Anthony Pompliano Explains Why Blockchain will Disrupt Derivatives Trading
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Anthony Pompliano Explains Why Blockchain will Disrupt Derivatives Trading

Anthony ‘Pomp’ Pompliano is host of the popular “Off The Chain” podcast which has over 180,000 downloads in 120 countries. In his public newsletter, he recently discussed the DTCC’s latest advancements in utilizing blockchain technology, which he says open the door for serious disruption from non-corporatized entrepreneurs.


The Further Development of DTCC’s Blockchain-based Platform

The Depository Trust & Clearing Corporation (DTCC) is the largest securities depository in the world. Based in New York, it offers post-trade financial services by providing clearing and settlement services to the financial markets.

In recent news, the DTCC announced an advancement to the testing phase of its project to move all credit derivatives to distributed ledger technology (DLT).

Under this particular phase, 15 of the world’s largest banks are performing various end-to-end tests and using simulated use cases to ensure the platform’s efficiency. After this phase they will move to a more open testing period with additional market participants.

Chris Childs, Vice President of DTCC, provided the following comments on the project’s status:

“The transformation of DTCC’s Trade Information Warehouse using distributed ledger and cloud technology […] is truly a ground-breaking effort pushing the boundaries of technology use in the industry. We are proud to be collaborating with a number of the world’s leading banks, MarkitSERV and all our partners on this exciting initiative to revolutionize the derivative industry’s credit market infrastructure. We look forward to launching the service next year.”

The Full Impact of the DTCC Explained

Before getting into Pompliano’s reasons on why the blockchain will disrupt derivatives trading, it’s important to understand the DTCC’s full impact.

With more than 45 years of experience, the DTCC processes more than 95% of the world’s total credit derivatives. As the transaction and settlement bridge between hundreds of banks and financial enterprises, it is susceptible to many benefits offered by blockchain technology.

In 2017, DTCC’s subsidiaries processed over $1.61 quadrillion in securities transactions.

The DTCC is working with a list of partners in establishing its distributed ledger project. IBM is providing program management, DLT expertise, and integration services. Axoni is providing distributed ledger infrastructure and smart contract applications. R3 is said to be acting as a solutions advisor.

How the Corporate Mindset Opens the Door to Serious Disruption

What we ultimately see here, says Pompliano, is not what may initially appear.

The DTCC is embracing blockchain technology, and for this, they ought to be applauded. However, what they’re really doing is duplicating their existing model on a blockchain. Pompliano says such a process screams inefficiency.

“This is the equivalent of taking a newspaper, copying it page-by-page with a copy machine, and then presenting the PDFs on a website for readers. In this scenario, media companies could have celebrated their ability to embrace technology and leverage the internet. Unfortunately, the value accrued from replication would have been minimal because they wouldn’t have been benefitting from the full power of the internet (real-time editing, distribution, etc). The DTCC is acting the same way here — they are ‘PDFing’ their current system and putting it on a blockchain.”

A more efficient approach would entail a complete reformation of securities transactions given the novel technological capabilities. Yet this simply won’t happen due to the mindset of large corporations. What’s the result of the situation? A high susceptibility to legitimate disruption, says Pompliano:

“The odds are high that a new company will unseat DTCC from their position of power by leveraging blockchain technology applied in a nuanced way. Don’t be surprised if the new product has a different business model, a more holistic system design, and is able to iterate at a faster pace. Outside of Bitcoin replacing fiat currencies, the biggest market opportunity for an entrepreneur is to attack the DTCC’s monopoly.”

According to Pompliano, derivatives will undoubtedly experience such disruption thanks to blockchain technology. And with the security token industry already soaring, his argument has a lot of weight. Tokenization has already affected real estate, stocks, short trading, and private capital acquisition in general. The next stop could very well entail derivatives.

What do you think of Pompliano’s remarks on the future disruption of derivatives? Will open-minded entrepreneurs out smart the larger institutions as security tokens witness adoption? Let us know what you think in the comments below.


Image courtesy of DTCC.

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November 10, 2018

About Author

GaryStevens Gary Stevens is a full time developer based in Canada. He's an early bitcoin investor and loves everything open source. Gary believes in a decentralized future and has worked with a number of corporate clients helping them understand blockchain technology and innovation.