A blunder Down Under: ASX’s failed blockchain plans

At the end of 2022, ASX dropped its plans to move to distributed ledger technology (DLT). Once hotly anticipated as the century’s most creative and innovative development in financial market infrastructure and post-trading to date, ASX’s adventure in blockchain will now be remembered as a cautionary tale.

ASX has a history of being adventurous in its adoption of new models and technologies, so when it announced its DLT project in 2016 there was little reason to think it would go the way of some notoriously failed system replacement projects in other countries.

ASX still plans to withdraw from CHESS, the system it currently uses to track the holdings and personal details of investors. When that will now be achieved is anyone’s guess. The abandonment of blockchain means the end of seven years of confusion, delays and frustration – but it also means that ASX has to write off up to AUS$255m, and may have to compensate trading firms to the tune of AUS$100m for what they spent on upgrading their own systems to align with ASX’s plans. 

What might have been

Hopes were high for a system based on leading-edge technology that would bolster trading volumes, allow for greater competitiveness, and provide more security to investors and traders than CHESS, which is now around 30 years old. It was also hoped that a new solution would reduce reconciliation requirements and improve transparency for the regulator.

Although the 2020 launch date had long since come and gone, in May 2022 a conference room full of ASX stakeholders had been assured that Australia was about to lead a revolution in critical market infrastructure and that “96% of the software” was working. 

Instead, just six months later, ASX’s new CEO, Helen Lofthouse, pulled the plug on the entire project. She cited an independent review and ASX’s own assessment of the situation, both of which found that nearly half of the code would need rewriting and that the rebuild was still only 63% complete.

What went wrong

There’s probably a book to be written about what went wrong for ASX as it tried to make its DLT dream a reality – especially as DLT is being used successfully in other large-scale environments:

• More than 100 Italian banks (that’s 91% of all Italy’s banks) are now using it for interbank reconciliation.

• The Swiss Digital Exchange and central securities depository (CSD) went live with its DLT solution in 2021, and it now supports numerous listings (primarily of bonds for now). Switzerland is also testing the use of a central bank digital currency (CBDC) with the Swiss National Bank.

• Many brokers and large trading houses now use it to support the trading of digital assets, including Fidelity and TP ICAP plc.

• According to the Bank for International Settlements (BIS), 93% of central banks are testing ledger-based systems to support national currencies. The BIS is also working on interoperability models to support cross-border DLT settlements.

It is therefore unlikely that technical issues alone can be said to have scuppered ASX’s plans. Instead, an independent report found that the plan’s failure was largely a result of shortcomings at the top of ASX and an initial error in understanding the true requirements of the project.

The independent report pointed to (among other things) vendor management failures, an overly-complex system (including trouble recruiting people with the necessary expertise to work with it), and “dysfunctional management.”

Where to from here?

Australia’s bruising experience has not deterred others from giving the DLT route a try. At around the same time that ASX geared up to blaze the trail, in 2018, the Hong Kong exchange announced that it, too, was adopting blockchain as a post-trade processing and settlement risk-reduction tool.

However, despite press releases in 2020 declaring that “HKEX Synapse” could be expected in 2022, HKEX has gone very quiet since. Perhaps it was merely a coincidence that HKEX’s partner in its venture, Digital Asset, was also integral to ASX’s own plans.

Meanwhile, SDX (SIX Digital Exchange, Switzerland's regulated FMI for digital assets) is using DLT, and other venues are considering it. Nasdaq is the largest exchange operator looking at implementing DLT, and is even establishing a crypto custody unit to support the clearing and settlement of digital assets. 

Deutsche Börse is creating a new post-trade system called D7 that is being primed to support digital assets and expected to be live by 2024. (Deutsche Börse is the owner of a majority stake in Crypto Finance, a FINMA-regulated provider of trading, custody, and investment services for digital assets.)

JP Morgan claims to be the first global bank to offer a blockchain-based platform of wholesale payments transactions. Called Onyx, JP Morgan promises it will provide, “reliable infrastructure and services for the world’s most pressing problems – starting with digital assets, payments and information sharing within banking.” Since 2019, the bank has also been using its own tokenised US dollars – which it calls “JPM Coin” – to settle some internal client obligations. 

Furthermore, the Society for Worldwide Interbank Financial Telecommunication has embraced DLT. The society (better known as Swift) has been the leader in cross-border payments since 1973, but in an increasingly crowded field now recognises the need to take advantage of the opportunities offered by DLT.

Given the direction of travel, therefore, it shouldn’t come as a surprise if ASX revisits its blockchain plans at some point – though perhaps with more caution and under greater scrutiny than the first time around.