NOVEMBER 2021

DIGITAL SECURITIES MANAGEMENTBRINGING PRIVATE MARKETSINFRASTRUCTURE INTO THE 21ST CENTURY
INDUSTRY UPDATETABLE OF CONTENTSBACKGROUND.................................................................................................................................... 1Overview of DTCC’s Digital Securities Management Platform........................................................................ 1MODERNIZING PRIVATE MARKET INFRASTRUCTURE........................................................................ 2
SPOTLIGHT ON BOOK ENTRY+........................................................................................................... 3
How Does it Work?......................................................................................................................................... 3
Why Public Ethereum?................................................................................................................................... 3
What are the Benefits?.................................................................................................................................. 3

DSM BENEFITS THE ENTIRE ECOSYSTEM ACROSS THE FULL LIFE CYCLE OF SECURITIES.............. 4
Benefits of DTCC’s Digital Securities Management Platform......................................................................... 5THE PATH TO PRODUCTION............................................................................................................... 6CONCLUSION..................................................................................................................................... 6
GLOSSARY OF TERMS........................................................................................................................ 7

BACKGROUND
In 2019, DTCC began researching the U.S. private markets to evaluate modernization opportunities based on
unmet client needs, new technology and DTCC’s ability to provide robust and resilient market infrastructure.
Following an extensive evaluation of the private markets and the drivers for digitalization, DTCC published a casestudy on Project Whitney, a multi-phase project to address a range of issues, including manual processes, market
fragmentation, regulatory uncertainty and a lack of trusted providers. We developed a prototype and engaged key
stakeholders to validate the solution by:• Hosting a series of one-on-one workshops with 40+ clients and market
participants, including placement agents, custodians, transfer agents, cap
table providers, broker-dealers and marketplaces;• Meeting with 150+ representatives across issuer services, custody,placement services, trading, as well as technology and digital innovation
functions;• Showcasing the prototype solution at over 15 industry forums; and• Completing three technical integrations for experimenting workflows andfunctionality with potential partner firms.

All of this work andcollaboration has led to
DTCC’s decision to launch
DTCC’s Digital Securities
Management platform
to transform andmodernize private
markets infrastructure.

The industry response to Project Whitney was overwhelmingly positive, which
served as a catalyst for deeper and more comprehensive collaboration withclients and stakeholders to further understand the challenges and pain points inprivate markets in their ‘traditional’ format, as well as new challenges related to security tokenization.

All of this work and collaboration has led to DTCC’s decision to develop DTCC’s Digital Securities Management(DSM) platform to transform and modernize private markets infrastructure1.

Overview of DTCC’s Digital Securities Management Platform
Digital Securities Management is a modular, service-based platform positioned to modernize and digitalize private
market securities throughout issuance, distribution and secondary transfer. DSM will initially support pre-IPO
equity securities (‘Reg D’ and ‘Reg A’ instruments), however, the platform was designed to easily scale and expand
into other markets, positioning it to become the platform of choice for funds, debt, real estate, loans and other
instruments that are underserved today from a market infrastructure perspective.
The DSM platform will help remove manual processes end-to-end, reduce cost, increase speed to market and bringprivate market operational flows in line with other streamlined and efficient asset classes. In addition, DSM builds on
DTCC’s history of mutualizing non-competitive, non-differentiating services, such as trade processing and asset
movement. This is important as it enables firms in the private markets ecosystem to dedicate their resources to value
creation opportunities.
DSM is developed on cloud-based technology and uses an application programming interface (API) design, whileproviding optional, blockchain-agnostic functionality to tokenize securities. This provides maximum flexibility forfirms to choose the infrastructure that’s most appropriate for them and their clients based on their current
technology capabilities.
Finally, DSM supports more efficient secondary market liquidity, greater access to a broader set of investors andmore streamlined capital raising processes. The vision of DSM is to enable a seamless transition for companies as
they evolve from private to public. DTCC anticipates launching the first phase of DSM in early 20222.
1

Implementation of DSM and its services discussed herein are pending regulatory review and approval by the U.S. Securities and Exchange Commission.

2

Pending regulatory review and approval by the U.S. Securities and Exchange Commission.

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MODERNIZING PRIVATE MARKET INFRASTRUCTURE:
FOR TODAY AND FOR THE FUTURE
Given the explosive growth in private markets, there has been a proliferation of new entrants seeking to leverageinnovative and emerging technologies, such as blockchain, to accelerate the modernization of systems andprocesses that have not kept pace with market evolution. While it is easy to see the potential efficiencies andbenefits gained from these cutting-edge solutions, not all private market participants are prepared or able totransform their operating models at the same pace.
The lack of a coordinated transformation among market participants is likely to result in market fragmentation as
firms develop their business models—with some struggling to meet existing regulatory guidelines and identify how
new technologies could best be leveraged within their firms. As more players enter the space and fragmentation
increases, it magnifies the importance of establishing common infrastructure and standards that benefit thegreatest number of market participants, while allowing further innovation to prosper and thrive.
The feedback from market participants is clear, they require an industry-wide solution that, from inception:• Provides immediate benefits to the largest number of current market participants through widely used,
standard technology, such as databases, cloud infrastructure, APIs, and intuitive user interfaces; and• Supports blockchain-agnostic tokenization functionality for market participants already prepared tounlock the potential of the technology.
As a result, with the expected launch of DSM in early 2022, the platform will support two complimentary models tomodernize and digitalize private markets infrastructure:

TRADITIONAL SECURITIES (‘BOOK ENTRY’):

TOKENIZED SECURITIES (‘BOOK ENTRY+’):
From launch, DSM will provide the option formarket participants to create tokenizedrepresentations of a security without the needfor bespoke technology.

At its core, DSM is built on a cloud-based
infrastructure leveraging a relational databasearchitecture to create a ‘book entry’ record of
securities information and data, including security
master files, investor and issuer registries,
industry-standard security identification numbers
and codification of transfer restrictions.

Although it will initially integrate with thePublic Ethereum Network, the DSM platform
is architected to be blockchain agnostic, andadditional public and private blockchain
support will be rolled out based on client andmarket demand.

Clients will access the system using standard APIs
and custom-built, web-accessible graphical userinterfaces (GUIs). Integration into existing
infrastructure by market participants will bestraightforward, allowing for rapid time to market
and adoption and, most important, immediate
realization of benefits from a more efficient
operating model.

Importantly, DTCC is exploring the possibility ofDSM serving as a Good Control Location3, which– subject to regulatory approval – would allow
financial institutions to hold tokenized securities
on an investor’s behalf.

An entity’s designation as a Good Control Location is based, in part, on its ability to maintain exclusive control over customer securities. See Rule 15c3-3 under theSecurities Exchange Act of 1934 (17 CFR § 240.15c3-3), also known as the Customer Protection Rule. Use of DSM to establish Good Control is contingent uponregulatory consideration and approval by the U.S. Securities and Exchange Commission.

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SPOTLIGHT ON BOOK ENTRY+How Does it Work?

Token Holders

At the time of asset issuance, the DSM platform deploys a Token Contract implemented to maintain token
balances and enable token holders to instruct transfers, query balances and a range of other capabilities.
Tokens are then minted to the addresses associated with investors in a primary offering and linked back tothe positions maintained in the DSM Stock Record. Any on-chain token transfer first seeks approval from theDSM Platform, which acts as a Blockchain Oracle and ensures transfer restrictions pass and off-chain records
are updated. Due to the design of the Book Entry+ Token Contract, DSM validation cannot be circumvented.

Mint/Burn Tokens

Book Entry+
Token Contract

Approve/Reject Transfers

DSM

Reconcile Balances

Why Public Ethereum?
While the DSM platform is architected to be blockchain agnostic, the first release will support issuance ofBook Entry+ securities on the Public Ethereum Network given the network’s current adoption by financial
institutions and the range of existing tooling and standards.

What are the Benefits?
• Compatible with existing tooling due to the use of an ERC-20 Interface• Implements transfer restriction logic off-chain to enable the enforcement of complex restrictions
while minimizing gas costs• Allows the option for Investors to hold tokens directly in wallets, initiate transactions, and settle
against on-chain payment mechanisms3DSM BENEFITS THE ENTIRE ECOSYSTEM ACROSS
THE FULL LIFE CYCLE OF SECURITIESPrivate markets operate today in a complex ecosystem served by a mosaic of market participants. DSM is designed
to integrate seamlessly within that ecosystem:

Book Entry

Issuers

Investors

INVESTOR’S AGENTS

MARKETPLACESISSUER’S AGENTS

Cloud-Based DSM Platform
REFERENCE DATAIssuer DataTransfer Restriction Repo

Security Master Data & IDs
Investor Registry

ASSET ISSUANCE & SERVICINGBook Entry

Book Entry + (Tokenized)

TRANSACTION CONSENT ENGINEGROSS SETTLEMENT SERVICEPOSITION & POST-TRADE REPORTING

Blockchain Agnostic Interface

DLT Network(s)DLTConnectivity

ISSUER’S AGENTS

MARKETPLACES

Issuers

DLTConnectivity

INVESTOR’S AGENTS
DLTConnectivity

Investors

Book Entry+
Key features of the DSM platform across the life cycle of a security include:
ASSET ELIGIBILITY• Creation of Security Master Record and assignment of unique asset identifier• Election of transfer restriction programs

PRIMARY OFFERING• Ability to upload a ‘book’ of primary Investors for offerings closed outside of the platform• Support for the distribution and closing of an offering on the platform

ISSUANCE
SECONDARY TRANSACTIONSPOST TRADE• Uncertificated issuance (Book Entry)• Option for tokenized representation (Book Entry+)• Venue-instructed trade processing from Marketplaces• Participant-instructed bilateral delivery orders• T+1 (or beyond) gross settlement for primary and secondary orders• Position and activity reporting for Investor’s Agents and Issuer’s Agents4

Benefits of DTCC’s Digital Securities Management Platform
As a foundational layer of market infrastructure that supports the full life cycle of private market securities, DSM isdesigned to provide a range of benefits for all market participants in the private market ecosystem:• Cost mutualization of non-differentiated services, such as centralized stock record keeping and codificationof transfer restrictions;• Reduced operational costs through standards and increased automation, including security identifiers, T+1
gross settlement, and electronification of transfer restriction approvals; and• A dynamic platform that is easily extendable and expandable to a broad range of private market instruments,
including funds, real estate, debt and others.
In addition to the broader industry benefits, DSM provides many enhancements, improvements, and businessenablers to specific private market participants:• Maintain a real-time share register through existing agents or cap table providers
ISSUERS• Ensure compliance with regulatory and issuer specified transfer restrictions• Streamline the process of secondary liquidity for new and existing shareholders• Consolidated source of real-time investor ownership records to incorporate into cap tables

ISSUER’S AGENT• Option to tokenize assets without the need for bespoke solutions or use of tokenization technology providers• Automated enforcement of transfer restrictions, including ROFRs and Issuer manual approvals,
across marketplaces and trading desks• Shortened settlement cycle leveraging DTCC settlement service, eliminating the need for wire transfers

INVESTOR’S AGENT• Consolidated view of Investor holdings without the need for bespoke logins to online portals or cap
table solutions• Golden source of security reference data and documentation aligned to a unique identifier• A lign operational flows of private market securities with other efficient asset classes

INVESTORS• Consolidated Investor positions, with the option for Investors to own directly or beneficially• Streamlined access to private market securities through a more efficient and robust secondary market

MARKETPLACES• A lleviates the need for bespoke integrations and siloed solutions, enabling access to a broader rangeof introducing brokers leveraging DSM’s centralized stock record• Increased execution rates by providing surety of investor holdings at the time of order placement• Simplified cash settlement for broker-dealer subscribers to the venue

Further, DTCC is exploring the ability for broker-dealers to hold customer assets while relying on DSM as a“Good Control Location” for both traditional and tokenized representations of securities, subject to regulatory
consideration and approval.35THE PATH TO PRODUCTION
DTCC is now in the production build phase of the Digital Securities Management platform and, subject to final
regulatory approval, is expected to launch the service in early 2022.
2020

PROTOTYPING

2021

EXTERNAL
VALIDATIONCASE FOR
CHANGE

2022

DSM
PRODUCTIONBUILDLAUNCH

From a product scope perspective, the initial offering will support Reg D and Reg A/A+ securities. Post-launch,client demand will drive the further evolution and expansion of the platform across both supported asset types(pooled investment funds, REITs, Debt, Loans and others), as well as alternate public and private blockchains.

CONCLUSIONDTCC has a long history of driving innovation to strengthen post-trade processes and providing resilient, secureand efficient infrastructure for the financial services industry. Our commitment to innovation is reflected in theplatforms and processes we have implemented to protect the safety and soundness of the markets through record
volume and volatility. The DSM platform represents the next step in our digitalization journey and serves as an
example of incorporating innovative technology and business concepts designed to strengthen post-trade
processes and provide a resilient, secure and efficient post-trade infrastructure for the industry.
While DTCC believes the digitalization of both financial and real assets shows great promise, efforts to develop
highly efficient markets for these assets face substantial cost and complexities. Because markets are unpredictableand demand for new innovation may emerge over time, it is important to modernize infrastructure and processes ina way that enables use and adoption by a broad set of clients without forcing adoption of a specific technology.
This approach puts value creation front and center.
DTCC welcomes engagement with all participants in the private market ecosystem. Please contact the DSM teamat DSM@dtcc.com. We look forward to collaborating with the industry to advance the digital transformation of theprivate markets infrastructure.

6GLOSSARY OF TERMS
Alternative Trading System (ATS) – Trading venue operated by a broker-dealer that seeks to match buyers and sellers
in securities transactions.
Blockchain Oracle – Any device or entity that connects a deterministic blockchain with off-chain data.
Good Control Location – An entity’s designation as a Good Control Location is based, in part, on its ability tomaintain exclusive control over customer securities. See Rule 15c3-3 under the Securities Exchange Act of 1934
(17 CFR § 240.15c3-3), also known as the Customer Protection Rule. Use of DSM to establish Good Control is
contingent upon regulatory consideration and approval by the U.S. Securities and Exchange Commission.
Investor – The individual or institution who participates in the primary offering, or a secondary offering of a security.
Investor Agents – The companies who provide services to Investors to support their private market investment activities,
including broker-dealers, prime brokers, custodians, fund administrators and others.
Issuer – The private company looking to raise capital through the offering of their equity security.
Issuer Agents – The companies who provide services to Issuers to support their private market investment activities,
including cap table providers, transfer agents, placement agents, broker-dealers and others.
Marketplaces – Venues, such as Alternative Trading Systems, that match buyers and sellers of securities.
Placement Agent – An entity (usually a broker-dealer) that assists private companies in structuring and raising capitalfor an exempt security offering.
Token Contract – A smart contract deployed on a DLT Network that manages token balances and the methods by which
token transfers can be invoked.

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