The Australian Securities Exchange (ASX) announced in June 2016 that it was building a new post-trade solution using blockchain technology. The solution replaces its legacy Clearing House Electronic Subregister System (CHESS) platform, which has been running for around 25 years.
It's been over three years in the making, and ASX executive general manager of Equity Post-Trade Services Cliff Richards told Sibos in Sydney on Thursday the new system is still on schedule for an already delayed first-half 2021 go-live.
The CHESS replacement system has been touted as the world's first industrial-scale blockchain-based system for use in financial services. But why did the ASX choose distributed ledger technology (DLT), and what does the new CHESS solution actually look like?
CHESS currently performs all the core clearing and settlement functions of the Australian cash equities market, however, like most ageing technology assets, its life was nearing end.
"Coincidentally this occurred at a time when topics of blockchain, particularly the bitcoin blockchain, public implementations, were very much coming into the press," Richards said. "So not only had it caught the attention of our technologists, the board was aware of it as well."
As post-trade systems, particularly centralised market infrastructures, aren't systems that are replaced frequently, Richards said in making such a significant decision around tech that will see 10-20 years of life, the replacement shouldn't just be a shinier, newer version of what already exists.
With a small team of internal people in tow, the ASX took a "hard look" at DLT.
"We weren't comfortable outsourcing to the advice of others -- with all due respect to the experts that exist, we were a bit dubious about whether they were experts or not," he explained.
"What we really did was, and there's no science to this, we started with a Google search and we put in a few key words to find the universe of everyone that said they understood blockchain and DLT."
He said the ASX put Digital Asset through a "pretty brutal" selection process before announcing it was using their platform and technology to underpin the replacement of CHESS.
The market was consulted at-length, and Richards said feedback was that around 85 percent of what CHESS does today should be preserved.
Additionally, the market came back with a whole suite of new features in settlement, corporate action processing, and capabilities to allow new things to evolve over time.
"We are deep in the process of actually building that functionality," Richards noted.
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Appearing on a panel at the four-day global financial services conference, Richards was asked if he considered the ASX's move to a DLT platform a brave one, as the CHESS replacement project had come up during dozens of talks throughout the week.
"We are often told by many, including other market infrastructures, 'You're so brave that you're going first, you're using DLT' -- we actually genuinely consider it brave to embark upon a large transformation program and not adopt this technology," he said.
Richards believes that if a market infrastructure provider is seeking the same functionality from a replacement system, but uses essentially a newer version of the same tech, it's a wasted opportunity.
"We do not consider ourselves brave; we think perhaps the ones that don't make this step are the brave ones. Time will tell."
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According to Richards, the CHESS replacement has been architected in a way that doesn't force participants into a position where they need to take a node in the new network.
"If we had that as a pre-condition to implementing distributed ledger we think we'd be waiting for 10 years -- we'd have to convince the very last doubter, sceptical participant that they should take a node and join the network," he explained.
The new solution from Digital Asset allows every participant that interacts with the ASX via messaged-based integration -- which is the sending and receiving of messages -- into their existing back office systems.
This is exactly the same way they interact with market infrastructure everywhere else in the world, and nothing will change, except the messaging standards. The difference, however, is a lot of the complexity has been removed.
"When CHESS was built over 25 years ago, it was so functionally rich, there was no global, harmonised standard that had the sophistication sufficient to carry the features and systems -- so we built our own," Richards explained.
Currently, there are 533 messages CHESS uses. The ASX has taken those 533 messages and have mapped them to an ISO20022 -- an ISO standard for electronic data interchange between financial institutions -- equivalent, consolidating that figure down to around 90 messages.
"If you're a participant and you don't want to move, or you're not yet ready to move, you don't need to," Richards added. "We'll be offering nodes as a managed service at day one, so those participants that want to take them, they can. Participants can take both and they can peel off those elements they want.
"We're not forcing a change on the market."
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Where security is concerned, Richards' argument was to take a look at the security landscape currently facing the enterprise on a day-to-day.
"We have to remind ourselves of the security world we live in today and compare what we're talking about putting in place -- which by the way is vastly more secure -- but it still has the same traditional security protections," he said.
"We will run a private, permissioned ledger, so we're behind a firewall, controlled by ASX, and we'll start there.
"Even in the actual underlying technology, we could run -- we won't -- but we could run the Digital Asset platform on the public open internet and would have a security profile that would meet everything we'd have to meet."
Richards said the ASX is doubling down on security by running it as a private permissioned network.
Initially the CHESS replacement was slated for go-live at the end of 2020, but last month the ASX reported it was pushing back the earliest commencement date for its new system to March-April 2021.
The decision followed public consultation on the rollout of the system.
"While there was continued widespread support for delivering new scope on Day 1, respondents questioned whether the proposed implementation window of Q4 2020 to Q1 2021 was achievable given the significance of the technology change and the range of new scope being introduced," the ASX wrote [PDF] in its response to public feedback on the CHESS system.
A customer development environment is expected to be available as early as April next year, with an industry-wide test environment available in July 2020.
The availability of a pre-live production environment is pencilled in for mid-October 2020.
With what will be six years since the ASX typed the word blockchain into Google, Richards isn't too concerned if the market shuns the new system.
"If we fail, if no one takes adoption, no one sees value in everything we've been talking about, what we end up with is a replacement system that we've taken the market on a consultation journey through with features that they would like, we built those," he said.
"Everyone's connecting the way they did before, but through a global standard, and we carry on.
"That's the worst case."
ASIC has made a number of recommendations to the ASX to further its risk management, telling the exchange robust technology governance and operational risk management is central to its effectiveness as a market infrastructure provider.
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