Blockchain is here to stay, but so too are centralized authorities.
That realization was the general takeaway at the Depository Trust and Clearing Corporation’s annual fintech symposium in New York City on Thursday where executives behind some of the most mature blockchain platforms currently in the works took the stage to discuss the benefits and limitations of the nascent technology.
While in some cases, enterprises, including the DTCC, which conducts $1.5 quadrillion dollars in securities transactions per year, have found that blockchains are more powerful than first expected, it’s clear that there are still significant hurdles to overcome.
“We’ve learned a lot about what works and what doesn’t,” said Michael Bodson, the CEO of the DTCC, adding:
We’ve wrestled with the technology’s limitations, but we’re also uncovering new possibilities to help lead the digital transformation of the post-trade environment.”
During Bodson’s opening remarks, he set the groundwork for the rest of the day’s talks by recounting some of the lessons learned by the DTCC’s ongoing implementation of blockchain in its $11 trillion Trade Information Warehouse (TIW).
Designed to reduce the time it takes to clear over-the-counter derivatives, unexpected obstacles in the process have resulted in a delay of a commercial launch from this quarter to next year. Given the TIW’s relatively low volume compared to the rest of the DTCC business, he doesn’t expect any broader rollout of the technology any time soon.
“At the DTCC, we seamlessly process 60 million trades each day, and during peak times like we saw last month, we handled as many as 90 million transactions,” he said. “It would be impossible to do this today using a distributed ledger.”
He continued, citing a Deloitte report that showed out 26,000 blockchain projects that were started since 2016, as evidence of the narrowing scope of blockchain’s potential utility. Of those blockchain projects he said only eight percent are currently still active.
“As the industry has come to the realization that blockchain’s potential isn’t limitless, companies are focusing their resources on initiatives that can deliver real client value,” he said.
The limits of open source
In a panel following Bodson’s opening remarks, DTCC chief technology architect Rob Palatnick further elaborated on the limits of blockchain, namely those arising from the technology’s open-source roots.
Even as he acknowledged that “pretty much everyone in this room is looking to the open-source community for validation,” he cautioned that the old idealism that public, open-source blockchains can solve everything is starting to fade.
“The DTCC has been approached with some in the industry who say we’re involved in open source, which is good, but you need to think about a hardened proprietary set of ledgers for the things you do,” he said.
As such, businesses like the DTCC are exploring permissioned distributed ledgers that are connected via more open blockchains, what Palatnick called a “network of networks.” Several speakers at the event described the idea in various ways, including Accenture managing director Wynn Davies, who called it a “multi-stranded” blockchain.
At the core of this concept is the idea that public blockchains will never fully be able to give enterprise counterparties the trust they need to run their regulated businesses.
“We need to have neutral parties who are acting in everyone’s best interest,” Davies said, citing the DTCC and the Monetary Authority of Singapore as leaders in this push.
The trick, according to Davies, is going to be reimagining the incentive models so major players like the DTCC are willing to give up the “short-term gains” that result from holding onto innovative technologies, in order to let the benefits of blockchain accrue to the broader economy.
Expanding on that concept, Palatnick described a blockchain ecosystem where the DTCC and other infrastructure providers might manage “governance nodes,” where they provide some services to their customers but also allow them to connect directly, in a peer-to-peer way, for other services.
Intentional guardrails
As part of the DTCC’s work to explore this network of blockchain networks, Palatnick revealed new details about a program with Blythe Masters’ Digital Asset (DA), in which the DTCC is an investor.
Contrary to the DTCC’s work on its TIW, which started by identifying a problem that could be solved with the abilities of current blockchain technology, its interest in DAH’s work is aimed at learning a language – Digital Asset Modelling Language (DAML) – which could let them create any number of solutions in the future.
Masters, who spoke during the event as well, detailed how public blockchain’s structure – at least ethereum and certain others – has a disadvantage to global financial institutions, and as such, spurred the creation of the DAML language.
In December 2017, DAH was selected by Australia’s ASX to re-platform its entire CHESS clearing house with blockchain technology. In looking into a solution there, Masters explained how the flexibility of so-called “Turing complete” languages that some public blockchains use resulted in uncertainty about the order in which transactions would be cleared.
Not only was DAML built with this in mind, but the language was also designed with what Masters called “guardrails to reduce the likelihood of errors in programming that lead to the sort of events that you saw happening in the DAO exploit” in which millions of dollars were funnelled into one person’s account because of faulty code.
Masters said:
It is an inherent feature of the language that it is not possible to put an entity in a contract into a position where they are obliged to act or to elect something without their specifically having the ability to acknowledge, confirm, and concur with that.”
Regulations still uncertain
Another limitation most every speaker discussed was regulatory uncertainty.
Indeed, the industry has been reeling from rumors that the U.S. Securities and Exchange Commission (SEC) has sent out dozens of subpoenas and requests for information to all kinds of stakeholders surrounding the fundraising mechanism, initial coin offerings (ICOs).
While the head of the SEC’s trading and markets division Brett Redfearn did not confirm or deny any such subpoenas during his fireside chat at the event, he expressed frustration with companies that came to the regulator claiming they wanted to be compliant, but who hadn’t even gone through the process of registering their companies.
While he seemed open to potential improvements from the space, he emphasized how industry participants could actually learn a lot about protecting their users and implementing certain generally-accepted principles of fair markets, such as searching for spoofing efforts that falsely inflate transaction volumes, by reaching out to the SEC.
In spite of this, though, Todd McDonald, co-founder of enterprise blockchain consortium R3, said that unless those responsible for creating an innovative environment took a more progressive stance, U.S. companies would get left behind.
“I live in New York and I love America, but we have to get our act together,” he said.
Though, McDonald continued on a more positive note, saying that standardizing the way crypto assets are created and regulated across jurisdictions could help push the hybrid blockchain systems that many enterprises are looking to develop.
Speaking to what he called “net new” assets which could be created if all the industry’s hurdles are overcome, McDonald said:
All sort of new models and new business opportunities are going to come from this kind of ecosystem. The important part is to make sure we get the foundational pieces in place and make sure the risk-governance model is part of that initial foundation.”
