What DTCC's IBM Blockchain Transition
'Reimagining' Credit Derivatives Signifies
On the heels of the announcement by the U.S. Depository Trust Clearing Corporation’s (DTCC) transitioning a central part of its financial infrastructure onto a blockchain, the premier post-trade market infrastructure for the global financial services industry that processes trillions of dollars, many are wondering what it means for the blockchain market’s future.
It’s been described as a "watershed moment" for the industry in deploying distributed ledger technology (DLT) in production at this scale and a "reimagining" of credit derivatives processing by two of the IT vendor parties involved. According to Bridget Van Kralingen, Senior Vice President, IBM Industry Platforms, it represented "one of the largest and most groundbreaking distributed ledger projects to date in the financial services industry.”
The DTCC’s Trade Information Warehouse (TIW), which currently automates the record keeping, lifecycle events and payment management for over $11 trillion of cleared and bilateral credit derivatives, is to be re-platformed by IBM, in partnership with Axoni and R3 through a DLT framework to drive further improvements in derivatives post-trade lifecycle events. It will enable DTCC and its clients to further automate and reduce the cost of derivatives processing across the industry by removing disjointed, redundant processing capabilities and associated reconciliation costs.
The solution will be deployed in a number of stages, with an “end-state vision” to establish a permission distributed ledger network (i.e. private) for derivatives – governed by industry-owned DTCC with peer nodes at participating firms. It has been developed with input from a number of the big banks including Barclays, Citi, Credit Suisse, Deutsche Bank, J.P. Morgan and UBS as well as key market infrastructure providers, IHS Markit and Intercontinental Exchange.
Hurdle To Adoption
Eric Wiesen, a General Partner at early-stage, post-seed venture fund Bullpen Capital that invests in technology companies, says that although the “hurdle to adoption still remains high” the DTCC’s decision “validates the blockchain approach for core financial markets – not just fringe markets.” In addition, since the DTCC’s project uses neither Bitcoin nor Ethereum, one might ask what this move signals about the Public versus Private platform debate.
“The simplest answer here is that the IT environments of the financial services industry are both very complex and highly regulated,” said Wiesen, who in 2015 joined Bullpen located in Menlo Park, California, from RWE, and is currently a board member at Imgix and Yieldbot.
An early investor in Venmo, Braintree and NerdWallet, Wiesen explaining further said: “The evolution from the current methods, which range from API’s all the way back to 1980’s-style mainframe software, is one that involves both large-scale migration to new software and the migration to a largely new means of information flow, is a huge project both internally to each financial institution (FI) and to groups of counterparties.”
He added: “Add in the somewhat sketchy history of the Bitcoin blockchain and the markets where it has been deployed and you get another layer of resistance," he further noted. "Then, lastly, uncertainty about financial regulation under the Trump administration adds one more layer. It all adds up to a requirement of very high conviction and consensus to deploy.”
Blockchain Tech Adoption
Reflecting on the future adoption of Blockchain technology in the financial markets space going forward and how far developments could go, Wiesen opined: “If you view blockchain as an IT solution rather than a global force for change, the rationale for adoption makes a lot of sense. A blockchain approach strips out significant cost and speeds up transaction processing and settlement.”
He added: “These are factors that matter to many FI’s, which is why so many of them have been undertaking trials. Ultimately, it strikes me as very likely that as major players (DTCC and their partner, IBM being the latest to announce) move into production, that we’re likely to see more and more firms follow to attain the benefits of the blockchain approach.”
Costs Savings & Efficiency
Simge Alpargun, IBM, Territory Leader for Financial Services based in Istanbul, who gave a presentation last October on the Blockchain and its impact on all industries at the CoinsBank Blockchain summit in Belek, Turkey, noted: “What the Internet did for information the Blockchain will do the same for transactions.” Notwithstanding the need for “a standard”, the upshot of blockchain-based business and technology is that it reduces time and saves on costs.
In IBM’s case, as a founder in the HyperLedger Project, an open source collaboration hosted by the Linux Foundation, it has been working on standards in relation to “blockchain rules” and finding “real-life scenarios” to apply distributed ledger technology across financial services and other industries.
Alpargun referred to post-trade settlement as a prime business use case where adopting the technology can be applied to yield efficiencies alongside the transfer and sharing of high-value assets (e.g. Asset exchange). Add to that why not use the blockchain for dispute resolution. But as she also pointed out to industry movers and shakers in attendance on the Turkish riviera that one “cannot force all parties to use the same fabric.”
It was at this same event that I attended and reported on for Forbes, Nick Ayton, CEO of SmartLedger Labs and Blockchain-X, speaking in relation to Blockchain technology aimed at the capital markets and asset management, asserted that “blockchain operational models are the future”.
Ayton, who designs and implements digital and blockchain-based Business Operating Models and is currently working on a book about blockchain applications, noted that the “monopolistic tech landscape keep costs high”, identified hot spots where costs could be stripped out using DLT. For example, savings in Sales & Marketing could range from 20% to 30%, Operations (c.20%-30%) and IT Functions at around the 15%-20% level.
Public versus Private Platforms
In addition, since the DTCC’s project uses neither Bitcoin nor Ethereum, does the news announced earlier this month on January 9 signal much or anything about the public versus private platform tech debate? “It’s hard to know where this ends up and smart people line up on each side of this question,” Wiesen remarked, whose firm Bullpen most recently launched Bullpen III, a $75 million fund that will invest in technology start-ups between their Seed and Series A financing rounds with participation from Greenspring Associates, Venture Investment Associates (VIA), Oberlin College, and other institutional and individual investors.
“But this project certainly tilts the scale more toward the private side.” That said, he also posited “whether that trend continues is hard to predict,” he observed. In terms of the collaboration with IBM, its timings and the tangible benefits, cost savings and efficiencies, Wiesen elaborated that: "In a future where they move their infrastructure from what I imagine is a complex environment of interconnected software with a ton of proprietary adapters and middleware to a blockchain, the cost savings and improvement to settlement time – currently as long as a week for some of DTCC’s trades – will be pretty monumental to their business.”
That IBM is working with the DTCC them "lends credibility to the effort and is consistent with the industry’s view of IBM as a leader in global IT services projects" according to Wiesen, whose investing philosophy and approach is informed to some large measure by his experiences as a two-time founder, first in the 3D Graphics hardware space and later on in the enterprise software/ERP sector. The other category of player are the technology companies themselves, he pointed out. Axoni in the case of DTCC and companies like Chain, who power Visa’s new blockchain payment network (incidentally where Wiesen was once on the Board).
“I think these deployments will validate the companies that enable these new blockchains and who continue to develop and iterate on the core platforms themselves," asserted Wiesen. Under the DTCC agreement, IBM will lead the initiative, provide program management, DLT expertise and integration services as well offer the solution-as-a-service. Axoni is to provide distributed ledger infrastructure and smart contract applications, while R3 is acting as a solution advisor. The development was scheduled to begin this January and build on Axoni’s AxCore distributed ledger protocol which will be submitted to Hyperledger when the solution is anticipated to go live in 2018.
As to future developments in the blockchain space it’s a big question and I don’t have a crystal ball. Some might have been scared in the beginning, while others in finance circles have been in denial. But the progress cannot be denied. While it will no doubt lead to job losses there will be job gains too. And, as one blockchain pundit at CoinsBank’s inaugural blockchain of event put it: “We always move to a better place with technology.” That is, presumably as long as it’s safe.