Blockchain Implementation in Today’s Security Settlement Process

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Abstract

Since its inception around 2009, distributed ledger technology, simply referred to as blockchain, has been thought of as a revolutionary idea that could seriously disrupt and change the financial services industry.  Blockchain is a decentralized network that contains every single past network transaction and as a result of this is immutable. Each transaction, which is contained in a block, must be approved by a series of connected nodes that verify previous blocks, through the use of cryptography, before additional transactions can be added.  Additional blocks are added to previous ones creating a chain, hence the name blockchain. This technology is mostly used as the backbone of cryptocurrencies – digital tokens that can be transferred between parties which do not rely on central parties to facilitate the change of ownership.

The current process of security settlement which is used to transfer ownership of financial securities such as common stocks and bonds could be made more efficient, secure, take less time, and be made less costly and risky by the implementation of a consortium blockchain by a central securities depository, such as The Depository Trust Company (DTC).  However, the new system would need to be able to handle all volume processing requirements of the legacy system currently in place, and the advantages of this new technology must outweigh blockchain network constraints and the conversion cost. Considering the amount of resources that would need to be exhausted to migrate from the legacy system to one based on blockchain, it may not be in the best interest of a central security depository, such as DTC, to make the change.  However, by implementing a new set of processes that rely on blockchain technology, DTC and their parent organization will be able to strengthen their competitive advantage in their respective industry.