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 simulated central bank digital currency (CBDC), and the other was for tokenized securities on the DTCC Digital Settlement Network prototype. A distinctive feature of the pilot is that it retains a role for a central counterparty, which some blockchain solutions seek to eliminate.

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

“As a potential digital alternative to cash, a US CBDC should be carefully explored in consultation with key stakeholders from the public and private sectors,” said Jennifer Peve, DTCC CEO, Director of Strategy and Business Development. “The DTCC pilot program with DDP evaluated the use of a simulated CBDC and DLT for DvP settlement in US 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 efficiency and transparency.

How the DTTC liquidation pilot worked

Looking at the functionality of the blockchain solution, it essentially involves escrow. Cash in the form of CBDC is deposited until the security agreement occurs. Similarly, on the other side of the transaction, when the price of a security transaction is agreed upon, the security token is deposited or encumbered. It must be released for transfer when the CBDC payment is released. This security deposit would occur throughout the day with the settlement of the payment (cleared) once a day, either on the same day (T0), the next day (T1) or in two days (T2), as is the current convention.

A key question is how to ensure that the transfer of security tokens on the DTCC ledger occurs at the same time as the transfer of cash on the CBDC ledger. The decision was made to use a neutral (automated) external “orchestrator” to ensure settlement occurs atomically across the two DLT networks.

This third party (in this case also DTCC) assumes a role similar to that of a central counterparty (CCP), such as NSCC, owned by DTCC. Additionally, the feature includes storing the keys to release tokens from escrow on both networks.

Sometimes there can be transaction failures. One might think that it just rolls back the transaction after a timeout. But what if the CBDC was unlocked and transferred, but the communication failed for some reason? It would be incorrect if a hold time meant that you returned the value to the seller even though the payment was made. What should happen is the security transfer to the buyer is complete. But that would require an intervention. Solving these types of problems 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 implied that it was R3’s Corda enterprise blockchain.

Other DTCC DLT Initiatives

That’s the same distributed ledger technology used by DTCC in Project Ion, DTCC’s stock settlement system that went into production in August. Another DTCC DLT project is the digital securities management (DSM) platform for digitizing private stocks. And the DTCC has a particularly large DLT project about to launch, the Trade Information Warehouse for Credit Derivatives.