Simply put
- The no-action letter permits the DTCC to create and eliminate tokenized entitlements on approved blockchains without invoking certain compliance rules related to clearing houses or systems.
- Participants can transfer eligible securities, including Russell 1000 stocks, U.S. Treasuries, and major index ETFs, to blockchain-based wallets depending on approved structures.
- As part of monitoring the pilot, DTCC must provide detailed quarterly reports on usage, technology choices, and any instances where transactions need to be reversed.
The SEC has granted permission to clearinghouses responsible for processing nearly all U.S. stock transactions to conduct a three-year pilot program that will record specific securities on selected blockchains. This marks a significant step as it’s the first instance of a blockchain-based record-keeping system being integrated into the core of the U.S. market.
In a statement issued Thursday, the SEC announced it would refrain from enforcement actions if DTCC’s clearing subsidiary, the Depository Trust Company, mints and burns blockchain tokens that represent the security entitlements it already holds. Essentially, clearinghouses can now generate and retire blockchain tokens that reflect the securities they possess, starting with the pilot in the latter half of next year.
This exemption lifts several standard requirements, including key SEC regulations relating to the dependability and security of essential market infrastructure, 19b-4 filings, and some clearing house standards.
“By utilizing blockchain technology, DTCC aims to connect traditional finance with decentralized finance, fostering a more resilient and efficient global financial system,” the DTCC stated.
Through this program, participants in the DTCC can opt to convert their transfer entitlements into “tokenized entitlements” on the blockchain.
The DTCC needs to report quarterly on the number of participants, the total value of the tokenized entitlements, the blockchains that were either used or discarded, system outages, the number of registered wallets, and any instances in which companies used their revocation powers.
Eligible securities for this pilot include those from the Russell 1000, U.S. Treasuries, and leading index-tracking ETFs.
Structure
When a participant opts for tokenization, the DTCC withdraws the securities from the central ledger and places them into a new digital omnibus account. Following this, the corresponding tokens are created in blockchain wallets managed by those participants.
Tokenization services may simplify coordination requirements and facilitate rights transfers outside regular market hours, while still upholding necessary safeguards for domestic securities, according to the report.
Tokens can exist on approved public or private blockchains, provided the network complies with DTCC’s technical standards.
Even though the ledger is transparent, it maintains a permissioned structure. Tokens can only be exchanged between wallets recognized by the DTCC, which also has a “root wallet” that can rectify any transactions in cases of errors or fraud.
DTCC intends to release a list of supported networks later, indicating that the regulatory guidelines do not mandate a specific type of blockchain design, but rather focus on DTCC’s storage and control protocols.
Representatives from DTCC have not yet responded to inquiries regarding this development.
