Robert Palatnick has no delusions about the changing role of The DTCC, a centralized transaction processing firm that has recently been in the crosshairs of blockchain disruptors.
Yet, the chief technology architect at the post-trade services behemoth (it processes $1.5qn in annual transactions) tells CoinDesk the DTCC’s strengths in risk management are no less important in a blockchain world. What will change, he now believes, is the technology the company employs.
While some startups using distributed ledger technology are working to undermine centralized transactions processors, others have joined in the fight to modernize the existing infrastructure.
In conversation, Palatnick explained how by partnering with startups, the DTCC can focus its efforts on making sure what’s created complies with financial regulations.
“To build the pyramids, flexible pyramids, updatable and renewable, these things that will contain the assets that allow the markets to function and allow liquidity to happen and allow firms to finance themselves and allows startups to go public. That’s our role.”
So far, the DTCC has publicly announced its work with two Wall Street startups, Axoni and Digital Asset. But Palatnick says they’re “in different levels of conversations” with at least a half dozen others.
The DTCC announced its first collaboration with a startup with Digital Asset in March. The private blockchain trial was designed to show that distributed ledgers could bring efficiency to the market for repurchasing agreements, which accounts for an estimated $2.3tn in transactions daily.
After the test, Palatnick said the DTCC entered conversations with other potential partners to explore creating solutions for additional asset classes. Then the following month, the DTCC revealed it had successful tested 85 structured use cases for blockchain applications in credit default swaps.
Currently, Palatnick says he is in conversation with “more startups than ever in DTCC’s history.”
Rather than try to become a specialist in cryptography, Palatnik said the DTCC wants to leverage its existing risk management strengths.
As a result, he says he’s focused primarily on companies with a strong background in the technological aspects of blockchain. That said, in an increasingly competitive space, the startups that distinguish themselves understand both the “tool and the transaction,” he said.
This strategy of focusing on the strengths of the startups and not overextending DTCC’s original mission has resulted in some surprising turns of event.
“Once they realize we have people who deal with regulators and deal with the regulation of our code, [and] that that’s what it means to get into this business, they’re suddenly interested in becoming a software provider to us.”
Caught in the middle
But not every blockchain startup wants to work with the DTCC.
Founded in its current incarnation in 1999 after the merger of The Depository Trust Company (DTC) and National Securities Clearing Corporation (NSCC), the firm helps financial institutions settle their transactions in an average of three days depending on the trade.
But the firm has also faced several lawsuits alleging it had sold shares in stock without first procuring a borrow, a controversial process called a “naked short sale”.
Utah-based retailer Overstock, for example, founded a blockchain division in 2014 and it now has the DTCC square in its sites.
Not only does it aim to close the settlement time from three days to zero, but it wants to prevent naked short-sells by ensuring companies like the DTCC are actually in possession of the shares they trade.
A recent CoinDesk opinion piece proposed that Medici’s services could “give back title in shares to shareholders instead of the DTCC.”
In this way, the DTCC is not alone in being at a bit of a crossroads.
Like many, it’s chosen to join the numerous financial middlemen that have responded to pressure from blockchain innovations by embracing partnerships with the firms.
But Palatnick wants to embrace the disruption in more than just one way, as he wrote earlier this year. So, in addition to increasing the DTCC’s collaboration with startups, an interest in open-source collaboration is now a pre-requisite for aspiring partners.
Each of the companies with which Palatnick negotiates are either already members of open-source blockchain project Hyperledger, or they have committed to be join, he said.
“That’s very important to us,” he added.
Selling the goods
The strategy seems to be working.
The firm’s Trade Information Warehouse blockchain prototype is now “past proof-of-concept point” and is “getting close to being finalized.”
Palatnick says his team is currently in “conversations with various vendors” interested in using the repo product built with Digital Asset.
Yet, Palatnick acknowledges the changes have gone beyond technology.
Palatnick summed up the…