Even if centralized clearinghouses are eventually built into or replaced by a blockchain, some services will inherently require the aid of a middleman, according to Collin Platt, the former lead blockchain developer at BNP Paribas who earlier this year launched his own blockchain startup to test this market thesis.
Based in London, DPactum is working to use blockchain tech to reduce risk for central counterparty clearinghouses (CCPs) by replicating some of their services on a blockchain, thus freeing them up to fulfill tasks he says are safe from eventual disruption.
With reported investments from several large financials, Platt said his team of four is now working to build a prototype application using technology from the open-source Hyperledger project.
Platt told CoinDesk:
“What we are doing is creating a new scaling process that will be governed by CCPs for derivatives. And this will allow clearinghouses using this tech and a distributed ledger system that we’ve set up to individualize the extent to which they are authorized.”
Along with co-founder and fellow BNP Paribas alum, David Acton, the bootstrapped team has already built a proof-of-concept for contract creation and trade registration that uses a smart contract for US treasuries and other cash-like short-term treasury instruments in Europe.
The smart contracts are intended to represent bilateral contracts between parties that are backed by different guarantors, likely a member of the CCP clearinghouse. The smart contracts themselves would be administrated by the CCP.
In Europe, CCPs such as the European Central Counterparty NV and Eurex Clearing serve counterparties by both taking funds from a buyer and assets from a seller and managing the risk in a wide range of ways. In the US, the DTCC fulfills a similar function.
But according to Platt, only some of those methods of mitigating risk are themselves also at risk.
Platt breaks down the value proposition of CCPs into four categories.
The first two — managing operational tasks to reduce settlement risk and tracking the credit risks counterparties may pose — are perfectly suited to being encoded into smart contracts and run on a distributed ledger, he said.
By encoding the operational tasks into a blockchain, Platt believes he’ll be able to give his clients the ability to determine who has access to what information.
“They can see more information and thus can make greater assessment of the true risk,” he said.
He contends the other two value propositions of CCPs will remain valuable long after the other services are “wrapped into a heartless smart contract”.
He said services which are the “more nuanced”, and therefore not likely to be disintermediated by blockchain smart contracts, include the handling of counterparties that default on a contract and the management of systemic risks.
Clearing up the future
Contrary to earlier reports that DPactum was participating in the Post-Trade Distributed Ledger Group (PTDL), Platt said his company is not a member. “PTDL is for regulated, incumbent services,” he said.
In his previous job, Platt focused his efforts on the actual trade, not the post trade, and he expects that that will stay the same for the time being.
Elsewhere, he said an earlier plan his team made to deliver a pilot alpha of the derivatives blockchain product for exchange-traded futures and options was derailed earlier this month when the UK voted to exit the European Union.
He said such efforts could now be delayed until September of this year.
“We’re building a prototype. We want to work with these firms to see how we can make this thing operational on a very small scale.”
Photo of Colin Platt via DPactum