Australia’s equity market the ASX has decided to replace its CHESS system to record changes in shareholding with distributed ledger technology found in blockchain.
The global equities exchange community has been watching the ASX as it develops and tests a system to cut the cost of transactions, and make them faster and more secure.
Blockchain uses computers with advanced encryption to keep track of transactions, giving confidence to both buyers and sellers. Transactions of the cryptocurrency Bitcoin are tracked used blockchain.
Dominic Stevens, the ASX managing director and CEO, says the exchange has been carefully examining distributed ledger technology for almost two-and-a-half years.
“We believe that using DLT (distributed ledger technology) to replace CHESS will enable our customers to develop new services and reduce their costs, and it will put Australia at the forefront of innovation in financial markets,” he says.
The ASX was hit by a hardware failure which stopped trading for most of September 19, 2016. Brokers couldn’t get enough traction in the market to close major trades for clients in the short window that all stocks were available.
It was the longest breakdown on the ASX since 2011 when trading was out for four hours. The ASX had an outage in August 2015, in the middle of the annual results reporting season, due to technical issues.
The 2016 outage sparked a wider review this year by the corporate regulator, ASIC, into the operational and technological risk management arrangements at the ASX.
The CHESS (Clearing House Electronic Subregister System) was introduced in the 1990 to manage the clearing and settlement of equity transactions in Australia.
The ASX now plans to replace this with technology developed by Digital Asset, a company founded only in 2014. The ASX, which invested $14.9 million in Digital Asset in January 2016, today announced it had subscribed to $US3.5 million in convertible notes at Digital Asset.
The exchange says today’s decision follows the successful build of enterprise-grade software for core equity clearing and settlement functions, and the completion of extensive testing over the past two years.
The ASX says it will now work with stakeholders on finalising the scope of functionality for the new system. The proposed timing for transition is expected to be released for market feedback at the end of March 2018.
The new system will operate on a secure private network where participants are known, have permission to access, and must comply with ongoing and enforceable obligations.
Blythe Masters, the CEO of Digital Asset, says the technology not only works but can meet the requirements of mission critical financial infrastructure.
“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,” she says.
Treasurer Scott Morrison says the federal government supports the ASX’s commitment to designing a system that does not raise barriers to access for non-affiliated market operators and clearing and settlement facilities.
“This development puts Australia at the forefront of digital innovation in financial markets and will strengthen our financial system through greater efficiencies,” he says.
“We will continue to take action to support initiatives by our innovative FinTech sector to ensure Australia is globally competitive in this rapidly growing market.”