The DTCC Collateral Appchain wants to rewrite the rules of TradFi settlement
T+0 is here
DTCC and Svetlana Lukienko/Shutterstock and Adobe modified by Blockworks
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When you see pro-crypto people declaring on Twitter that “blockchains will replace TradFi,” what that specifically means is the disruption of the DTCC (Depository Trust & Clearing Corporation) as the canonical post-trade clearing and settlement house for US securities markets.
The DTCC is owned by a consortium of the world’s biggest banks. The company has a monopoly on securities settlement, clearing something like $9 trillion to $11 trillion in value daily.
The idea that the DTCC would use a blockchain would’ve been laughable just several years ago. It was expected that the incumbents would be too slow or too skeptical of the tech to adapt.
Well, not anymore.
The Depository Trust & Clearing Corporation (DTCC) announced earlier this month that it was creating a new platform, “Collateral AppChain,” for “tokenized real-time collateral management.”
In the DTCC’s “Great Collateral Experiment” hands-on demo, they explained how its Collateral Appchain could be used to mobilize treasuries, equities, tokenized money market funds and even cryptoassets globally in real time – free of settlement or liquidity constraints.
You can watch it here for yourself. It reminded me of some of the earliest “enterprise blockchain” efforts like JPMorgan demoing Quorum back in 2016. Except this time, it’s more than a proof of concept.
The DTCC team demonstrated how its Collateral Appchain would improve upon its antiquated T+X settlement processes to a real-time model where firms no longer face liquidity bottlenecks due to constraints around market hours or needing to hold extra collateral as a buffer while waiting for settlement.
Translation: We recognize the merits of blockchains, we are updating our outdated technology to blockchain rails, and you don’t have to use Ethereum.
Or, as Galaxy Research’s Thad Pinakiewicz notes: “The DTCC is trying to avoid having their position usurped by co-opting the only tech that can feasibly threaten them.”
But what does this mean for crypto?
It’s not so surprising that the DTCC has come around to blockchain technology. Many financial institutions are already embracing the tech.
What is surprising is that the DTCC has proven a lot more nimble than crypto-natives would’ve expected.
Should the DTCC’s Collateral Appchain come into reality quickly, it does bring into question the remaining value proposition of public blockchains.
Yes, the DTCC’s Appchain validator set is probably going to be centralized. Assets are still going to remain in traditional custodial systems to remain regulatory-compliant. It’s built on the Hyperledger Besu Ethereum client, so it’s likely going to be a permissioned system and non-composable with DeFi.
But the DTCC Appchain will have other crucial advantages.
The DTCC Appchain will be unencumbered by the complexities and costs that public blockchains require to facilitate onchain securities trading.
The Appchain will also have the liquidity to enable trillions in daily trading that public blockchains do not currently possess.
There’s a reason why the DTCC has stuck to its suboptimal T+1 netting settlement process, and that reason is because it’s more efficient than having to process every transaction like a public blockchain does.
What does that mean for crypto-native efforts (such as Ethena’s Converge chain) who have been building a similar settlement layer for TradFi clients?
Guy Young, founder of Ethena, believes the DTCC’s developments are a “strong validation” of its Converge chain thesis.
“However, these purpose-built settlement layers for TradFi need real products or assets to be delivered alongside the infrastructure otherwise it will be just more empty blockspace. This is where Ethena and Securitize are uniquely positioned to provide our existing 10b+ AUM asset base and product set to these pools of capital.”
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