Today the DTCC and the private sector Digital Dollar Project (DDP) shared the results of their Securities Settlement Pilot using two blockchains. One distributed ledger (DLT) was for the simulated central bank digital currency (CBDC), and the other was for tokenized securities on the prototype DTCC Digital Settlement Network. A distinguishing feature of the pilot is it retains a role for a central counterparty, which some blockchain solutions seek to remove.
The Digital Dollar Project is a private initiative founded in January 2020 by Accenture and former Chair of the Commodity Futures Trading Commission (CFTC) J. Christopher Giancarlo’s Digital Dollar Foundation. Last year Accenture agreed to fund five of the DDP’s CBDC pilot programs. Turning to the DTCC, its subsidiaries processed $2.4 quadrillion in securities transactions in 2021.
“As a potential digital alternative to cash, a U.S. CBDC should be carefully explored in consultation with key stakeholders across the public and private sectors,” said Jennifer Peve, DTCC Managing Director, Head of Strategy and Business Development. “DTCC’s pilot with DDP assessed the use of a simulated CBDC and DLT for DvP settlement in the U.S. wholesale markets through direct engagement with market participants.”
Those market participants were Bank of America, Citi, Nomura, Northern Trust, State Street, Virtu Financial and Wells Fargo.
One of the findings was that a CBDC network would improve operational efficiencies and transparency.
How the DTTC Settlement Pilot worked
Looking at the functionality of the blockchain solution, it essentially involves escrow. Cash in the form of CBDC is escrowed until the security settlement should happen. Likewise, on the other side of the trade, when a security transaction price is agreed, the security token is escrowed or encumbered. It should be released for transfer when the CBDC payment is released. This escrowing would happen throughout the day with the payment settling (netted) once a day on either a same day basis (T0), the next day (T1), or in two days (T2) as is the current convention.
A key issue is how to guarantee the transfer of securities tokens on the DTCC ledger happens at the same time as the transfer of cash on the CBDC ledger. There was a decision to use a neutral third-party (automated) ‘orchestrator’ to ensure settlement happens atomically on the two DLT networks.
This third party (in this case, also the DTCC) takes on a similar role to a central counterparty (CCP), such as DTCC-owned NSCC. Additionally, the role includes storing the keys to release tokens from escrow on both networks.
Sometimes there might be transaction failures. One might think that you just roll back the transaction after a time-out. But what if the CBDC was unlocked and transferred, but the communication failed for some reason? In other words, if only one side of the transaction was successful.
It would be wrong if a time-out resulted in the security returning to the seller despite the seller receiving payment. What should happen is the security transfer to the buyer should complete. However, that would require intervention. Resolving these sorts of issues is also the role of the trusted third party.
In terms of technology, the project didn’t mention which blockchain was used, but the terminology implied it was R3’s Corda enterprise blockchain.
Other DTCC DLT initiatives
That’s the same distributed ledger technology used by the DTCC on Project Ion, the DTCC stock settlement system that went into production in August. Another DTCC DLT project is the Digital Securities Management (DSM) Platform for digitizing privately held stocks. And the DTCC has a particularly big DLT project nearing launch, the Trade Information Warehouse for credit derivatives.
