ASX is promising that its new blockchain-based system will go beyond settlement upgrades to provide new products and services and more – but questions remain.
The quest for a golden source of truth sounds highly philosophical, but it is also a commercial and regulatory goal for the financial services industry. And ASX now states that its upcoming distributed ledger technology (DLT) system for cash equity settlement will provide a single source of truth for trades.
ASX will replace the CHESS cash equity settlement system with a form of DLT by 2021, and the new system is expected to result in a shared, secure, single source of truth for settlements, say ASX and Digital Asset, the company that is developing the system.
The notion of a golden source of truth featured heavily in a recent presentation at ASX headquarters during the international Sibos conference in October. Digital Asset chief executive Blythe Masters, and ASX executive general manager for equity post-trade services, Cliff Richards, spoke about the current status of DLT development, the potential improvements from implementing DLT for settlement, and the potential advantages for stakeholders.
DLT, of course, is more commonly known as blockchain, the algorithm used as the basis for trading cryptocurrencies such as bitcoin. But blockchain got nary a mention during the presentation, which focused heavily on less sexy ideas such as reconciliation, smart contracts and reduced settlement latency.
“Unlike traditional databases, which are maintained [and] controlled by a single owner with its own perimeter security, distributed ledgers are shared and replicated so multiple independent entities have access to that information,” Masters said. “In some cases, all the information is available to everybody but, importantly, [that is] not always the case. It’s possible to share, replicate and validate that data without seeing everybody’s information, just the information that is pertinent to you, that you have a legal need and right to learn.”
Multiple entities can use the shared ledger to run processes and operational workflows without having to keep their own database, which would have to be reconciled at cost, Masters said.
ASX started reviewing replacement options for the 25-year-old CHESS platform in 2015. In January 2016, ASX selected Digital Asset as its technology partner and paid $14.9 million to acquire a 5 per cent equity interest in the company.
“A golden source of truth was attractive because we recognise that there is this reconciliation problem, albeit on CHESS itself it’s not that bad,” Richards said. “The point is, no one knows that they’re operating on the truth. The only source of truth now is CHESS and everything else is a copy of it. Because it’s a copy, you have latency in the system, and people in financial markets know that latency might equal opportunity but it also equals risk.”
Another benefit of DLT is the ability to effectuate near real-time settlement and what Masters called “atomic settlement”.
She also addressed the concept of “smart contracts” with DLT. This opens up a potential new front of product and service delivery for ASX. Smart contracts can be used not just with cash equity settlement but also in financial vehicle transactions, such as for asset-backed securities, derivatives and more.
“What smart contracts allow you to do is automate multiparty processing across these shared, replicated, independently validated ledgers, allowing enormous advances in the productivity of organisations seeking to work on a single co-ordinated workflow referring to a single golden source of truth,” Masters said.
ASX has not decided what to do with the 25 years of trading data from CHESS, nor whether that data should be moved onto the DLT platform. It is engaging with stakeholders regarding the benefits of the new system and safeguards to protect privacy, data and permissions.
Questions to be answered include who decides what permissions are granted to participants and how that decision is made, and what role the Reserve Bank of Australia and ASIC have in overseeing DLT.