With the formation of InterWork Alliance (IWA) this week, it is time to reflect on DTCC’s sustained effort to fully digitize their services using Distributed Ledger Technology (DLT). Who better to test and implement DLT than DTTC, a financial giant that handled trillions upon trillions worth of transactions in 2019 alone?
DTCC: Giant Among Financial Giants
As financial infrastructure goes, Depository Trust & Clearing Corporation – DTCC – is right at the top with the likes of SWIFT, Clearstream, Udall, and other mediators who facilitate big trade. Generating $1.76 billion in revenue and clearing $2.15 thousand trillion transactions in 2019, DTCC serves as a third-party mediator between buyers and sellers. We can place these transactions under the umbrella of clearing and settlements. In fact, DTCC is responsible for the transactions of most US securities, clearing trillions of dollars’ worth of securities on a daily basis.
Such a vital role in the financial market imparts DTCC with a cautious mindset when trying to upgrade its services. Nonetheless, as digitization sweeps the financial sector, everyone will have to adapt if they don’t want to be left behind. More importantly, the market leadership position is reserved for only those that are ahead of the game.
DTCC seems to be jousting for that leading role. During last year’s DTCC FinTech Symposium conference, the CEO of DTCC, Michael Bodson, delivered in his speech three important keynotes:
- Digital platforms are becoming the default across all industries that can serve a client through an API. They opened a new level of demand for convenience and speed. As millennials and Gen Z’ers enter the financial markets, they will demand digital services they’ve grown accustomed to from early childhood.
- DTCC will continue to be a strong proponent for diversity and inclusion so that the new generation sees DTCC as a welcome environment. In turn, DTCC will be better positioned to serve its clients by gaining the advantage of multiple perspectives.
- Machine learning will be ever-more important in the coming years as mountains of data need to be properly assessed in order to reach competitive strategic decisions.
Specifically, Bodson mentioned DLT – Digital Ledger Technology – as a potential carrier technology but warned that it needs a lot of work to be made up to scale. To test DLT as a potential foundation for DTCC’s digital future, on May 18, 2020, they unveiled two ongoing case studies: Project Whitney and Project Ion.
Murray Pozmanter, Head of Clearing Agency Services and Global Operations and Client Services at DTCC, had this to say about Project Ion:
“Project Ion is about working with the industry to further the value proposition on accelerated settlement leveraging new capabilities such as DLT and tokenized securities, and to learn how DTCC can best deploy these technologies to deliver additional value to clients and the industry.”
Jennifer Peve, Managing Director, Business Innovation at DTCC, clarified Project Whitney:
“The private markets are ripe for increased levels of automation and lack much of the infrastructure that has supported the public markets for decades. Project Whitney presents an exciting opportunity to leverage emerging technologies and develop completely new solutions from the ground up. We look forward to continuing our exploration of this area with the industry and in leveraging our vast infrastructure expertise.”
Keep in mind that DLT is not the same as blockchain. The latter is a type of DLT that inherently holds a cryptographic signature through blocks that form a hash. On the other hand, DLTs are simply decentralized records with no central arbiter/controller, which makes them more resilient to fudging. Aside from increased security, this Accenture study shows DLTs’ potential to save investment bank compliance costs by up to 50%.
As things move along on the technology front, new standards have to be developed to ensure everything runs smoothly. For this purpose, the InterWork Alliance (IWA) was established this week as a non-profit organization for the standardization of tokenization. Naturally, DTCC is IWA’s founding member.
All of this: IWA, Projects Ion and Whitney, and Bodson’s 2019 FinTech speech, clearly indicate DTCC is committed to digitizing their services. They are exploring both public and private DLTs, and the momentum of this digitization is carried out by this 2018 study showing that DLT can support the US equity market with over 100 million trades per day.
Projects Ion and Whitney will further test the robustness of that number and whether there is room for improvement. The success of Project Ion should prove to be a major milestone for DLT implementation. Consequently, the financial industry can expect to see maximized liquidity, reduced settlement cycle times, and the reduction of the overall risk.
The scale of Big Finance is somewhat difficult to grasp. Does its fortification with DLT instill you with confidence? We’d like to know what you think in the comments section below.