Back in 2020, the Securities Industry Professionals Association (SIPA) penned an eloquent op-ed piece called “DTC Monopoly Must End,” which was actually their response to the SEC’s request for public commentary Comment Letter to SEC Release No. 34-88474; File No. SR-NSCC-2020-003.
John Busacca, the founder of SIPA, articulated some of the primary reasoning DTC is an exploitative, monopolistic entity. Literally nobody in the entire capital markets industry likes them, nor do they believe in their necessity. DTC operates under the auspices of a quasi-government agency for clearing literally trillions of dollars in securities settlements.
Yet, they are a private entity that operates outside the boundaries of anti-trust. Unsurprisingly, DTC’s user-owners include: Citigroup, BNP Paribas, JP Morgan, State Street, UBS, Goldman Sachs, Morgan Stanley, Virtu, Barclays, BNY Mellon, Bank of America. So there’s quite a self-serving interest to preserve capital markets infrastructure.
As Mr. Busacca points out, DTC’s linchpin status as the monopolistic behemoth for post trade settlement and clearing hurts capital formation of early stage companies and small cap securities. His example shows how a regulation crowdfunding investor actually loses money through the fee layers after experiencing what they believed to be a 25% gain on an investment.
The most important point raised was that of DTC’s unilateral ability to declare an asset to be illiquid, forcing fee layers because they’ve openly stated on public record that an “illiquid security is a ‘security that is not listed on a specified exchange'”.
How wonderfully self-serving.
Busacca goes on to provide a couple of solutions: 1) approve an alternative settlement and clearing company; and 2) approve additional correspondent and/or self-clearing firms.
Yes, I most certainly agree with the alternatives, and especially the concept of self-clearing for securities issuers themselves.
Blockchain technology now enables a mathematically provable, highly-secure T+0 settlement between two parties without the need for an intermediary account model. We can directly send a Bitcoin to someone anywhere in the world, and obtain confirmation in a few moments that it has arrived.
Blockchain technology must be adapted to contemplate the full regulatory recordkeeping and metadata layer of securities, which is indeed a bit more complicated than a basic token unit of account. It’s relatively easy to send a dumb token from point A to point B. However, when it comes to the iterative body of infinitely expanding recordation of all the metadata about the security, asset, entity, identities, and transactions, even blockchain-native players in the space have perpetuated their siloed intermediary status.
They simply don’t want to give access to that data. I know firsthand, I’ve worked directly with issuers and their legal teams to wage the fight with the various portal operators.
Back in 2017, seeing the coming risks of market fragmentation the fledgling tokenized securities market will face, we started building XDEX, the Extended Index. XDEX is a decentralized, blockchain records repository market infrastructure layer for regulatory governance, risk, and compliance for digital, tokenized securities. Functioning as a highly specialized oracle, an offering issuer can achieve real-time embedded compliance across global jurisdictions – even eliminating the reconciliation costs for cross-border transfer of assets. This alone represents $780 billion in annual capital drain on asset performance.
Unlike the hermetically sealed, walled gardens of broker dealers, ATS exchanges, crowdfunding portals, and even other tokenization service providers who seek to capture a securities offering issuer’s data, our approach is to empower the securities issuer and their investors with a direct, Master Data Management (MDM) layer that gives them the direct ownership of their information, and it’s governance, risk, and compliance.
Having quietly been in market for two years, we’ve also incubated and formed one of the chartered Wyoming Special Purpose Depository Institutions (SPDI), and now we’re pursuing a Puerto Rico-based International Financial Enterprise (IFE) charter to provide for global custody and clearing of post trade settlement of tokenized securities.
Our goal is to eventually decentralize the governance of XDEX as an association-based model, putting the direct participation in the network into the hands of the true stakeholders, the owners of securities assets and their investors. It’s their assets and capital at risk, not the rent-seeking toll extractors who have somehow managed to operate outside of the boundaries of federal monopoly laws and creating the behemoths of global banks who enjoy the multi-day float of the capital while doing whatever they do on their IBM System/36s and COBOL.
When the efficiency that currently exists is only achieved through radical centralization, and transformative technology emerges, it is no wonder that DTCC is now proposing a “Digital Securities Management” platform based on blockchain technology.
Albeit the right approach, they’re suggesting they can achieve T+1 settlement, which still gives the rent seekers 24 hours of cash float, and still requires you to buy a CUSIP ID from them, along with the myriad of other fee layers that are rendered unnecessary with an optimized implementation of distributed ledgers like XDEX, which has been fully operational in the market for nearly two years.
And then, there’s the fundamental question:
How can the centralized monopoly actually decentralize their functional role with any credible trust after exploiting the entire market for years?
It’s simply not in their financial interest to do so, and they’re not going to give up their extortion without a fight.
It’s time to put the power back into the hands of the actual risk takers and owners of the assets. Those who resist this idea have, in some fashion, a hidden vested interest in preserving the piracy.
Decentralize Depository Trust.