Crypto’s Ledger Technology is Keeping Track of Stock Ownership

8/24/2022

Tech

0 min read




Image Credit: Marco Verch (Flickr)

Why Blockchain May Now be Keeping Tabs on that Stock You Just Bought

If you’re invested in stocks that clear or settle in the U.S., it’s extremely likely the Depository Trust and Clearing Corp. (DTCC) has been entrusted with keeping your assets safe. So when the DTCC announced progress on Project Ion this week, a move that introduces distributed ledger blockchain technology into trade clearing and tracking, the success or failure will impact you and perhaps the speed and accuracy of change in recorded ownership of shares. It also would be seen as a nod by a quasi-government entity to recording asset ownership using crypto.

About Project Ion

The Project Ion platform was developed as an alternative test settlement platform that is implemented with distributed ledger technology (DLT). It is now live, running parallel with standard DTCC settlements for DTCC members. Project Ion is currently processing an average of over 100,000 equity transactions per day and almost 160,000 transactions on peak days. While in parallel production, DTCC standard settlement systems remain the authoritative record.

The project was launched in 2020 and is testing on a small fraction of the billions of shares that change hands each day.

“Digitized assets and emerging technology like DLT are shaping and evolving the financial services landscape, and we remain committed to advancing innovative solutions that capitalize on opportunities, deliver new value and drive the industry forward,” said Murray Pozmanter, managing director and president of DTCC Clearing Agency Services.

Ramifications of Crypto Settlement

As a member of the Federal Reserve and counterparty to the major U.S. exchanges and markets, DTCC clears and settles virtually all broker-to-broker securities transactions, including registered stocks, listed corporate, muni bonds, and UIT trades in the country; the transaction volume is enormous.

The DTCC, a subsidiary of the Depository Trust Company (DTC) has always been out front adopting new technology in order to help improve speed and accuracy of trade settlements. Without the DTC we’d all still be taking physical delivery of stock certificates.

It is now looking to implement crypto-style tracking and is running live testing of a private blockchain to see whether it’s sufficient to clear and settle transactions in the $40 trillion equities market. This could also help move toward faster settlements and fewer securities lending issues.

Not to be overlooked this is a huge milestone for the blockchain technology. Traditional finance’s most trusted and relied upon center is embracing the ledger technology, the same technology that forms the foundation of bitcoin (BTC), Ethereum (ETH) and NFTs.

Settling stock trades in the U.S. currently takes two days (T+2), which, when compared to the speed of cryptocurrency settlement, is like comparing travel by plane to travel on horseback. High-speed trading, done in fractions of a second, but settling in T+2 is clumsy and needs to improve. Last year brokers were forced to restrict meme stocks from trading because of a $3 billion collateral request from DTCC, which stockpiles money as a safeguard in case something bad happens during the two days while it’s processing a trade. Robinhood and others became involved in lawsuits as the restrictions had costs for their clients.

The U.S. Securities and Exchange Commission (SEC) has proposed speeding up stock settlement times to something called T+0, or same day as executed. Last year, Robinhood (HOOD) CEO Vlad Tenev said that T+0 would’ve prevented volatile markets like those seen with meme-trader favorites GameStop (GME) and AMC (AMC).

Project Ion is private and permissioned and has been developed with large financial firms, including BNY Mellon (BK), Charles Schwab (SCHW), Barclays (BCS), Citadel Securities, Citigroup (C) and Credit Suisse (CS). DTCC partnered with software provider R3 to launch Project Ion using R3’s Corda distributed ledger technology (DLT) software.

Take Away

Without DTC, which is the parent of DTCC, all public market trading on Wall Street literally stops. DTC is registered as a clearing agency with the Securities and Exchange Commission, but they are the clearing partner for all the major clearing houses. Organized as a limited purpose trust company under the New York Banking law and a member of the Federal Reserve System, they have quasi-government status. Its foray into using distributed ledger technology to clear trades shows acceptance of blockchain at the highest levels in finance and may one day make T+0 possible.

Paul Hoffman

Managing Editor, Channelchek

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