The case for a ‘sovereign’ distributed securities depository for securities settlement

Since the release of Satoshi Nakamoto’s breakthrough white paper in 2008, which preceded disruptive peer to peer value transmission through the Bitcoin network instead of by traditional means, many applications have been sought in financial services generally and more narrowly within capital markets for the Blockchain technology that underpins the Bitcoin network. To date, no capital markets infrastructure globally has implemented a commercially viable Blockchain or distributed ledger technology (DLT) solution. Blockchain technology is also experiencing a period of inflated expectations on a global scale from being a solution to curbing online piracy to replacing rational databases. Within the ambit of capital markets, the most ‘obvious’ of all the use cases, is in post-trade securities settlement. There are various use-case specific prototypes at custodians, investment banks, stock exchanges and central securities depositories (CSDs) alike. The utopic use-case being the ability for a buyer (investor) to transact directly with a seller on a ‘peer to peer’ basis and to have settlement occur in near-immediate time with a low transaction cost and records of the transaction immediately available to the issuer of the stock, even on a crossborder basis. Although public blockchains such as the Bitcoin Blockchain and Ethereum provide the closest match to this elementary example, both have limitations and have experienced cyber security attacks, which have cast doubt over their ability to house or operate notoriously risk-averse capital markets infrastructures. Most of these infrastructures, although largely aligned to international best practices, are designed specifically to suit country or regional specific operations and regulations. This paper will review the approaches, solutions and cryptographic techniques taken to settle securities on a DLT platform to date and why none of these approaches have as yet resulted in commercial use either by an unknown business outside of the capital markets in a disruptive manner or by the incumbents. The approaches and the technology aspects will be combined to develop a conceptual DLT ecosystem for securities settlement. This will be based on available literature that could realistically be applied to a capital markets infrastructure and deliver some of the promises of DLT, which will potentially enhance securities settlement for the purposes of commercial use.