The Long Disrupt: How Blockchain Startups Are Reshaping the DTCC
Facing threats from blockchain, the DTCC embraces startup innovators.
Robert Palatnick has no delusions about the changing role of the DTCC, a centralized transaction processing firm that has recently been in the crosshairs of blockchain disruptors.
Yet, the chief technology architect at the post-trade services behemoth (it processes $1.5qn in annual transactions) tells CoinDesk the DTCC's strengths in risk management are no less important in a blockchain world. What will change, he now believes, is the technology the company employs.
While some startups using distributed ledger technology are working to undermine centralized transactions processors, others have joined in the fight to modernize the existing infrastructure.
In conversation, Palatnick explained how by partnering with these startups, the DTCC can better focus its efforts on making sure what's created complies with the immense burden of financial regulations.
So far, the DTCC has publicly announced its work with two Wall Street startups, Axoni and Digital Asset. But Palatnick says they're "in different levels of conversations" with at least a half dozen others.
The DTCC announced its first collaboration with a startup with Digital Asset in March. The private blockchain trial was designed to show that distributed ledgers could bring efficiency to the market for repurchasing agreements, which accounts for an estimated $2.3tn in transactions daily.
But this blending of expertise and experience between the two companies is about more than quickly getting a product to market, according to Chris Church, chief business development officer of Digital Asset.
"We expect the results will provide capabilities at a lower cost and with a longer-term strategic benefit to the DTCC," he said.
After the initial test with DA, Palatnick said the DTCC had entered into conversations with other potential partners to explore creating solutions for additional asset classes. The following month, the DTCC revealed that the partnership with Axoni had resulted in the successful tests of 85 structured use cases for blockchain applications in credit default swaps.
Currently, Palatnick says he is in conversation with "more startups than ever in DTCC's history."
Rather than try to become a specialist in cryptography, Palatnik said the DTCC wants to leverage its existing risk management strengths.
As a result, he says he's focused primarily on companies with a strong background in the technological aspects of blockchain.
That said, in an increasingly competitive space, the startups that distinguish themselves understand both the "tool and the transaction," he said.
This strategy of focusing on the strengths of the startups and not overextending DTCC’s original mission has resulted in some surprising turns of event.
Caught in the middle
But not every blockchain startup wants to work with the DTCC.
Founded in its current incarnation in 1999 after the merger of The Depository Trust Company (DTC) and National Securities Clearing Corporation (NSCC), the firm helps financial institutions settle their transactions in an average of three days depending on the trade.
But the firm has also faced several lawsuits alleging it had sold shares in stock without first procuring a borrow, a controversial process called a "naked short sale".
Utah-based retailer Overstock, for example, founded its Medici blockchain division in 2014 and it now has the DTCC square in its sites.
Not only does Medici aim to close the settlement time from three days to zero, but it wants to prevent naked short-sells by ensuring companies like the DTCC are actually in possession of the shares they trade.
A recent CoinDesk opinion piece proposed that Medici’s services could "give back title in shares to shareholders instead of the DTCC."
In this way, the DTCC is not alone in being at a bit of a crossroads.
Like many, it's chosen to join the numerous financial middlemen that have responded to pressure from blockchain innovations by embracing partnerships with startups.
But Palatnick wants to embrace blockchain disruption in more than just one way, as he wrote earlier this year. So, in addition to increasing the DTCC’s collaboration with startups, an interest in open-source collaboration is now a pre-requisite for aspiring partners.
Each of the companies with which Palatnick negotiates are either already members of open-source blockchain project Hyperledger, or they have committed to be join, he said.
"That's very important to us," he added.
Selling the goods
The strategy seems to be working.
The firm’s Trade Information Warehouse blockchain prototype is now "past proof-of-concept point" and is "getting close to being finalized."
Palatnick says his team is currently in "conversations with various vendors" interested in using the repo product built with Digital Asset.
Yet, the chief technollgy architect acknowledges the changes have gone beyond technology.
He summed up the evolution of the DTCC, adding:
DTCC image via Twitter
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