Clearing company tests out securities transaction settlements on blockchain networks

The Digital Dollar Project and the Depository Trust & Clearing Corporation trialed a potential settlement system using tokenized securities and CBDC in real world conditions.

The Digital Dollar Project (DDP) and the Depository Trust & Clearing Corporation (DTCC) released the results of their Security Settlement Pilot project Nov. 30. The project tested a simulated digital U.S. dollar in transactions with tokenized securities on a blockchain network under real-world conditions. 

The project was designed “to better understand the implications of a U.S. Central Bank Digital Currency (CBDC) on post-trade settlement,” especially on DvP (delivery versus payment) settlements, sometimes called atomic settlements, that ensure securities transfers only take place simultaneously or nearly simultaneously with payment. No U.S. CBDC has been developed or even authorized yet.

DTCC managing director Jennifer Peve wrote in her company’s foreword:

“These efforts, which are detailed in this white paper, simulate future settlement functionalities while ensuring optionality for clients as well as the same – or higher – levels of safety and security as DTCC’s existing settlement solutions.”

The pilot used a third-party “orchestrator” between DTCC’s Digital Settlement Network prototype and the Digital Dollar Network to execute instructions and eliminate counterparty risk. This is because the parties in a transaction may have different settlement banks that will not have full visibility into both networks. Assets were encumbered on both networks during transactions.

In addition, it used “an algorithmic encumbrance mechanism to enforce conditions on the release of assets, which leveraged smart contracts to control the asset rather than a third party.” Transactions in the test system take a total of 12 steps.

The pilot system allowed for a variety of netting and settlement options that encompassed T2, T1 and T0 intraday and end-of-day.

JUST RELEASED: Results from @Digital_Dollar_ and @The_DTCC Security Settlement Pilot, the first private sector initiative to explore how tokenized securities and a wholesale #CBDC could operate within the U.S. settlement infrastructure leveraging #DLT. https://t.co/I5NApRwlls

— The Digital Dollar Project (@Digital_Dollar_) November 30, 2022

U.S. settlement practices differs significantly from the rest of the world. Results of the settlement trial were evaluated by participating banks, which included Bank of America, Citi, Nomura, Northern Trust, State Street, Virtu Financial and Wells Fargo.

This was the first of five planned pilot projects. The Digital Dollar Project was created in 2020 by the Digital Dollar Foundation and technology consulting firm Accenture. It created a technical sandbox in September. The DTCC handles the vast majority of securities transaction settlements in the United States.