Wall Street is excited about Blockchain.
Nasdaq CEO Bob Greifeld has said his company needs to be a “rapid applier” of the technology. Autonomous Research has called the technology a “game changer.” Goldman Sachs has said the use of blockchain technology in stock trading could result in $6 billion in industry cost savings globally.
There’s no shortage of hype, but widespread implementation is still a long way away in the highly regulated financial services industry.
While the rest of Wall Street watches, the Australia Securities Exchange (ASX) is pioneering the attempt to implement blockchain technology in a large scale market.
The exchange is looking at replacing its clearing and settlement system with a blockchain solution, and will make a decision on whether to go through with the change by mid-2017.
“The securities industry is experimenting with blockchain across the post-trade market,” Morgan Stanley said in a research note titled ‘Blockchain – Is ASX set to shape a brave new world?’
“Within equities, the most progressed of these is the ASX-planned replacement of the central depository (CSD) with a blockchain solution. If successful, the implications could be significant across the securities value chain.”
Blockchain uses computers with advanced encryption to keep track of transactions, and the use of a blockchain solution in clearing and settlement has the potential to reduce costs, save time, and cut complexity.
Goldman Sachs set out how this could work in a recent note. It said:
Essentially, by enforcing agreement at the time of entry, blockchain could eliminate some of the most common post-trade issues and errors, such as incorrect settlement instructions or incorrect account/order details. Today, these details are confirmed/affirmed by multiple parties (DTCC, custodians, broker/dealer, clients) and multiple times throughout the life cycle of the trade. If blockchain could be fully implemented across these parties, many of these attributes could be included in a smart contract, thus becoming a pre-trade requirement to execute an order rather than a downstream, post-trade check that requires multiple parties to agree.
The US bank said this would reduce duplications in affirming and reconciling trades, and help save the industry $6 billion globally.
There are challenges however. The size and fragmented structure of stock markets in the US and European Union could slow the adoption of blockchain technology for example, according to Morgan Stanley. There are regulatory concerns too.
This will only work on a large scale if global exchanges decide to follow suit and adopt the same standards. Without this, the market risks ending up with multiple systems with similar cost challenges as those faced today.
That means the world will be watching what happens in Australia.
“If the ASX “flicks the switch”, this would increase the pace of innovation and disruption risk to the post-trade securities market,’ Morgan Stanley said.