Blockchain technology has the potential to provide superior post-trade infrastructure to investors. Fund managers will soon be enjoying faster and cheaper transactions than what monopoly incumbents such as the ASX offer, thanks to competition, a tech company boss predicts.
The post-trade world is “very, very expensive relative to the work that is performed”, says Peter Randall, president of technology company SETL. SETL has built institutional payment and settlements infrastructure based on blockchain technology, which could emerge as competition to a blockchain-based platform the ASX is now developing to replace its legacy Clearing House Electronic Subregister System (CHESS) infrastructure.
Randall will speak at Investment Magazine’s upcoming Investment Operations Conference, to be held in Sydney on February 26.
Randall says Australia’s equity market contributes roughly $100 million annually to the ASX and that investors could benefit from lower fees at an alternative service based on a distributed ledger.
“A blockchain-based solution is able to offer a significant reduction in cost, a significant increase in speed, and a great jump in capacity,” Randall says.
SETL was founded in 2015 and has Citi, Crédit Agricole Investment Bank, Computershare, S2iEM and Deloitte as shareholders.
The company developed IZNES, a pan-European record-keeping platform used by more than 20 major European fund managers. A SETL-powered central securities depository has received approval from AMF – the French financial markets regulator – to operate, and has obtained permission from TARGET2-Securities to connect to the European securities settlement system.
Having a monopoly operator leaves investors without avenue for complaint about the cost or efficiency of services, Randall argues.
“The current system is a little like Back to the Future,” Randall says. “If you want to know what the system looked like 20 years ago, just go and look at it today.”
Prime Minister Scott Morrison announced in 2016, when he was treasurer, that the government would allow new sharemarket operators, should a competitor to the ASX emerge – responding to a recommendation from the Council of Financial Regulators.
In the same year, the ASX announced it was building its own post-trade solution using blockchain technology, to replace its 25-year-old CHESS platform. The ASX has completed a prototype and is aiming to begin its operation in 2021.
With the help of blockchain technology, the cost of making investment decisions could fall, with flow-on benefits for the market more broadly, Randall says.
“There’s any amount of evidence investors are extremely sensitive to transaction costs and frictional costs of business transactions,” he says. “It might be that prices become lower and more competition would almost certainly mean liquidity will be better and that activity will increase.”