Post-Trade Giant NSD: Blockchain 'Useless' If Not Legally Binding

After nearly two years of experimenting with blockchain, the National Settlement Depository (NSD), Russia's central securities depository, believes it now knows what incumbents must do to reap benefits from the tech.

The largest securities depository in Russia, the NSD has found that there are only a few cases where blockchain solutions can provide benefits over centralized alternatives, and that there are two criteria it uses for determining a 'good' distributed ledger use case.

According to the NSD's director of innovation, Artem Duvanov, the first is that blockchains should only be used to record legally binding information.

"Blockchain is useless if it stores information that has no legal consequences," he told CoinDesk in a new interview.

The remarks follow a number of smaller announcements from the NSD about its blockchain work in recent months. In April 2016, the NSD first revealed it had launched a distributed ledger trial, and by the year's end, it had announced collaborations with two other global central securities depositories (CSDs).

Duvanov said that, through these trials, the NSD has determined a second criterion: that blockchain must be used as a tool to satisfy "non-functional requirements" in a multi-party environment.

He told CoinDesk:

"Centralized systems are inherently vulnerable to operational, legal, and cybersecurity risks. Blockchain allows us to mitigate these risks with lower costs that can be achieved through enhancement of traditionally digitized collaboration in multi-party environment with additional reconciliations, audits and other external means."

The findings come on the heels of an uptick in activity at global CSDs – the large, often national entities that provide a central point for the depositing and settlement of financial instruments.

The most active to date has been the Depository Trust & Clearing Corporation (DTCC) in the US, which revealed in January that it would seek to migrate its derivatives processing to a distributed ledger system sometime in 2018.

Multi-party benefits

But, what does it mean for a blockchain solution to enhance digital collaboration?

Duvanov described the NSD's proxy voting trial as an example of what the organization believes to be a true use case for a blockchain or distributed ledger.

As explained in its 2016 announcement, the NSD is using a test blockchain to process messages between the issuers of securities within a digital environment, ensuring that all votes are properly "submitted and accounted for".

"[In this case,] blockchain doesn’t bring new functions for customers, end investors or issuers, but it ensures a voting environment with dramatically less operational, legal and cybersecurity risks," he said.

Though Duvanov did not provide any updates on the state of the trial, he described proxy voting as the company's "main business case" relating to the technology.

Created through a merger in 2010, the NSD provides services in clearing, securities settlement, cash settlement and asset servicing, support tools including equities and money market instruments. It later gained CSD status in 2012.

Confidentiality concerns

But while the NSD believes it has gleaned insights from its work with the tech, the organization is still grappling with many of the same challenges as its peers.

"The main obstacle for implementation of blockchain in corporate environment is lack of confidentiality mechanisms in existing blockchain platforms," Duvanov said.

The statements follow an uptick in interest around privacy in blockchain systems, with enterprise blockchain firms debuting new tech in recent months aimed at providing solutions to this long-held concern.

It's here, however, that Duvanov said the industry can expect the NSD to soon make a contribution, as he projects the firm will provide a "limited solution" to the Linux-led Hyperledger blockchain project this year.

For now, however, Duvanov suggests industry observers may want to caution their expectations for the technology's growth, arguing that that while it can decentralize recordkeeping, this does not mean it can create sweeping change.

Duvanov concluded:

"Blockchain cannot completely remove intermediaries. That was the widespread belief."

Correction: A previous version of this article incorrectly stated the year the NSD received its CSD status.

NSD image via YouTube; Crumpled paper via Shutterstock