news The Australian Securities Exchange (ASX) has selected US firm Digital Asset Holdings to develop a blockchain post-trade solution for the Australian equity market.
The new solution could end up replacing a legacy post-trade system that relies on 20-year-old technology, and bring benefits in a number of areas.
The ASX said distributed ledger technology could remove risk and reduce back-office administration and compliance costs for its clients, while investors could experience far faster settlement of equity transactions – potentially in close to real-time.
The announcement comes soon after the ASX joined 12 other major financial institutions in Digital Asset’s recent funding round, paying A$14.9 million to acquire a 5% equity interest in the firm.
That investment will fund an initial phase of development of the proposed blockchain solution and allow the ASX to acquire a warrant for the right to purchase further equity and appoint a director to the board in the future.
The ASX has been planning for some time to replace or upgrade its main trading and post-trade platforms, announcing last year that an initial “phase 1″ of the program will replace ASX’s existing trading and risk management systems by the end of 2016.
Phase 2 will focus on the post-trade services, including clearing and settlement of the cash equities market. The system that currently provides these services to the Australian equity market is known as CHESS.
As part of that plan, ASX will work with Digital Asset to design a new post-trade distributed ledger solution for the Australian equity market.
The ASX said that, in the initial six to 12 months, it plans to develop a solution to demonstrate the benefits that distributed ledger technology could bring to a range of users – including investors, listed companies and intermediaries.
The development will take place alongside normal CHESS functionality, and will allow all interested parties to assess the benefits and implications of the new post-trade solution before a final decision is made in 2017.
“There has been very little innovation in the post-trade services that operate around the world for the better part of 20 years,” said Elmer Funke Kupper, ASX Managing Director and CEO. “Rather than replace CHESS with a new version that is based on the same legacy processes that operate in the market today, we should aim to re-engineer and simplify those processes to deliver significant benefits to the users of the market.
The ASX said, along with Digital Asset, it will engage with regulators and government agencies to assess the benefits of any future solution, and to ensure that it will meet the high regulatory, operational and security standards that apply to Australia’s financial markets.
While publicly available blockchains, like that of bitcoin, are permissionless, the standards that apply to regulated financial markets mean any ASX solution will be on a private network whereby all participating parties will be permissioned to do so – as they are on the CHESS system.
Ms Blythe Masters, CEO of Digital Asset, said: “Digital Asset is delighted to partner with ASX. The work we have done with ASX to date indicates that Australia has a unique opportunity to be a world leader in the adoption of Distributed Ledger Technology. We expect the solution that Digital Asset can deliver will bring significant benefits and exciting new business opportunities to ASX and the Australian market.”
Blockchains or distributed ledgers are distributed databases made up of ‘blocks’ of data linked together and cryptographically enforced. This means these digital ledgers are almost impossible to alter once a record validated, even by those supporting the network.
The most famous instance of a blockchain so far is that which underlies the bitcoin digital currency, but many use cases are cited in industries such as finance, where they are viewed as having the ability to speed up, and reduce the cost of, legacy systems.