exploring this application, as in early 2016 Nasdaq announced the development of a proxy voting system for the Estonian market.

Choose NXT

In addition, technology selection is also a factor that distinguishes NSD from its peers.

Despite voting to develop its own private blockchain system, the company still chose to use the technology of blockchain community NXT. NXT is an early participant in the crypto 2.0 community and is a pure proof-of-stake blockchain, although it has been questioned for centralization issues because it has ownership of its network tokens.

But Yakovlev said the technical flaws are minor compared to its ability to verify high transaction volumes.

“But we cannot say that NXT is a panacea for all use cases, some use cases still require the use of other platforms or specialized solutions.”

As part of its research, NSD also invited developer teams from Estonia, Israel, Russia, the United States and the United Kingdom to provide blockchain application consulting to the company, among which DSX stood out with its NXT-based solution.

The system allows bondholders to submit votes to authorized parties, and the NSD will count the votes and submit them to the blockchain, which can be publicly verified.

Next step

NSD’s next blockchain development plan is to focus on improving its voting pilot project.

Yakovlev said NSD will continue to gather customer feedback, and that early projects will include safety audits and detailed legal investigations. Despite the occasional alarmist headlines in the field, NSD is confident its efforts will not be hampered.

While some in Russia’s political establishment have been pushing to ban cryptocurrencies, Yakovlev said the controversy surrounding the technology is “far from reality.”

"A distinction should be made between cryptocurrencies, which remain the subject of legal controversy, and their underlying blockchain technology."

The Russian central bank has previously indicated that it is taking the lead in exploring blockchain, including convening industry roundtables and encouraging technology research and development. Yakovlev said the central bank encourages domestic technological innovation.

"Russia will continue to invest in blockchain exploration and develop more technological prototypes."