The Sydney Stock Exchange (SSX) is embarking on a project that will result in the instant settlement of trades on its exchange, using blockchain technology, the underlying system that facilitates transactions such as bitcoin trading.
With the help from Sydney-based Bit Trade Labs, SSX director of market development Loretta Joseph said the project will remove settlement risk from its customers and free up liquidity in financial markets.
According to Joseph, the last 20 years have seen vast efficiencies in tradings across asset classes, but clearings processes in Australia have remained stagnant and very archaic, which she said has limited innovation.
"I've always been amazed that I can trade in the blink of an eye, in a millisecond on some exchanges. However, the clearing and settlement process can take between two and 30 days depending on what asset class you're trading," she said. "The backend is really slow and it's really clunky."
Speaking at the SINET 61 conference in Sydney on Wednesday, Joseph said she decided to kick off the project in response to the monopoly the Australian Securities Exchange (ASX) held on the infrastructure for clearing and settlements.
In October, Australian Treasurer Scott Morrison implemented changes to the Australian Clearing Competition Laws that previously rendered the SSX reliant on a competing market operator.
It was the limited wiggle room the SSX had prior to this that led Joseph straight to blockchain.
"I actually look like an agent of the ASX and it means that I am reliant on existing processes and there is an absence of innovation in my financial markets," she said.
"The government recently allowed for competition of ASX-listed securities, but the SSX listings don't overlap with the ASX, so as the clearing competition moratorium only applies to ASX products, it doesn't apply to me clearing my own products. Game on."
As the SSX is a small market, Joseph said it gives her a great opportunity to implement change.
"This provides the ideal opportunity for my little exchange to develop its own clearing settlement registration function," she said. "It means that I take control of my own destiny rather than relying on my own competitor."
"We have a fall back if the blockchain doesn't work, I can always go back to using the ASX or whatever competitor comes into the market now."
According to Joseph, immediate settlement registration removes the need for clearing and it also reduces risk. She said that currently the ASX holds over AU$4 billion in collateral risk over night at a cost to the industry somewhere in the range of 10 to 15 percent.
"If we take out risk, you've got nothing to manage," she said.
Joseph believes the path she and the SSX are heading down will deliver the sort of innovation the Australian economy needs, saying that if blockchain technology can be implemented and rolled out across various public and private sectors, it would give Australia a global advantage.
"We have one regulator and that regulator is very supportive of technology change and we have a government that has an innovation agenda," she said. "Australia is right in a sweet spot to drive this change."
Joseph also chairs the Australian Digital Currency Commerce Association (ADCCA) which is currently aiming to encourage the "responsible adoption" of blockchain technology in Australia. She said an important first step of ADCCA will be to review the regulatory landscape in Australia to ensure that it is technology-neutral.
"This is one of my big issues at the moment," Joseph said.
"Neither myself, the SSX, or the ASX can realise their ambitions to overhaul all these settlement processes when the legislation still refers specifically to [ASX's] CHESS (Clearing House Electronic Subregister System). Similarly, the debt repossession arrangements with the reserve bank should not make specific reference to Austraclear."
ADCCA is also working with law firms to develop a list of recommended regulatory reforms which Joseph said it will share with the Council of Financial Regulators this month. This will help sweep away the unintended obstacles she said the adoption of blockchain technology may have.
"It is our hope that we can lead to set policy recommendations that the government can adopt in order to facilitate blockchain-based innovations," she said.
At the start of the year, the ASX enlisted US-based firm Digital Asset to help it develop its own solutions for the Australian equity market using blockchain technology. The announcement was part of the ASX's plans, which it revealed last February, to replace or upgrade all of its main trading and post-trade platforms.
The ASX then launched a showcase space at its Sydney headquarters to gather feedback from the market on blockchain technology, which it plans to use to develop its new post-trade platform.
ASX is currently two years into completing its technology transformation program and the exchange is aiming to see its futures trading platform go live by February 2017.
In February, the ASX also announced a partnership with Nasdaq that will see Nasdaq replace ASX's existing equity options clearing technology platforms.
Under the deal, ASX said the technology will be developed on Nasdaq's Genium INET clearing platform, which is already being used by the organisation for futures clearing.
It was announced on Thursday that Australia will manage the secretariat of an international technical committee for the development of blockchain standards after the International Organization for Standardization (ISO) approved Standards Australia's proposal for new international standards on blockchain.
Standards Australia said that the ISO blockchain committee will be charged with the responsibility of developing standards that support interoperability among systems, privacy, security, and terminology.
Joining Australia on the technical committee are 35 ISO member bodies including: Germany, the United States, Canada, Estonia, France, Japan, the United Kingdom, and Korea.