Greg Medcraft puts ASX’s new CHESS oversight group on notice: don’t abandon blockchain

Mr Medcraft said it would be sensible for the new committee being led by Mr Cameron – also a former ASIC chairman – to review ASX’s plans, and ensure it is building future infrastructure that allows for “atomic settlement”. This refers to the instant transfer of security title and payment at the same time as a trade; it promises substantial benefits to investors, but could threaten the lucrative role ASX plays as a clearing house for trades.

“We need to be able to legally enable ‘atomic’ settlement – and blockchain technology can be used to innovate around settlement, to reduce risk,” Mr Medcraft said.

The comments came as the Senate on Tuesday passed a new law providing stronger powers to ASIC and the Reserve Bank to break ASX’s monopoly in clearing and settlement.

The Senate also debated a private member’s bill on Tuesday, introduced by Liberal senator Andrew Bragg, that seeks to create a licensing regime and reporting requirements for “gatekeepers” dealing with digital assets.

The Senate’s legislation committee this week recommended the bill not be passed, even though it sought to create basic consumer protections and provide certainty to businesses using blockchain systems and cryptocurrencies.

Mr Cameron, who chaired ASIC between 1993 and 2000, has been given a wide remit to review ASX’s choice of technology for a new CHESS. ASIC said last week his group should consider “any issues or matters that are strategically significant to, or have a material influence or effect on, ASX Clear and ASX Settlement’s selection of the replacement system”.

Mr Medcraft, who oversaw extensive research into the digitisation of financial market infrastructure during a stint at the OECD after he left ASIC, said blockchain-based systems could cut the amount of capital held against settlement processes by reducing counterparty and operational risks. They may also reduce the need for large, central clearing houses.

ASX has not revealed what technology it might use in its second attempt to rebuild CHESS but indicated a move away from blockchain was being considered, as it looked for a more “out-of-the-box” system to satisfy regulators’ demands to quickly get the project back on track.

But a growing number of other exchanges appear to be swayed by blockchain. London Stock Exchange, for example, has drawn up plans to offer blockchain-based trading of traditional financial assets, the Financial Times reported this week.

Other markets are experimenting with the technology to shorten settlement cycles to near real-time, or T+0, compared to today’s T+2, where trades take two days to finalise. In the US, where settlement for all trades will become T+1 by May next year, the Depository Trust and Clearing Corporation is testing a distributed ledger to support T+0 processing of up to 160,000 transactions a day. Last year, the US Securities and Exchange Commission approved the Boston Securities Exchange to use blockchain for real-time settlement.

“This is not going to happen without competition. If you allow competition in straight-through processing, we will see who wins,” Mr Medcraft said.

In the UK, its Treasury has set up a “financial market infrastructure regulatory sandbox” to allow a wider range of companies to test and adapt new technologies, including blockchain, to streamline settlement processes.