Early adopters have this week begun testing the ASX’s controversial world-leading equities blockchain.
The ASX is moving all of its stock records from the decades old CHESS system (Clearing House Electronic Subregister System) onto the blockchain by 2021.
At a cost of $75 million this year alone, it’s the world’s largest deployment of a private blockchain in the financial markets, and is being closely watched by other international exchanges, central banks and investment banks.
The system is expected to cut transaction costs, and make them faster and more secure.
Complaints from ‘ancient tech’ registries over costs and benefits
While the Australian Stock Exchange distributed ledger test is a huge milestone for the ambitious project, some brokers and share registries have complained about the costs of upgrading their own systems to comply, and queried the potential benefits. They believe it’s being forced through by the monopoly ASX.
In response the ASX slammed share registry companies with ‘ancient’ technology, saying they want to profit by holding back progress.
World leading blockchain technology
The new system replaces CHESS which was introduced in 1994. Although there have been a number of small scale blockchain trials on exchanges including the NASDAQ, NYSE, Tokyo Stock Exchange, Deutsche Bourse and India’s Securities Exchange Board, the ASX is on track to become the first major exchange to transition to blockchain.
On Tuesday, the exchange switched on the test site to allow testers access to its data store. The first 11 organizations to test the system in the sandbox include global investment banks, the big four’s brokerage arms and some local broking firms.
Nine of them are running nodes and will test the performance of the distributed ledger technology against the current system.
The ASX says the system will eradicate the cumbersome back and forth checking between outside organisation’s systems and the ASX’s own for reconciliation. The use of smart contracts will help automate workflows across sectors to reduce errors and costs.
The blockchain system will ultimately be used for things like secondary market capital raising.
Scathing criticisms in Deloitte report
In March, concern over the rapid pace of change bubbled over into the public sphere with the publication of a Deloitte report that contained scathing criticisms of the ASX’s approach.
The report – partly funded by share registries Computershare and Link – claimed:
- The ASX did not provide a business case with costs and benefits
- No principles had been established to allow for any value created by the project to be
shared with stakeholders, including issuers and investors
- The project had been designed to “avoid reasonable challenge to the committed course of action”.
ASX deputy chief executive Peter Hiom told the Australian Financial Review the share registries simply do not want to cover the cost of updating their systems to match the new standards.
“We are trying to build a system for tomorrow,” he said.
Open source, cross-blockchain
The system is being developed by a company called Digital Asset which has said the source code will be made open and would be able to run on other ledgers including VMware Blockchain and Hyperledger Sawtooth.
Its ‘digital asset modelling language’ DAML is the only programming language certified by the International Swaps and Derivatives Association. This means it can be used with smart contracts for products like interest rate swaps.
Six upgrades to the testing environment will be introduced every six to eight weeks from now on. Industry wide testing begins next year.
As is practically expected for major tech projects, in September last year the go live date for the project was pushed back from late 2020 to March/April 2021.
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