The Depository Trust and Clearing Corporation has issued a new white paper on block chains and their significance in the context of the post-trade landscape. Block chains, also known as distributed ledgers, are a hot new technology, made so in large part by the cryptocurrency Bitcoin and by the publicity it has long received. But aside from the particulars of Bitcoin or of analogous currency schemes: here’s a Q-and-A. Question: what is a block chain? Answer: It’s a record of digital events that is shared among many parties, one that is updated by additions, never by erasures. Lots of people, and institutions, are very enthusiastic about these block chains. Anju Patwardhan, of Standard Chartered Bank, has called the blockchain aspect of Bitcoin “a technology model for a low-cost and transparent transaction infrastructure.” Singapore’s Monetary Authority has suggested that distributed ledger systems might well be “applied in any area which involves contracts or transactions that currently rely on trusted third parties for verification.” The word “disruption” is used often nowadays, by the real thought leaders in finance as well as by those who merely fancy themselves thought leaders. “Disruption” is almost always used as a term of praise, as when something new is praised for “disrupting” a cartel or a conventional inefficiency. And in this positive sense, block chains are often called disruptive. Florian Graillot of Tech Crunch has described blockchain as the next disruptive technology, playing a role in this decade analogous to that the personal computer played in the 1970s, or the internet itself played in the 1990s. Into this context… The DTCC is a central institution in the system of modern securities processing, and that system in turn is pretty near a paradigmatic case of the sort of thing a disruptive new technology is nowadays expected to disrupt. So you might expect a priori that the DTCC’s paper would try to throw some cold water on the notion that its own “strict controls and regulatory oversight” (in the words of this paper) can be replaced by a “decentralized, trustless, replicated ledger of transactions.” In this suspicion, you would be right. Much of the paper makes the point that blockchain technology should not be given credit for enabling real-time or near-real-time settlement. After all, it says, the barriers to real-time settlement in the securities world aren’t technological, they are regulatory and structural. The modernization of existing practices and laws to enable real-time settlement, then, will not depend on block chains. Markets at present work on a T + 3 system: that means, settlement occurs three days after a trade is executed. It makes sense for brokered trades to require central counterparty netting to net out the broker’s position and assume counterparty risk. Still, there is a case to be made that this should be shortened, or even made T0 (real time) for many transactions. For example, those T + 3 brokered trades could be priced differently than the peer-to-peer trades that could settle immediately. Achieving this would require “significant changes to existing trading processes.” Still, the thing could be done. The DTCC’s point in this part of the discussion, though, is that conflating such reform with the introduction of block chains is simply confused. Disruption can be a bad thing Another point: DTCC expresses concern that industry research into block chains has been uncoordinated. This raises the prospects that no one blockchain will be implemented, and that instead a lot of different chains with different standards and resulting conciliation issues will prove a disruption in a very negative sense of that word. Thus, the DTCC nominates itself as the party best positioned to coordinate the introduction of block chain technology into the world of securities transaction settlements: “[As] an industry-owned and governed financial market utility with more than 40 years of experience mitigating risk and driving operations and cost efficiencies, DTCC is uniquely positioned to perform this role with absolute focus on the best interests of post-trade processing in a manner that serves the industry, regulators and the investing public.” But wait … wasn’t much of the charm of the blockchain idea the prospect of putting intermediaries such as DTCC out of business? If I read this white paper properly, DTCC now proposes to put itself into the business of putting itself out of business, although it doesn’t put the point precisely that way. Such are the oddities of this thing of ours.
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