DTCC begins to transform its business model to face disruptive blockchain technology

Baozou Comment : Although blockchain technology has attracted the attention of more and more enterprises and government agencies, the popularity of this technology is not high. Many small companies that want to participate in it do not really understand it, but are blindly looking for so-called technical support. DTCC is willing to change its business model, hoping to promote the integration of blockchain technology through cooperation with banks and other institutions, and bring useful solutions to more industries and companies. Although DTCC's efforts have been doubted by some companies, I think that research from different angles on such a complex and huge system as blockchain will help us completely unveil its mysterious veil and fully tap its potential.

Translation: Nicole

Last year, DTCC traded $1.6 trillion in securities. If the financial transaction chain is stopped, the Depository Trust & Clearing Corporation (DTCC) will suffer huge losses.

So the Depository Trust & Clearing Corporation (DTCC) has been working hard over the past few months to put itself at the center of a wide-ranging experiment that other companies are also doing with blockchain technology.

Rather than fighting against bitcoin’s distributed ledger technology, the DTCC is embracing this new tool and using it to define the future architecture of the industry, even if it means changing the company’s business model.

Robert Palatnick, Chief Technology Architect, DTCC

Robert Palatnick, DTCC’s chief technical architect, told CoinDesk:

“Part of our responsibility is to help the industry innovate how to use decentralized ledgers to solve industry problems. If that means we need to change our business model, that’s what the industry needs us to do.”

DTCC charges users account fees but does not include occasional monthly fees and commissions. Securities trading totals more than $1 trillion per year, and even a small amount of commissions adds up to an average of $1.4 trillion in the most recent annual report.

But in theory, blockchain has the potential to enable businesses and consumers to find solutions to change after they conduct transactions themselves.

Blockchain Education

In order to popularize the disruptive potential of blockchain, DTCC joined the non-profit Linux Foundation's Hyperledger project in December 2015, and DTCC Systems Director Pardha Vishnumolakala became a member of the project's technical steering committee.

Although still in its early stages, Hyperledger primarily uses blockchain technology to provide open source financial solutions.

Palatnick said:

“But this is just the beginning of the company’s plans to move forward.”

A month later, the DTCC joined what is now the largest investment in a non-bitcoin blockchain company, releasing a white paper exploring blockchain applications that put the industry at “risk of repeating past mistakes and creating countless new siloed solutions based on different standards.”

Palatnick sees the DTCC as an orchestrator for companies, helping to ensure that these silos don’t exist in a new financial paradigm. He said he gets at least one call a day from vendors building pilots using different blockchains to streamline mortgage lending, bank lending and asset liquidation processes.

Palatnick added:

“We’ve been contacted by many organizations because they feel we can help them in many ways.”

"Whether that's in a way that supports their business use case, or in a way that thinks about how you mitigate the risk of a particular business use case from an appropriate industry risk perspective."

experiment

Palatnick would not mention which specific banks and institutions the DTCC is in contact with, but he said that experiments are underway to integrate blockchain technology into a large database infrastructure, with the goal of making identifying past transactions as easy as a Google search.

Frequent experiments are conducted in what DTCC calls “idle areas” with average settlement times of about three days, but it can take months to close settlements. Last week, at a roundtable attended by 500 DTCC clients, the company discussed plans to reduce settlement times to two days by September 5, 2017.

Palatnick said the DTCC (a private company comprised of several banks that use it) does not use a single blockchain, but rather different ledgers that are each decentralized in their own way and subordinate to the firm’s post-trade services.

Indeed, the potentially disruptive impact of blockchain has led to some interesting and even surprising collaborations within the global securities industry.

Three months ago, New York-based Digital Asset Holdings announced that DTCC and U.K. competitor ICAP each participated in a $5 million (later increased to $6 million) Series A funding round.

As part of the investment, DTCC CEO Michael Bodson becomes a member of Digital Asset’s board of directors.

While the exact content of the DTCC-funded experiment remains shrouded in secrecy, we got a hint of what’s in the works last week when digital asset investor ICAP announced it had completed an internal blockchain test for post-trade processes.

Resistance and survival

Despite all the research into blockchain technology and the old ways of clearing and settling trades, the co-founder of a company whose model is being influenced by decentralized ledgers thinks the DTCC’s efforts are futile.

Jim Mullen, chief technology officer at Firm58, which manages transaction fees for the New York Stock Exchange and U.S. stock and options exchanges, said:

“They have to do something. They need to look at the technology, but in their subconscious, they need to remember that the essence of blockchain is to make them unimportant.”

Mullen, whose company helps clients by analyzing their data, believes there is no way to provide blockchain technology to the DTCC.

He said companies could adopt a decentralized ledger that would eliminate the need for dealers, but would still require a centralized, experienced authority to fund, host and maintain the decentralized ledger.

As a result, DTCC has a history of surviving and thriving in the face of disruptive technologies.

The company was founded under its current name in 1999 through the merger of the Depository Trust Company (DTC) and the National Trust and Clearing Corporation (NSCC), both of which were founded during the 1968 Wall Street paperwork crisis.

At that time, the old-fashioned text transaction documents could no longer keep up with the accelerating exchange rates, and the institution used new technologies to digitize the process. Now, DTCC processes more than $100 million in digital transactions every day in 139 countries.

Despite that experience, Palatnick acknowledges that every call he receives from a vendor experimenting with blockchain gives him a better understanding of how the technology could impact a company’s bottom line.

Palatnick concluded:

“I wish I could fast-forward to where things are going to be a year from now. Then I can focus all my resources on doing this.”