ASX told to look at offshore markets for blockchain lessons

The executive, who asked not to be named, said Hong Kong uses Digital Asset’s technology to solve a defined problem relating to north bound trading on Stock Connect in Hong Kong, which provides access to stocks listed on Chinese exchanges in Shenzhen and Shanghai.

The technology helps to accelerate trade settlement confirmation for investors in Europe and the United States, given different time zones. The Digital Asset software, and its smart contract development framework known as DAML, speeds up global institutions using links to institutional trade processing services developed by DTCC, the US clearing house.

The so-called HKEx Synapse project has also faced delays related to mainland China’s “delivery versus payment” rules, but is expected to be up and running next year.

Legacy infrastructure

“The HKEx have taken a different approach with Synapse, and just tried to take a part of the market, which relates to Stock Connect,” the custody executive said.

“Their problem was different. Obviously, the ASX was legacy infrastructure and its legacy platform.”

Germany has decided to use the Digital Asset technology in a new market for digital assets, known as D7, which involves issuing an electronic security after the German government made legal changes allowing electronic issuance in mid-2021. The initial version does not use blockchain, but Germany plans to adopt this in a third phase of the rollout.

The custody executive said ASX’s problems did not relate to the underlying technology itself but its approach to implementation. ASX was embarrassed last week after an independent report by Accenture identified multiple problems with the project, including uncertain timelines, excessive complexity and poor management.

“When you’re looking to replace a whole market infrastructure, it’s obviously complex,” the executive said.

“When you’ve got registries, brokers, clearers, custodians, there are lots of different participants. When you are offshore and you look at Australia, CHESS as it stands today is proprietary, and there are so many different parties, which makes it very complicated in how the technology was designed to operate.”

Gilbert Verdian, founder and chief executive at Quant, a London-based supplier of blockchain technology to the financial services industry, said ASX needed to rethink how it designs the CHESS replacement in light of Accenture’s critique.

“For similar projects, we suggest a different tack. Instead of a big bang, or a like-for-like replacement of the entire infrastructure, they need to complement the existing platform with digital asset capabilities,” Mr Verdian said.

“By integrating an overlay, you can avoid disrupting current capital market flows and trade digital assets alongside traditional asset classes. Eventually, you can migrate to the new technology once critical mass is achieved.

“We’d also recommend using established distributed ledger technologies rather than building blockchains from scratch.”

Mr Verdian, who has also worked for the UK Treasury, EY and HSBC, said capital markets worldwide were undergoing foundational transformation, and it was right for ASX to explore blockchain because it allowed assets to be “tokenised”. This can reduce costs by offering faster trading and, ultimately, cheaper clearing and settlement.

But rather than forcing its design onto the market, he urged ASX to work collaboratively in a pilot “sandbox” environment, to allow participants and counterparties to speed up implementation. Markets in Europe, including the UK, have recently established development sandboxes as they consider new infrastructure.