The Australian Securities Exchange (ASX) has embarked on a project to switch from its established CHESS equities settlement clearing system to a new system that is based on a distributed ledger technology known as blockchain.
ASX explains that distributed ledger technology is a shared, replicated ledger that is managed via a distributed database synchronising mechanism.
“Each transaction must reference a balance received from a previous transaction and must be cryptographically signed by the legal approver of the transaction. The solution forms an exact chain of title over time," the ASX CHESS Replacement project team statement explains.
The stock exchange has been consulting with the market since 2015 about the introduction of the new system. ASX has stated it expects to be able to announce its decision on implementation of the new system by the end of 2017.
Should a blockchain solution replace CHESS, it's possible the time it takes to settle a share trade will drop from three days to one day.
Deputy ASX CEO, Peter Hiom explains the exchange's focus continues to be on building the next generation equity post trade platform.
“Our aim is to work with all stakeholders to design a system to replace CHESS that can reduce costs, risks and enable greater innovation in financial markets," he said in a statement to the market.
Hiom said, “We have also made satisfactory progress with our technology partner, Digital Asset Holdings, to build base level functionality to facilitate cash market clearing and settlement. This is necessary to enable us to test the capability of the solution to meet enterprise grade business and technical requirements regarding scalability, speed, persistence and security."
He also confirmed that the project is meeting its goals so far. “While we still have a lot to do, we remain on track to bring together stakeholder requirements."
Hiom has confirmed ASX has commissioned a third-party review of the technology, especially the cryptographic features of the platform.
“All of this information is necessary for ASX to make a decision in December 2017 whether to proceed and use distributed ledger technology to replace the CHESS system. Assuming we do proceed, subject to the assessment, the Day 1 scope for the new system would be published for further market consultation around March 2018," said Hiom.
He said one reason ASX is examining distributed ledger technology is for its potential to help market participants lower their back office, technology and general operations expenses.
“Remember, if we can provide our customers with a single source of truth on which they can rely, then a whole range of new services are possible. We are encouraged by the feedback we have received from customers on potential new services, although progress on this is of course subject to our decision in December," he said.
The introduction of distributed ledger technology is something chief financial officers might benefit from watching closely.
John Buhman is the CFO for Australia and New Zealand at IBM. He has outlined his top five considerations for CFOs when it comes to blockchain.
1. Blockchain reduces transactional disputes
The more complex a finance system, the more often disputes may arise. Blockchain could spell an end for that rule, says Buhman.
“When applied to financial ledgers, the technology can eliminate a big proportion of inter party disputes," he says.
2. Blockchain may save CFOs time and capital
Buhman says distributed ledger technology can allow CFOs to reclaim time and increase cost savings in the process.
“Working out the reasons behind disagreements on a certain transaction ties up the finance team and capital whenever a dispute occurs. What's more, every day spent trying to resolve each issue can put the business at greater risk of encountering noncompliance penalties and litigation," he says.
3. Wholly transparent, accurate records
Blockchains are decentralised by their nature. Rather than being controlled by one party, each ledger can be viewed and added to by all approved parties involved in a transaction.
“That creates a high degree of transparency in transactions, extending all the way from invoice to cash. No matter how complex a finance system may be, this transparency allows CFOs to quickly pinpoint where a dispute may stem from, and clarify which party's claim is justified," says Buhman.
4. Harder to tamper with - you can't edit blocks
Blockchain's new ledger system means authorised parties can only add a new record if everyone agrees to support it.
“And once it's added, nobody can erase or rewrite it," he adds.
5. Collaboration between CFOs and CIOs
CFOs need to work closely with their CIOs if they want to apply blockchain to their finances, says Buhman.
“The technology remains relatively new to most businesses, and its unique ledger-based model requires a rethink of not just IT systems, but also the fundamental processes of record-keeping and financial accountability.
“Those CFOs who can grasp and master blockchain, however, will find themselves with fewer disputes – and more valuable time – on their hands. That's an advantage that any finance system can do with," he adds.
The ASX's use of blockchain is just one of the first steps in what is likely to be an ongoing process to embed distributed ledger technologies across many aspects of business.
Understanding blockchain technology and the ways it might be implemented throughout a variety of different aspects of business, may help CFOs re-evaluate how to better manage transactions both within their own business and with other businesses.
- Distributed ledger technology may replace existing CHESS equities settlement system.
- Time taken to settle a share trade may reduce from three days to one day.
- ASX expected to decide on the new technology by the end of 2017.