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Coming soon to the Australian Securities Exchange: distributed ledgers © Bloomberg
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The Australian Securities Exchange said on Thursday it planned to use blockchain technology to manage the clearing and settlement of equities.
The decision to replace its ageing clearing and settlement system, known as Chess, with distributed ledger technology — the engine behind the digital currency bitcoin — makes it one of the world’s first global exchanges to commit to the technology.
The ASX said Digital Asset Holdings, the company run by former JPMorgan Chase executive Blythe Masters, has built and tested the software.
“ASX has been carefully examining distributed ledger technology for almost two and a half years, including the last two years with Digital Asset,” said Dominic Stevens, ASX chief executive. He added that the system would cut trading costs and put Australia “at the forefront of innovation in financial markets”.
Blockchain is an electronic ledger of transactions that is continuously maintained and verified in “blocks” of records. The ledger is shared among parties on computer servers and protected by cryptography.
Some say it is a threat to banks and exchanges as it could disintermediate them by removing the need for a central reconciliation authority. But others just see an opportunity for institutions to save billions of dollars by eliminating inefficiencies and the need for trade insurance.
ASX has not decided on the date to launch the blockchain system and said its cost was comparable to the expense of replacing Chess with another platform.
ASX will operate the system on a secure private network with known participants. The participants must comply with regulation, according to the ASX, which said its system had nothing to do with blockchain technology deployed by cryptocurrencies such as bitcoin.
Some analysts have questioned how the technology can be made secure and fast enough to be adopted by large institutions. But Mr Stevens said he saw the introduction of the system as an opportunity for more timely and accurate information.
The ASX said it had been testing the new software for equities clearing and settlement over the past two years.
“After so much hype surrounding distributed ledger technology, today’s announcement delivers the first meaningful proof that the technology can live up to its potential,” Ms Masters said.
ASX was an early investor in DAH, alongside more than a dozen financial and technology groups, including Goldman Sachs, JPMorgan Chase, Citigroup, Santander, BNP Paribas, Accenture, IBM and the Depository Trust & Clearing Corporation.
Most global exchanges are investigating using blockchain, including Nasdaq, which has already employed the technology for trading private securities in the US and is testing it for the Estonian market. The US-based exchange operator is also selling blockchain-enabled technology to other bourses.
The Depository Trust and Clearing Corporation, a US clearing and settlement services provider, introduced blockchain for storing credit default swap trade information. Meanwhile, Euroclear, one of the world’s largest settlement houses, has joined start-up Paxos to develop a settlement system for the London gold market.
Additional reporting by Nicole Bullock in New York