When Dominic Stevens, ASX managing director and CEO said: “this is an exciting day”, to analysts and journalists last Thursday, he wasn’t kidding. The ASX had effectively announced that it would become the first stock exchange in the world to use distributed ledger technology for messaging and backoffice transactions. The ramifications for fund managers, their clients, and individual investors will be enormous.
ASX, through its investment in the US provider Digital Asset, in which it has become an increasingly important shareholder, will now embark on a scoping study which will take about three months to develop a timeline for the replacement of the CHESS system with a distributed ledger, more commonly known as ‘blockchain’.
Peter Hiom, the ASX deputy CEO who has been championing the project for nearly three years and speaking to industry participants about it for nearly two, said during the briefing: “It’s true to say that we are the first exchange to consider taking this step. We do think it puts us ahead of other exchanges.”
He said: “It’s easy to think of this as if it’s from the fourth dimension, but it has many parts which are familiar to us… Importantly, it gives us an enhanced database infrastructure. That’s why we don’t think it’s high risk.”
Nevertheless, when the timeline is announced, there will be a transition period for participants. Some will quickly want to “take a node” to enjoin the new system, while others will want to sit back and be comfortable following the herd.
Hiom said there was a confluence of factors which led to the decision, not the least of which was the necessity to look at replacing the aging CHESS system with some sort of upgrade. The ASX looks to do this every 10-15 years.
“So, there was some serendipity for us, in terms of our technology spend. We also felt that there was more of an issue in the marketplace about costs in post-trades and we could help address that,” he said.
Stevens pointed out that the ASX could not have an “open, anonymous” system. Users needed to be “known and regulated entities”. There was no need for any form of “consensus mechanism” in the new system.
The savings, to do with not needing to reconcile data under a distributed ledger, meant there would be significant costs taken out of the backoffice, Stevens said. “But that is just a small piece of the market. There are efficiency benefits for registries, custodians, wealth managers and administrators… The better, real-time, data will also allow them to improve their services to their customers.”
The first section of the market to enjoy the benefits would be the “cash equities” market – which means listed companies – that totals about $1.5-2.0 trillion. It was logical that the “cash-debt” market – which means, mainly, derivatives – would follow.
Stevens said the costs associated with the initiative were really not dissimilar to the usual cap-ex expenditure. However, ASX has an increasing investment in its provider, Digital Asset. As part of the announcement, ASX will provide Digital Asset, run by the high-profile Blythe Masters, with an extra $3.5 million in convertible notes.
ASX and Digital Asset have agreed to work exclusively in Australia and New Zealand, Masters said in a statement last week. She said: “After so much hype surrounding distributed ledger technology, today’s announcement delivers the first meaningful proof that the technology can live up to its potential. Together, DA and our client ASX have shown that the technology not only works, but can meet the requirements of mission critical financial infrastructure.”
For compliance and backoffice specialists, the briefing included various references to international standards, run by the SWIFT organisation. This tends to mirror recent announcements to do with Australia’s “New Payments Platform” and coincides with Calastone’s recent announcements to enjoin the blockchain revolution (see separate report this edition).
Greg Bright is publisher of Investor Strategy News (Australia)