Even if centralized clearinghouses are eventually built into or replaced by a blockchain, some services will inherently require the aid of a middleman, according to Collin Platt, the former lead blockchain developer at BNP Paribas who earlier this year launched his own blockchain startup to test this market thesis.
With reported investments from several large financials, Platt said his team of four is now working to build a prototype application using technology from the open-source Hyperledger project.
Platt told CoinDesk:
The smart contracts are intended to represent bilateral contracts between parties that are backed by different guarantors, likely a member of the CCP clearinghouse. The smart contracts themselves would be administrated by the CCP.
In Europe, CCPs such as the European Central Counterparty NV and Eurex Clearing serve counterparties by both taking funds from a buyer and assets from a seller and managing the risk in a wide range of ways. In the US, the DTCC fulfills a similar function.
But according to Platt, only some of those methods of mitigating risk are themselves also at risk.
Platt breaks down the value proposition of CCPs into four categories.
The first two — managing operational tasks to reduce settlement risk and tracking the credit risks counterparties may pose — are perfectly suited to being encoded into smart contracts and run on a distributed ledger, he said.
By encoding the operational tasks into a blockchain, Platt believes he’ll be able to give his clients the ability to determine who has access to what information.
"They can see more information and thus can make greater assessment of the true risk," he said.
He contends the other two value propositions of CCPs will remain valuable long after the other services are "wrapped into a heartless smart contract".
He said services which are the "more nuanced", and therefore not likely to be disintermediated by blockchain smart contracts, include the handling of counterparties that default on a contract and the management of systemic risks.
Clearing up the future
Contrary to earlier reports that DPactum was participating in the Post-Trade Distributed Ledger Group (PTDL), Platt said his company is not a member. "PTDL is for regulated, incumbent services," he said.
In his previous job, Platt focused his efforts on the actual trade, not the post trade, and he expects that that will stay the same for the time being.
Elsewhere, he said an earlier plan his team made to deliver a pilot alpha of the derivatives blockchain product for exchange-traded futures and options was derailed earlier this month when the UK voted to exit the European Union.
He said such efforts could now be delayed until September of this year.
Photo of Colin Platt via DPactum
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