The DTCC's innovation dilemma

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Banks aren’t going to go down quietly.

Rather than completely ignore blockchain and crypto, the intelligent financial organizations are scrambling to leverage the technology for their own benefit. The latest attempt is a consortium of fifteen banks that have begun working with The Depository Trust & Clearing Corporation (DTCC) to use a blockchain-based system for trading credit derivatives.

Here is what you need to know:

  • DTCC is a relatively unknown giant outside of finance circles, but they process over 95% of all credit derivatives globally. Since they are the transaction and settlement point connecting hundreds of banks and financial organizations, the company is poised to be disrupted by a distributed ledger.

  • In 2017, DTCC processed over $1.61 quadrillion in securities transactions. The reward for disrupting this archaic infrastructure is so large that it is almost hard to fathom.

  • The consortium of 15 banks are testing a replica of DTCC’s warehouse that has been rebuilt using distributed ledger technology. The key challenge for the company is their ability to efficiently interface with hundreds of different counter-parties.

  • The DTCC has enlisted the help of partners in an attempt to build the technology correctly. IBM is providing “program management, DLT expertise, and integration services,” while startups Axoni and R3 have contributed the technology infrastructure, smart contract applications protocol, and “solution advisory” work.

This is the classic innovator’s dilemma. The Depository Trust & Clearing Corporation has built a large, profitable business that monopolizes securities transactions on a global scale. Blockchain technology poses a significant and credible threat to the business model, leaving DTCC with two choices: ignore the technology or embrace it.

The company should get credit for trying to be innovative and forward-thinking, but it likely won’t matter. They are simply trying to replicate their existing warehouse model on a blockchain. This is the equivalent of taking a newspaper, copying it page-by-page with a copy machine, and then presenting the PDFs on a website for readers.

In this scenario, media companies could have celebrated their ability to embrace technology and leverage the internet. Unfortunately, the value accrued from replication would have been minimal because they wouldn’t have been benefitting from the full power of the internet (real-time editing, distribution, etc). The DTCC is acting the same way here — they are “PDFing” their current system and putting it on a blockchain.

The better approach would be to completely reimagine securities transactions from scratch using the new technology. How can it be improved? What is possible now that wasn’t previously? Where can inefficiencies be ripped out?

This is not how large corporations think though and it is why they are so susceptible to disruption. The odds are high that a new company will unseat DTCC from their position of power by leveraging blockchain technology applied in a nuanced way. Don’t be surprised if the new product has a different business model, a more holistic system design, and is able to iterate at a faster pace.

Outside of Bitcoin replacing fiat currencies, the biggest market opportunity for an entrepreneur is to attack the DTCC’s monopoly. There are numerous companies trying already in a variety of ways, but it remains to be seen who will emerge as the most serious contender.

Buckle up and get your popcorn ready. This will be a fight worth watching.


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