ENTERPRISE BLOCKCHAIN

APPLICATIONS
(BIAS TOWARDS TRADE SETTLEMENT)

Rohit Gajare, Intellect One Markets Team

Why look at Blockchain/DL Technologies ?
• Blockchain/DL will transform the businesses, may lead to creation
of new business models and disruption of existing ones.
• Key promises* by these technology –
• Unified view across counterparties
• Transform business structures, lowers information asymmetry

• Immutability
• Adds trust to the data structure, less time and money spent on verification

• Tokenisation of Assets
• Creation of digital identities of various assets – land, personal (medical, education, employment etc) records,
Identification
• Achieving Consensus
• Getting people to reliably vote

• These technologies promise to lower cost of operations, improve

quality of service and also reduce risks within existing business
processes

*Thoughts shared by S.Banerjee, CTO NSE

Blockchain vs. Databases
• Blockchain
• Is a write only datastructure, new entries are appended to the end of the ledger.
• Each new block gets appended to the latest block and there are no administrative
permissions within a blockchain to allow editing or deleting data.
• Designed for Decentralised Applications
• Immutability or 'unchanging over time' feature makes the blockchain useful for
certain applications. Once a transaction is written onto the blockchain, no one can
change it, or, at least, it would be extremely difficult to change it.
• Database
• Can be easily modified or deleted. DB Admin can change part of data or its
structure.
• Designed for Centralised Applications.
What is Enterprise Blockchain & Why ?
• Public Blockchains
• Bitcoin and other such blockchains are permissionless, participant/nodes are free to enter
and exit the system.
• Participants may be unidentified/anonymous, this requires significant effort to achieve
consensus i.e. PoW , which is time consuming.
• Public blockchain working is heavily interlinked with underlying cryptocurrency(ies)
• Low throughput in processing transaction due to focus on building consensus.
• Enterprise Requirements
• Enterprises systems work within a closed set of participants, where entry or exit of
participants is reasonably communicated/known across participants
• Consensus protocols like PoW (Proof of Work, time consuming) may not be required in
Enterprise situation, a simpler consensus mechanism may suffice.
• Cryptocurrency may not be required/appropriate in case of Enterprises.
• Frameworks for building enterprise level blockchains are underdevelopment
(Hyperledger, Corda etc)

Key Question: If Enterprise Blockchain has few participants and the consensus
mechanism is weak, is it really as secure as public blockchain, what if there is
collusion amongst participants ? Government /Regulatory pressures or directive ?
Hyperledger vs. Public Blockchain (BTC,ETH)
Suitability of Blockchains
• Blockchain is best suited for business applications where one or more of the following conditions
apply:
• There is a need for a shared common database
• The parties involved with the process have conflicting incentives or do not have trust among
participants
• There are multiple parties involved or writers to a database
• There are currently trusted third parties involved in the process that facilitate interactions
between multiple parties who must trust the third party. This could include escrow services, data
feed providers, licensing authorities, or a notary public
• Cryptography is currently being used or should be used. Cryptography facilitates data
confidentiality, data integrity, authentication, and non-repudiation
• Data for a business process is being entered into many different databases along the lifecycle of
the process. It is important that this data is consistent across all entities, and/or digitization of
such a process is desired
• There are uniform rules governing participants in the system
• Decision making of the parties is transparent, rather than confidential
• There is a need for an objective, immutable history or log of facts for parties’ reference
• Transaction frequency does not exceed 10,000 transactions per second.
• When Not to use BC
• The process involves confidential data
• The process stores a lot of static data, or the data is quite large
• Rules of transactions change frequently
• The use of external services to gather/store data
Source: edX , Blockchain for Business
Decision Tree
 Blockchains & Distributed Ledgers
(for Trade Settlement)
• Blockchains and Distributed Ledgers are evolving
technologies.
• Bitcoin Blockchain (for instance) maintains the entire transaction
history in each blockchain for each participant (holder)
• This transparency of holding may not be suitable in Securities
market. Some data access protection needs to be enforced.
• Trade Volumes would be high and may lead to cumbersome data
maintenance
• Settlement infrastructure in most countries is at varied
degrees of maturity, but scope remains to ..
• Lower Settlement risks (T+2 to T+0)
• Lower Margin requirements placed by participants
• Low risk /opportunity costs due to settlement failures etc
• Secured Distributed Ledgers could offer a platform for next
generation settlement systems.
• Declining cost of data storage improve feasibility of
distributed ledgers
Why Not simply share a DB x Participants ?
• Databases (traditional) are not immutable; users with malicious
intentions may modify entries.
• Will be a centralized database, with it’s vulnerabilities and
dependency on central party. Question of Trust will eventually get
raised.
DL/BC - Characteristics to Focus
• Distributed / Unified View
• Immutable
• Need for Third(Trusted) Parties
Distributedness
• Disparate systems/functions in the capital markets lead to creation of many silos of
data.
- Fund Manager/Investor System - Custodian System
- Fund Accounting System - CSD/Depository System
- Registry/Transfer Agency System - Issuer System
• These need to be reconciled on a regular basis to maintain consistency checks.
• Fund Manager <-> FA <-> Custody <-> Depository <-> Registry <-> Issuer
• By Adopting DL/BC
• Participants in capital markets eliminate the need for reconciliation & risks
associated with mismatches..
• However, system design needs to incorporate or revision …
• Data access privilege
• Granularity of maintenance of data appropriate to systems..
• Investor/Fund Manager may prefer fund/portfolio level holding
• Custodian may need to have data on Fund/Portfolio level as well as Securities
Account level
• CSD may have information at Omnibus level or at fund/investor level
depending on the structure etc
Immutability
• Property of Permanence
• Trade Flow
• In current trade cycle only a settled transaction may be deemed permanent i.e. with
certainty; transactions pending settlement may not be final (assumed here that
settlement cycle does not change)
• Property of Immutability is important to provide confidence to investors and
counterparties to the certainty of data
• Access Control
• Immutable ledger would be ideal to monitor system access at user level
• This will maintain record of all user actions in an append only data structure
(like blockchain)
Third (Trusted) Party Presence
• Third Parties like – Clearing House/CCP, CSD act as key intermediaries
in Settlement Infrastructure
• Clearing House/CCP
• Reduce Settlement risk by interposing themselves between transactions
• Provide netting function for stocks as well as cash to reduce settlement failure as well as
reduce liquidity requirements
• A Distributed Ledger/Blockchain based solution may eliminate need for Clearing House
as the Counterparties could ascertain trade success (availability of cash and securities) at
the time of execution itself.
• Settlement Netting would not be possible in an instantaneous settlement scenario with
DL/BC or would require appropriate design. (Would the benefit of instantaneous
settlement outweigh the pressure on liquidity requirements due to absence of netting.
What will be impact on market liquidity? Can the payment systems (RTGS) keep up with
settlement volumes on Gross basis ?)
• CSD
• Maintains central security holding and executes settlement between accounts.
• Facilitates in asset servicing.
• A DL/BC implementation may eliminate the notary role for CSD as data would be
publically maintained.
• Asset Servicing role too may be intermediated in the DL/BC scenario.
Perspective on Ecosystem level change
• DL/BC approach towards trade settlements has the ability to
fundamentally reimagine the trade lifecycle
• It may eliminate certain roles of key intermediaries
• Benefits of DL/BC (instantaneous settlement, lower settlement
risk/failure) need to be weighed against possible costs (lack of trade
netting, risks in operating DL/BC)
• Efforts need to arrive at consensus between “new” market participants,
regulators etc
• Governance structure of the “Settlement DL/BC” needs to be agreed
upon..
• Who takes ownership of the infrastructure ?
• What are the rules?
• Who Makes Them?
• Who takes the blame if errors crop up ?
• How to limit/permit access across participants & regulators ?
• Money Settlement – via Bank/RTGS or DL/BC ?
• Achieving DVP on DL/BC ?
Settlement Bank A

Infrastructure
Custodian
A Issuer X

Exchange

Registrar
CCP

CSD
Investor Broker A
A Issuer Y

Investor Broker B
B
Issuer Z

Custodian
B

Bank B
Regulator
Big Bang Bank A

Transformation
Custodian
A Issuer X

Exchange

Registrar
CCP

CSD
Investor Broker A
A Issuer Y

Securities DL/BC

Investor Broker B
B
Issuer Z

Custodian
B

Bank B
Regulator
Nuanced Bank A

Transformation
Client
Face A

Custodian
A Issuer X

Exchange

Registrar
CCP

CSD
Investor Broker A
A Issuer Y

Securities DL/BC –
Transforming the Market Side
of Settlements.
Investor Broker B
B
Issuer Z

Custodian
B
Client
Face B

Bank B
Regulator
Ideas for PoC
• Entire Ecosystem transformation (most disruptive to our Custody business)
• Would require collaboration amongst participants, regulators and technologists.
• Require significant investments
• Require greater confidence in DL/BC frameworks
• Ideas
• Model DL/BC which encompasses functions of CCP/Custodian/CSD/Registrar.
• NSE is conducting a PoC involving Exchange, Custodians & CSD
• Corporate Actions – Voluntary/Elective event management over BC/DL
• Intra Company transformation
• Require lower investment
• Quicker turnaround and help gain experience in technology.
• Ideas
• Immutability is a strong property, could be leveraged for Audit/user access purposes;
could be useful for regulatory and forensic reporting and conflict resolution -
• User Access/Action/Instruction to system which cannot be debated.
• BC/DL which covers Custodian users & its investor/clients
• Brokerage Front/Back Office trade entry
• Client Instructions (settlement, corporate actions etc)
Strategic Imperatives
• Evaluate and Identify key Enterprise DL/BC technologies/frameworks (ex. Hyperledger/
Corda).
• Develop technical skills in chosen frameworks (participation in workshops, trainings).
• Drive Industry level blockchain conversations in Key Markets (India, Middle East, South
America), get involved at early stage.
• Have conversations with clients regarding their plans for BC/DL and help identify use
cases.
• Need to Ideate the role of custodian (or any business) post Blockchain and strengthen
these capabilities.
• Market Settlements may get commoditized further. Significant changes on the
custodian systems on the market side – interface with BC/DL.
• Client (side) service capabilities may be differentiators amongst custodians.