Reality bites the ASX blockchain

  • By Pat McConnell

Last December, with considerable fanfare, the ASX announced that it would replace its decades-old equities settlement system with a brand new one based on the blockchain ​and claimed that it would be the world leader in this new technology.  

In April, the exchange published a plan outlining how the distributed ledger technology (DLT) was to be implemented, calling for a quick turnaround response from the industry by June, and expecting to provide a ‘final’ functional scope and implementation roadmap in late July.

However, the deadline was quietly shifted out to an anticipated ‘late August’ due, no doubt, to the less than enthusiastic response of some in the industry to the proposed new system.

In its response to the consultation, market heavyweight, Computershare, reported that some of its clients were gob smacked at the extent of the project outlined by the ASX, as they were led to believe that it was merely a technology ‘switch’. 

The proposed project is indeed very much more than a mere technical facelift, with a number of large, previously moth-balled, business projects, that have nothing to do with blockchain, being kicked off immediately.

These include a proposed move to ISO20022 (i.e. SWIFT) messaging standard, which was first mooted in 2012 and which will necessitate a significant disruption to many internal processes in the back offices of all market participants.

Despite claims of significant savings to be made across the industry by introduction of DLT, no hard benefits nor implementation cost numbers have been provided, provoking some respondents to demand a proper business case analysis before proceeding with such a major overhaul.

Blockchain-lite

It is indeed very difficult to identify significant benefits for the project because the raison d’être of the project [the move to blockchain] has been significantly downgraded – so much so, that the technology no longer qualifies as even ‘blockchain-lite’.

In the first blush of enthusiasm for the wonders of blockchain, ASX management promised near’ real-time settlement.

Unfortunately, the realities of the novation and netting processes that CHESS provides to minimise settlement risk, means that the new system will, as today, settle commitments on T+2 (i.e. 2 days after Trade Date), which does not qualify as ‘near real time’.

Reality has taken a huge bite out of the hype surrounding blockchain.

But it gets worse.

One of the fundamental principles of a blockchain is that there is no central authority and participants will deal directly with one another, cutting out the middle man, except for some minor roles.

In the new CHESS, ALL information will continue to go through the ASX and, contrary to the pipedream, participants will not deal directly with one another, only with the ASX.

Dependent on the ASX

In fact, not only is there no decentralisation, some participants are suggesting that the new system will be even more centralised and dependent on the ASX than today.

The final blockchain principle to be skewered by reality is ‘database transparency’, where all changes to the ‘distributed database’ are made available to everyone, so that everyone can ‘trust’ the database.

While this was never a real business requirement, because some participants will not want their trading intentions to be disclosed to other players, it has been jettisoned here with only a participant’s own data being supplied back to them, through a Data API.

As a result, the key principles of blockchain have been discarded in the new Chess system, mainly because the reality is that there was little or no business requirements for this functionality in the first place – at best they were ‘nice to have’.

In terms of IT architecture, all that remains of the pure blockchain in this proposed implementation is what is known as a ‘message bus’, which is being built from scratch by ASX partner, Digital Asset

However, as might be expected, there are many proven implementations of such a messaging bus that are secure, reliable and high-performing, even one by an existing software supplier to the ASX - TIBCO with its EMS software. 

The question that must be asked is why is the ASX re-inventing the wheel in this instance?

The reality is that: blockchain was never going to achieve the savings claimed by the ASX; was never going to provide the necessary business functionality needed by the industry; and was never going to be easy to implement.

Reality has taken a huge bite of those pretentions.  It will be interesting to see how many more chunks will be bitten off when the full set of the industry’s responses to the April proposal are revealed in a few weeks’ time?

A key question remains - how much is the industry prepared to pay for the minimal improvements to the current equities settlement process that will, in reality, be provided by this over-hyped non-solution?