Blockchain applications require cooperation and consensus

Rage Comment : The author of this article, Michael Bodson, is the chairman and CEO of DTCC. The article calls for close cooperation among post-trading industry stakeholders as blockchain and distributed ledger applications are tested and developed in depth. The article points out that although distributed ledger technology has unlimited potential and attracts extensive development and exploration around the world, this situation of fighting alone has brought unnecessary troubles to the large-scale implementation of the technology. Therefore, in order to realize its potential as soon as possible, the world should achieve industry-wide cooperation and consensus, and the government should also lay a good regulatory environment for the development of the technology and lay a unified technical and policy environment for the realization of the broad benefits of the technology.

Translation: Annie_Xu

The Depository Trust & Clearing Corporation (DTCC) is one of the largest post-trade service companies in the United States, with an annual settlement volume of up to 1.6 trillion.

The author of this article, Michael Bodson, is the chairman and CEO of DTCC. In this article, he calls for closer collaboration among the post-trade industry as blockchain and distributed ledger applications are further tested and developed.

Michael Bodson

224 years ago, the Buttonwood Agreement in Lower Manhattan established the New York Stock & Exchange Board. In the years that followed, the investment field gradually evolved into a highly complex yet orderly global market. The world began to conduct cross-border and cross-regional financial transactions at microseconds.

The advancement of trading technology inevitably requires the upgrade of its underlying post-trading infrastructure.

Although the current relatively low-cost, efficient, stable and reliable market infrastructure is sufficient to maintain the integrity of the current global market system; however, the reality is that the system largely lacks conscious architecture and design, and therefore becomes cumbersome and redundant in many cases.

But just as technological advances have brought about changes in the transaction process, distributed ledger technology can also improve the post-trade environment; shaping it into a more efficient, high-return, low-risk ecosystem for trading parties and investors.

Given today’s difficult regulatory and economic environment, the emergence of distributed ledger technology could not be more timely.

The DTCC Blockchain Symposium attracted nearly 500 attendees from across the industry, including large global banks, small businesses, regulators, end users, investors, infrastructure providers, technology experts, academics, and fintech practitioners, who shared their views extensively.

Three main themes seemed to dominate the discussion:

1. Industry-wide collaboration

First, many speakers believed that the entire industry should work together to restructure core processes and operating specifications to ensure standardized operation of the industry.

Despite this consensus, research and development activity over the past year has been chaotic. The irony of many banks and service providers exploring their own use of consensus technology may help spur innovation; however, the simultaneous emergence of isolated distributed ledger technologies based on different standards will create a new maze, with significant technology integration challenges.

The end result is that future systems will still face the same challenges that exist today.

A more sensible approach for the industry is to cooperate with each other to develop a suitable architecture, with the construction of blockchain infrastructure as the main line, and to pool everyone's strength to conduct testing cooperation and improve the technical architecture.

2. Standards and Regulation

Second, existing regulated and trusted central institutions should take the lead in establishing standards, regulatory environments, and technologies that are conducive to the implementation of distributed ledger technologies.

Industry-wide collaboration among these institutions can ensure that these new opportunities deliver substantial improvements to post-trade processes and are in line with market participants’ long-term goals of reducing risk, improving efficiency and saving costs.

Government regulation and the management of standards, rules, and trust boundaries should be irrefutably just and reliable, and free from any commercial conflicts.

The nature of blockchain requires open source, neutral protocols and standards to encourage broad industry acceptance and implementation.

The Linux Foundation’s Hyperledger Project is representative of this collaboration, helping to build and maintain an open distributed ledger platform to meet the needs of numerous use cases across multiple industries.

3. Define the blank areas

Third, the industry should reach a consensus on exploring opportunities and discovering more cost-effective distributed ledger solutions rather than using cloud computing technology or workflow standardization to improve existing processes.

Many attendees at the webinar felt that the industry should explore targeted areas to improve existing infrastructure, change the status quo where automation is absent or limited, and find places where the technology can be used. Only then can the industry focus shift to larger opportunities.

DTCC has largely taken this approach.

We are working with Digital Asset Holdings to build and test a distributed ledger-based solution to manage clearing and settlement in the repo market, and we are also working with Axoni, the Big Four banks, and Markit to test the use of distributed ledgers to manage post-trade processes in the credit default swap market.

While the hype around blockchain will continue, especially as new pilot projects enter the market; an effective way to fully unlock the potential of the technology is to promote deeper collaboration among industry participants, encourage central institutions to take the lead in developing standards, policies and technologies, and reach consensus on industry opportunities.

While it will be many years before DLT is widely implemented, its potential to transform the post-trade environment is unquestionable.