Fireside | From T+1 to T+0: What Happens When Post-Trade Goes On-Chain

I think uh we have a pretty interesting panel today. I'm very excited to chat with uh Victor and Jason. Um I think before jumping into into collateral management um I would like to give you an opportunity to both present a little bit yourself and what you do especially in the digital asset space in your in your respective company.

Uh thanks appreciate it ribbon. Um my name is Jason Jason Emory. I run the product organization for the digital assets team within DTCC. We were uh brought into DTCC. I was part of the security acquisition a few years ago in order to kind of jumpst start and and accelerate the technology buildout of this uh digital asset capability within DTCC.

You probably saw recent announcements about uh products we're bringing to market here this year. Later in uh July, we'll have our first event where we'll see tokenization of assets from DTCC um onto a few different uh blockchains and then in October a more general launch of that capability.

Great.

Hi everybody. Nice to see you. Uh Victor Olanlin. So I uh I work at BNY. I've been there for about 17 years um in various product and strategy roles.

I I built the collateral optimization platform at BNY. Um so that process is about seven trillion uh at any given time throughout the day. Runs uh on top of our collateral management platform. Um I was head of digital for clearance and collateral management for a number of years. Um head of enterprise tokenization and then now I I lead what is called our global clearing business where we clear and settle uh 25 trillion a day, a million trades a day uh across 100 markets.

Just a little bit of uh collateral management I guess we have on stage today. Super exciting. Um thank you. Well, I'm going to jump in right on. I think we see more and more you know asking asset being tokenized on on DT or blockchain.

It depends you know who you're talking with and I'm curious to know from your respective like perspective um how do you see you know BNY or DTCC uh playing and helping you know changing like the market infrastructure in that regard? So, uh, BNY has been around for 240 plus years. We're actually eight years younger than the United States. And so, through that time, there's been lots of transformations in the marketplace, uh, as you could expect. And, um, we do view ourselves as global market infrastructure, particularly as our role is the settlement agent of the US Treasury market.

And with that um we are taking sort of our expertise in traditional markets which we are making 24 by7 and that's something that we're very focused on um but also uh bringing that same rigor of resiliency trust and innovation to the digital asset markets and so I work very closely with the digital asset business within BNY. Uh we're working on various projects and programs um and and with that we will um we believe that we'll be able to connect a lot of the digital asset marketplace through the platforms that we have within BNY Melon. Um a great example is um we talk about T+1 to T0. Uh quite a bit of the treasury market settles T0 today already. Um and that is then used as forms of collateral through our triparty collateral management platform.

um we will look at ways to to use tokenization to help enable that further in the marketplace. So it's really an iterative process bridging traditional markets and digital asset tokenized markets so that clients can traverse based on their needs and and utility of that particular use case.

Yeah. Um so from a DTCC perspective obviously we've not been around quite as long as BNY but um we were formed we're a memberowned company. I think everybody knows that that was formed at the cusp of a of a technology transition, you know, where the paper paperwork crisis occurred in the 1970s and they needed to solve this problem. DTCC was formed specifically to help use technology to address efficiency, resiliency, reliability, and scale in markets. And that's kind of the same role that we're looking at playing again.

If you think about uh DTC in the context of a digital ledger, in a lot of ways DTC plays the role of the of the uh of of that settlement layer, that uh consensus player within traditional finance today. It's the consensus model. What we're doing with bringing assets onto the dig uh the distributed ledgers with the technology that we're introducing this year is extending that role into digital technology into into digital assets and tokenization and continuing to bring that resiliency, reliability, and scalability to the market that's required along with things like investor protections and compliance and building that capability right into the tokenization layer. So that's what we're all about. I think something to think about and and I know that you know this uh Victor, the assets themselves just becoming tokens doesn't drive a huge amount of value.

The reality is the use case on chain is what's going to drive the value. And so extending the the capability, bringing the assets to the chain and then actually driving value with use cases like collateral mobility is where I think we need to get to and it eventually will.

Great. This is a perfect segway for my next question. Actually, for like the the record, I think it was 12 million piece of paper that were like p piling up in New York in 1970. And so, they had to close the market for a week because say, hey, we we don't have enough hands to process that

and they say, well, we're going to do something and they created DTCC. So as you said you know like tokenizing assets it's not very complicated in itself I would say but um how you know and we've seen a lot of project in that regards but also I'm curious from to to hear from you what it takes to actually have those asset being actively used as collateral and to improve collateral management and um what does it take you know to actually not having just asset tokenized that's sitting ill

right yeah so I think there's a few different things so one thing that's uh happening this year in uh is regulatory clarity, you know. So, bringing that um the the regulatory clear uh definition and legal aspects of of uh the tokens and how they can be used and that sort of thing is is super important for us to actually take advantage them of them in these different use cases. and then having the capabilities to custody to hold to transfer to manage assets by the different players in the market like custodians and broker dealers and that sort of thing um has to be in place and in some cases that means new regulatory uh requirements for those different market participants as well. And so I think in addition to just simply bringing an asset into being on a distributed ledger, you have to have the infrastructure, you have to have the application built, you have to have the different market participants with the capabilities in their infrastructure as well in order to take advantage of that. And then on top of that, having the regulatory clarity in order to be able to do this activity is is necessary as well.

Yeah, we see agree um we see tokenization as another form of uh capability, right? And so there's different ways of using tokenization. You can use it within a private network. You connect it into a public network. It depends on the value that it creates for the end user essentially.

And so for us um we see tokenization, let's use funds as an example. It's not just enough to tokenize something. There needs to be a network of counterparties that can agree on the use of that asset and the demand for that asset. So collateral is a great demand for a fund or a security and and so do does everyone agree in the network that you're participating in that that tokenized asset represents a real world asset? Can they represent can there is there trust that there's an underlying asset underneath of that because not everything is mo most is not issued on chain.

There's no not many native digital assets on chain except for cryptocurrencies and some stable coins. And so that the connectivity between the underlying asset and the tokenized assets critically important. The legal framework in which the two counterparties are operating for that collateral agreement is extremely important. And so it's it's in the operations around supporting that tokenized asset, particularly if you're talking about 24-hour markets. A lot of a lot of clients are not set up to be able to run and manage risk 24 hours a day.

They have back office systems and other things that they need to contend with to be able to operate in that model. And I know we'll talk a bit about that later. Um, but for us it's really around the the regulatory frameworks. Number one, what happens in the course of a bankruptcy? If two people disagree and there's a failure in the market and you're using a tokenized asset, like how does that asset get treated in bankruptcy court?

Um, are you going to be tied up in an FTX uh workout for three years? That's not why clients use BNY triparty. They expect us to handle it and to do it immediately so they can get their assets as quickly as possible. And so those legal frameworks are super critical in in addition to the regulatory framework which we expect that will get worked out.

I would quote actually Nadine Nadine Shaka from DTCC. She said something at Cyos in in September last year say well um I might um and I'm paraphrasing a little bit but he says it's going to take a while for us to believe in in code we trust. You know like that very defy defy um quote saying you know like well the smart contract is here you should trust that. Well, it's going to take a while because you know both of your organization are here to also mitigate counterparty risk and we haven't seen even yet you know what's going to happen some of those tokenized you know um product when something goes wrong and and this is the role of organization like DTCC or BNY to make sure like those risk are very well understood and mitigated because um it's pretty critical if something goes wrong. Yeah, you know, that's actually one of the key design principles around the tokenization service that we're bringing to market.

That that legal clarity that you talk about is is exactly one of the the key aspects of what we were uh looking to build as part of the tokenization service. So, specifically for us, what we end up doing is providing our clients with the same legal rights associated with the asset that they have if they held that to that asset in traditional form. So, the token represents the exact same legal rights. And so all that uh clarity that you get from transacting in traditional forum assets through DTC comes along with the tokens that we create and bring into the market as well. That was a a key design principle and it's super critical as you pointed out.

Yeah.

And and underlying assets of tokens are not all created equal. So just because there's legal certainty of the asset underlines it doesn't mean that it's a good form of collateral. And so the ability to liquidate the asset, the ability to trade and value the asset um under especially for liquid assets where everyone thinks that you can tokenize something and therefore it's pristine collateral and it can be used just like a US treasury is not correct. Right? And so there's a lot of infrastructure that needs to be built around these traditional assets to allow them to be good forms of collateral in the traditional world before they can be good forms of collateral in the tokenized world.

And so the work that you know BNY are doing, DTC, others like we're building that underlying infrastructure to make those assets liquid and available so that they can be used as good forms of collateral and there's active projects focusing on that.

Yeah. And I I agree and I think that it's going to take a while for us to build markets and infrastructure necessary to to have tokenized assets behave the same way traditional assets do. You know, have the same level of liquidity. And again, that was a second or third design principle that we had associated with the solution was to be able to con uh convert quickly and easily between forms of the asset since it's the same asset. When we tokenize an asset, it's the exact same asset, the same the same legal right as you're holding in traditional form.

Being able to convert easily and quickly between forms to access liquidity pools in the traditional markets when when events occur quickly and easily is another key design principle associated with it. I always love the I recommend everyone every time I do a panel to watch the the demo of DTCC last year. I think the the great collateral experiment it's uh it's extremely well done and it really like enlighten me in how collateral management operates and I think you touched base a little bit on this already but I'm I'm curious to also hear um what are like the requirements you know for actually some of your clients or your I guess society members um to actually be able to operate you know tokenized asset and do collateral management. um is you mentioned a little bit like process you know like the infrastructure uh even being armed you know for compliance but I'm curious if there is anything else that you want to share.

Yeah so um certainly I think the role that DTC plays in uh tokenized markets is to deliver these assets in a form that's usable in the different use cases and can be easily transferable between forms. So a couple of the requirements that we have for our our clients to use our tokenized assets is for instance they have to have the infrastructure necessary to hold an asset in token form. They have to have wallet infrastructure or c custodial non-custodial whatever they want to do but they have to bring their own wallet infrastructure in order to be able to use the assets. Then we have to work together in order to bring them into different use cases. So for example, if a use case is a collateral mobility use case and the collateral application that exists on chain has to hold the asset, well in order for that to remain regulatory compliant and for us to be able to maintain good control over the asset, we have to have access to that wallet.

We have to be able to register that wallet that's going to hold that asset with the tokenization service. And similarly, if there's a an exchange or another application that needs to get involved in the processing of a transfer, we have to be in uh we have to connect to and integrate with those different services.

Yeah, I I would say the the biggest impediment for clients will be um bringing that asset on par from a traditional sense as a tokenized. So if they think about a tokenized asset, can they value it? Can it be integrated into their back office systems? Can their back office and risk systems uh process it? Are they able to uh clear, settle, report, and do compliance 24 hours a day, 7 days a week?

I would uh argue that if you talk to any vendor that's doing uh clearance and settlement for the largest dealers in the market, if they're available 24 hours a day, they would say no. Um, and so, uh, the operating model that the clients need to stand up internally, do they have a follow the sun model globally to be able to handle a pass the book situation for a 24 by7 marketplace? Um, and um, ultimately the the collateral frameworks themselves from a legal perspective um, really need to be ironclad. So like their chief risk officer needs to sign off on the fact that if there's a bankruptcy between two counterparties and there's an asset that's custodied in one location, it's tokenized in a network and it's delivered five times to counterparties on that network. Who's going to unravel all of that?

Who's going to be able to deliver? Because it comes back to that underlying asset and being able to deliver that asset or if they can't take delivery of the asset, they need to liquidate the asset. So there's a lot of infrastructure oriented things that that the players in the traditional markets will need to get comfortable with in a tokenized world. Operationally, there's efficiencies that can be gained from tokenization. But from a riskmanagement perspective, there's a lot to unpack for institutions.

Risk management, counterparty risk, that's uh all decentralization. It depends who you talk to. I guess we are about time but I'm curious also like what you see you know from you mentioned you know regulatory clarity you know genius act clarity act hopefully in about a month um we have also like a technology now that can be used um people are more comfortable with assets but you also mentioned there's a lot of road ahead you know in terms of like you know operational like you said like management of risk and so I'm curious you know what do you see are like the biggest roadblocks right now to actually un you know unleash more like collateral collateral management on chain.

I I really appreciate the the comments that you made Victor. I I think um it's interesting. I've been to these conferences for several years now and a lot of the time that we spend talking about tokenization is on the technology and how we make the technology better and more usable and how it's evolving and becoming more capable. And we don't spend a lot of time talking about the operational aspects of bringing this into businesses. And I think you you hit on a lot of the key aspects of that, Victor.

And I think that the reality is that's where the bottlenecks are going to be going forward. It's not the technology. We have a huge amount of technology capability built out already. What's going to need to happen is these businesses, the financial institutions have to figure out how how to operationalize this, how to bring it into their risk management teams, how to bring it into their operational teams, and that sort of thing. That's what the bottleneck's going to And I agree 100% with you.

Yeah, I would just leave it with um we think that you know the incumbent players have a responsibility to be able to deliver and move um these technologies forward and to be innovators for the marketplace. So we anticipate that you know the likes of BNY and others DTC by leading from the front and um proving out value using these new technologies whether it's within our own network because that's arguably the safest way of testing something and then connecting it more broadly and displaying that to regulators and also to educate clients on how they should be interacting with you as a provider is really the hard work, right? And so the regulators, we're engaged with them and we're obviously working with them and trying to make sure that everyone's fully aware and educated of the opportunities, but I think it's the education and then the operational risk elements because if you think about it, you know, tokenization can, you know, maybe it you can save 20 cents on a transaction, maybe you can narrow down your collateral buffers by, you know, 3% or those are real savings at scale. But if you can't actually work out a bankruptcy situation or the system goes down and there's no liquidity for you for hours and hours and collateral is the lifeblood of your organization, that incremental benefit does not outweigh the downside risk and that's where clients are trying to traverse the the upside versus the downside right now.

Yeah, I know we're out of time. I just had one more thing to add. I I think something that and I'll leave it on a DeFi note here is um we need to think about new ways of solving old problems, right? So the although we need to operationalize this, we need to bring it into existing risk manage risk management environments. I think the technology offers new solutions to those problems and we have to be open to the changes that would have to be made in those operational environments in order to take advantage of that technology.

Well, thank you very much, gentlemen. It was a pleasure and so hopefully um we'll see that in the future. I'm very excited about you know everything that you shared. I think you know definitely like the the risk and the operation is like it's not a technology problem you have and that's what I was talking with you um on the on the room we can solve everything engineering wise you know Ethereum or other ecosystem it's it's here it's about like how we can operationalize all of this. So thank you very much and uh have a good day guys.