Earlier this summer, Greenwich Associates published a white paper in partnership with DTCC, Steampunk Settlement: Deploying Futuristic Technology to Achieve an Anachronistic Result, with a fascinating look at Distributed Ledger Technology (DLT) as a replacement for the current clearing and settlement infrastructure – all in the context of lessons learned in over 500 years of banking history.
As a “pulse” poll of readers’ opinions, we placed a couple quick questions on the same web page that we created to promote the white paper content. Almost 100 people took this anonymous, un-scientific survey. Interestingly, survey results showed that nearly two-thirds of respondents think DLT can replace the current clearance and settlement system but fewer – approximately 55% – think it will.
Since the question was placed beside the content and not at the end of the paper, I’d be curious to see how respondents would answer after reading the white paper’s conclusion, or, at the very least, viewing the featured gallery synopsis which gives a fantastic summary of the history of the ledger.
The concern isn’t in using DLT — which we and many others see as a pivotal piece of emerging technology that may help bring about exciting new efficiencies in clearing and settlement. Rather, the concern is with the view held by “DLT Maximalists,” as Greenwich dubs them, who want DLT to replace every financial infrastructure across the globe. Their argument is that using DLT would make settlement instantaneous, therefore abolishing the need to post collateral – freeing up capital that could be used for other purposes.
However, as stated in Greenwich Associates’ white paper, DLT’s weaknesses at the payment and funding stages of settlement is what could undermine its potential for replacing the current system.
DLT’s real-time settlement would mark a return to pre-1891 bilateral gross settlement, requiring that all transactions in the U.S. market be funded on a transaction-by-transaction basis, and thus losing the liquidity and risk-mitigating benefits of today’s netting features. Instantaneous settlement through DLT makes it impossible to fund trading on a secured basis, because it doesn’t allow traders to pledge shares they have yet to transact as collateral. This scenario would require DLT trades to be prefunded, and on an unsecured basis. This would severely limit market liquidity – as medieval Venetians learned before correcting this shortcoming in the late 1500s.
Shortly after the white paper was released, I sat down with Ken Monahan, who authored the paper for Greenwich, to discuss his findings and to dive a bit deeper into what he meant by “DLT Maximalists.” As we’ve seen with the industry’s move to T+2 in 2017, and DTCC’s Settlement Optimization initiative currently underway, we are always looking at ways to enhance our infrastructure to help secure and shape the future growth of the U.S financial marketplace. While it may have an important place in advancing our approach, replacing the clearing and settlement infrastructure in place with DLT would actually have the reverse effect, perhaps negating all the progress achieved over the past century.