DTCC changes business model to cope with blockchain disruption

Last year, DTCC processed $1.6 quadrillion in securities, and if it were cut off from the financial food chain, the losses would be immeasurable.

So over the past few months, the Depository Trade & Clearing Corporation (DTCC) has been working diligently to establish itself as a hub for the kinds of experiments other companies are conducting with blockchain technology.

Rather than opposing the decentralized ledger technology popularized by Bitcoin, the DTCC has embraced the new tools and is helping to define the future architecture of the industry, even if it means changing the company’s business model.

Robert Palatnick, chief technical architect at DTCC, told CoinDesk:

“Part of the responsibility of helping the industry innovate is [looking at] how decentralized ledger technology can be incorporated into solving problems that the industry has. If that means changing our business model to accommodate that, then that’s how the industry uses us.”

DTCC charges account fees in addition to monthly fees and processing fees from its users, which add up to $1.4 billion on the more than $1 trillion in securities it processes each year, according to its most recent annual report.

Blockchain training

To train itself on its disruptive potential, DTCC joined the nonprofit Linux Foundation’s Hyperledger project in December 2015, and its systems director Pardha Vishnumolakala is now a technical steering committee member for the project.

Although still in its early stages, the project aims to provide open-source financial solutions using blockchain technology.

But that was when the company first launched, Palatnick said.

A month later, the DTCC joined the largest non-bitcoin blockchain investment firms and published a white paper in which it wrote that “uncoordinated” research into blockchain applications has put the industry at “risk of repeating the past and creating countless new siloed solutions based on different standards.”

Palatnick sees a role for the DTCC as a collaborative coordinator to ensure that these siloed solutions don’t exist, no matter what the new financial model looks like. He said he gets a call at least every other day from different vendors running trials using various blockchain building technologies to streamline mortgage lending, loan syndication and asset settlement, among other things.

“We are being contacted by organizations because they feel we can help them in a variety of different ways,” Palatnick said.

experiment

While Palatnick did not name specific banks and other institutions that the DTCC has been communicating with, he said experiments are underway to integrate blockchain technology into big data infrastructure, an effort that could make identifying past transactions as easy as a Google search.

The experiment took place in what DTCC calls the “white zone,” where average settlement times are around three days but closing can take months. The goal of reducing settlement times to two days was discussed during a roundtable with 500 DTCC clients last week.

Indeed, blockchain’s potentially disruptive impact on the global securities industry has led to some interesting, even surprising, collaborations.

Just three months ago, New York-based Digital Asset Holdings announced that both DTCC and its U.K. rival ICAP participated in what was then a $50 million Series A investment round in the company, which was later increased to $60 million.

As part of the investment, DTCC President and CEO Michael Bodson is joining Digital Asset’s board of directors.

Obstacles and Survival

Amid all the research into building blockchain technology into the old way of settling trades, one co-founder whose company’s business model is impacted by decentralized ledgers thinks the DTCC’s efforts may be in vain.

"They have to do something," said Jim Mullen, chief technology officer at Firm58, which manages trading fees for the New York Stock Exchange and other U.S. stock and options exchanges.

Mullen, whose company helps its clients stay compliant by creating and analyzing data, said that while there is a way for the DTCC to offer a blockchain, it would still be relevant.

He said the company could implement a decentralized ledger technology that eliminates the need for broker-dealers, but still needs to be funded, hosted and maintained by a centralized, experienced authority. “Maybe that’s their role,” he added.

The company was formed in 1999 using its current name by integrating the Depository Trust Company (DTC) and the National Securities Clearing Corporation (NSCC), both of which were formed following the Wall Street fiat crisis of 1968.

Despite this experience and the research other companies are helping to conduct, Palatnick admits that every call he gets from a vendor conducting a blockchain experiment brings him one step closer to understanding how the technology will impact his own company moving forward.

Palatnick concluded:

"I'd love to fast-forward and see where things are going in the next year. So I'd probably put all my resources into it."