DTCC Considers Launching a Stablecoin: Implications for the Financial Sector

DTCC’s Exploration into Stablecoin Development

The Depository Trust & Clearing Corporation (DTCC), a pivotal entity in global finance, is evaluating the feasibility of launching its own stablecoin. According to a report from The Information, a spokesperson from DTCC acknowledged their active monitoring of legislative and regulatory evolutions in the U.S., stating that the organization will weigh its options, including the potential issuance of a DTCC-branded stablecoin, if necessary. Communication with DTCC for further clarification did not yield a response before publication.

As the largest central securities depository and central counterparty globally, the DTCC processes an astounding $3 quadrillion in post-trade settlements each year and is integral to the clearing of virtually all transactions within major U.S. stock exchanges.

Ongoing Initiatives in Tokenization

Understanding the context of this report is essential, as DTCC is already involved in significant institutional initiatives. One notable project is Fnality, an institutional settlement token backed by central bank reserves. Institutions can mint this token for settlement purposes by transferring funds to Fnality Bank’s central bank account, although, in the UK, access is limited to firms with central bank account privileges. Unlike this, U.S. legislation like the GENIUS Act permits central bank reserves for stablecoins without such restrictions.

Fnality boasts backing from over 20 global financial institutions, including notable names like Nasdaq and Goldman Sachs, and it has already been operational in the UK. Additionally, Fnality Bank US received a provisional certificate of authority in Connecticut, marking its 18-month interim approval as a state-chartered innovation bank.

Furthermore, banks are developing interoperable tokenized deposits through the Regulated Settlement Network (RSN), with DTCC playing a contributory role. There’s also speculation about a collaborative stablecoin initiative spearheaded by The Clearing House.

In April of this year, DTCC unveiled plans to initiate a tokenized collateral platform, conducting a trial demonstration featuring the Fnality dollar and pound, along with Societe Generale’s EURCV stablecoin as collateral. The ability to swiftly transfer tokenized collateral is deemed essential by institutions for mitigating various risks, allowing them to utilize stablecoins or tokenized government bonds instead of cash for posting variation margins in trading.

Steps Towards Practical Implementation of Stablecoins

For DTCC, the technical evolution needed to enact stablecoin issuance could be straightforward. It already operates a bank subsidiary that holds complete authorization, unlike Fnality Bank US. Its primary subsidiary, the Depository Trust Company (DTC), functions as a limited-purpose trust company under New York’s banking statute and possesses access to a central bank account, facilitating substantial transaction settlements via Federal Reserve currency.

If DTCC opts to create a stablecoin, it could potentially offer a high-quality asset by aligning it with models similar to that of Fnality, possibly maintaining backing from central bank funds. Typically, stablecoins are secured by Treasury bills, recognized for their stability. However, recent volatility in money markets signifies the advantages of being fortified by central bank reserves to mitigate risks.

A challenge to consider is that the Federal Reserve’s high-value real-time gross settlement system (RTGS) is not operational 24/7. Although FedNow provides round-the-clock service, it focuses on retail transactions and features lower transaction limits, which may not meet the DTCC’s demands. Additionally, U.S. Treasury markets do not operate continuously, implying that institutions might need to maintain reserves to handle transactions outside regular hours.

In light of the Commodity Futures Trading Commission (CFTC) initiating trials for tokenized collateral and the CME and NYSE’s parent firm ICE looking into stablecoins, the timing seems favorable for an institutional-grade stablecoin—whether from Fnality or directly from the DTCC.