DTCC Report Points Limitations To Distributed Ledger Technology

The Depository Trust & Clearing Corporation (DTCC), has released a report, entitled “Embracing Disruption: Tapping the Potential of Distributed Ledgers to Improve the Post-Trade Landscape", that calls for industry-wide collaboration in leveraging distributed ledger technologies, CoinDesk reported. DTCC says that while the current system was not created through intentional architecture and design, it provides the necessary stability, reliability and certainty that ensure global markets are efficient, transparent and cost effective.

“The industry has a once-in-a-generation opportunity to reimagine and modernize its infrastructure to resolve long-standing operational challenges,” said Michael Bodson, President and CEO at DTCC. “To realize the potential of distributed ledger technology in a responsible manner and to avoid a disconnected maze of siloed solutions, the industry must work together in a coordinated fashion.”

DTCC recommends exploring distributed ledger initiatives in areas such as master data management; asset/securities issuance and servicing; confirmed asset trades; trade/contract validation, recording and matching for the more complex asset types that currently do not have strong, existent solutions; netting and clearing; collateral management; and settlement.

The paper noted that the blockchain is a network and a database that has rules and built-in security and maintains internal integrity and its own history. It pointed out that while these components create the value of the Bitcoin blockchain, each of these concepts has the potential to be applied individually or in various combinations to improve existing processing of financial transactions.

Speaking of limitations of distributed ledger technology, the report said that it does not have built-in integration with existing systems and supporting infrastructure and it does not simply integrate with user identity management systems or have any master data about legal entities or securities and many others.

Also, all transactions on the distributed ledger platform are considered immutable. The ability for clients to correct/cancel/adjust transactions that were accidentally charged or credited to the wrong account happens quite often and is well managed by today’s financial institutions, the report noted. The ability to cancel or reverse a transaction is not supported in today’s distributed ledger platform, and it is not clear how the platform could evolve to support that.

“The current state of distributed ledger technology today has its own challenges: it is immature, unproven, has inherent scale limitations in its current form and lacks underlying infrastructure to cleanly integrate it into the existing financial market environment. Improvements will come with time as they have with every new technology and as the industry learns from successes and failures of marketplace experiments”, the report said.

In its conclusion DTCC said that a mature, supported, integrated distributed ledger technology has the potential to help improve a number of existing financial market infrastructure limitations. The industry should seize the emergence of this technology as an opportunity to assess how to modernize and significantly lower risk and cost.

DTCC recently made a financial investment in Digital Asset Holdings, LLC, a developer of distributed ledger technology for the financial services industry. It has also joined the Linux Foundation, a nonprofit organization enabling mass innovation through open source, to support a new venture known as the Hyperledger project, a collaborative effort to advance the Blockchain technology.