DTCC Digital Dollar pilot for securities settlement uses CCP – Ledger Insights

Today, 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 characteristic of the pilot is that it retains a role for a central counterparty, which some blockchain solutions try to remove.

The Digital Dollar Project is a private initiative founded in January 2020 by Accenture and former Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo’s Digital Dollar Foundation. Last year, Accenture agreed to fund five of DDP’s CBDC pilot programs. In the case of DTCC, its subsidiaries processed $2.4 quadrillion in securities transactions in 2021.

“As a potential digital alternative to cash, a US CBDC should be carefully explored in consultation with key stakeholders across the public and private sectors,” said Jennifer Peve, DTCC’s Executive Director, Chief Strategy and Business Development Officer. “DTCC’s pilot with DDP assessed the use of a simulated CBDC and DLT for DvP settlement in the US wholesale markets through direct engagement with market participants.”

These 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 efficiency and transparency.

How the DTTC Settlement Pilot Worked

Looking at the functionality of the blockchain solution, it mainly involves escrow. Cash in the form of CBDC is deposited until the security settlement is to take place. On the other side of the trade, once a value for a value transaction price is agreed upon, the security token is escrowed or encumbered. It should be released for transfer when the CBDC payment is released. This deposit will take place during the day of payment settlement (nightly) once a day on either the same day (T0), the next day (T1), or for two days (T2), which is the current convention.

A key question is how to guarantee that the transfer of securities tokens on the DTCC ledger occurs at the same time as the transfer of cash on the CBDC ledger. It was decided to use a neutral third-party (automated) “orchestrator” to ensure that settlement happens atomically on the two DLT networks.

This third party (in this case also DTCC) assumes 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 may be transaction errors. 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? It would be wrong if a timeout meant you rolled back the security to the seller despite the payment happening. What must happen is that the security transfer to the buyer must be completed. But it will require intervention. Resolving these types of issues is also the role of the trusted third party.

In terms of technology, the project did not mention which blockchain was used, but the terminology suggested it was R3’s Corda enterprise blockchain.

Other DTCC DLT initiatives

It’s the same distributed ledger technology used by DTCC on Project Ion, the DTCC inventory settlement system that went live in August. Another DTCC DLT project is the Digital Securities Management (DSM) Platform for the digitization of privately held shares. And DTCC has a particularly large DLT project nearing launch, the Trade Information Warehouse for Credit Derivatives.