The Australian Securities Exchange (ASX) has finally revealed a detailed business rationale for one of the largest implementations of technology inspired by bitcoin.
Speaking during the presentation of ASX’s annual results, CEO Dominic Stevens meticulously outlined how the sixteenth largest exchange in the world plans to use distributed ledger technology (DLT) to bring new efficiencies to its users.
Instead of using the current centralized CHESS system for sending messages about buying and selling securities, ASX is implementing a decentralized, shared ledger similar to bitcoin’s blockchain and developed by former J.P. Morgan executive Blythe Masters.
At the core of the value proposition behind the move is what Stevens described as $23 billion in savings from fees currently paid by Australian firms for investment services, including insurance, online services and more.
But in a nod to the current middlemen providing Australian firms with the at-risk financial services, Stevens also made a noble effort to explain why they had nothing to fear.
“We see ourselves not as a competitor to those serving issuers and investors,” he said. “But as a supplier of infrastructure, structured data and analytics to help these service providers innovate and grow.”
The $23 billion number that Stevens says Australian investors can save by using DLT comes from a recent report by financial information firm Rainmaker, which also showed that the average fee paid by large investors is 1.2% of their assets. Stevens also claimed costs of equity clearing and settlement in Australia alone are about $100 million.
To reduce those costs the ASX CEO argued that access to real time data via a DLT coupled with artificial intelligence to help parse that data would help simplify regulatory compliance and regain returns lost after the global financial crisis. But potentially removing more than $20 billion in fees isn’t cheap. ASX also invested $21 million in Digital Asset’s $110 million in total venture capital, and expects the project could take more than five years to complete.
“If the value of what we can deliver by providing an enriched, real-time source of truth information to the industry ultimately allows the industry to offer new services that create only 5% incremental revenue or cost savings to end issuers and investors, we think it’s absolutely worth pursuing,” said Stevens.
But Steven’s effort to convince current financial services providers that their jobs would be helped by distributed ledger technology could be a tough order to fill. In fact, nearly half the address was dedicated to the purpose.
Following a presentation of financial results that showed the exchange increased revenue by 7.7% last year to $822.7 million, Stevens laid out in great detail how Digital Asset’s technology could radically change the current centralized CHESS clearing house workflow.
“In a DLT world, instead of sending messages back and forth to reconcile the many and varied databases, participants who choose to connect by having a node are linked via the distributed ledger that forms a perfect chain of title that cannot be altered,” said Stevens.
Similar to a bitcoin node that gives users access to the ledger of cryptocurrency transactions, the ASX nodes give access to other trading information. But unlike bitcoin, which anyone can access, no cryptocurrency is needed to reward users of the Digital Asset blockchain, which can only be accessed by permissioned users.
Specifically, Stevens laid out four key differences between the current CHESS system and the DLT upgrade, which he expects will contribute to the ecosystem’s overall savings.
First, he reiterated that by replacing trading messages with a shared, distributed record of transactions buyers and sellers would no longer need to reconcile their accounts. Second, he argued that by reducing the number of disparate databases to a single “harmonized” network, complexity, risks, and costs would be reduced.
But it’s the third and fourth points that most clearly highlight the Digital Asset influence. The third benefit will result from using a common modelling language, called DAML, developed by Digital Asset to enable smart contracts similar to ethereum, but with much of the complexity reduced. Because all users will build applications with the same language their tools will more easily interact, and could also be shared.
Lastly, Stevens discussed how ASX issuers and investors will have “direct access” to the record of transactions, and as a side effect be more connected to one another. In March, Masters announced her firm’s work on software development kits (SDKs) that would simplify building on the ledger for any number of users.
Last year, after two years of vetting, ASX announced its decision to upgrade CHESS using Digital Asset’s technology, and is currently about half-way through that process, according to a timeline of progress also presented during the address. Based on a graphic shown to the audience, it appears the exchange expects to finish the project around January of 2019, with market trials and implementation taking approximately another two years.
Perhaps the only larger enterprise blockchain implementation currently underway is the Depository Trust and Clearing Corporation (DTCC) move of its $11 trillion Trade Information Warehouse to New York-based Axoni’s blockchain platform.
As for ASX, following what appears to be extensive meetings with stakeholders in the current centralized system, Stevens says further details and the finalized scope of the ASX effort will soon be revealed.
“This will provide tremendous value by being a great business enabler for our customers,” said Stevens. “And a significant enabler of innovation for issuers and investors.”