ASX Limited has acquired a 5 per cent equity interest in New York-headquartered Digital Asset Holdings, a company that specialises in developing blockchain-style distributed ledgers.
ASX paid $14.9 million for the stake in Digital Asset and to fund the initial development work on a new post-trade solution for the Australian equity market.
In investing in Digital Asset ASX joins 12 other financial services companies: ABN AMRO, Accenture, BNP Paribas, Broadridge Financial Solutions, Citi, CME Ventures, Deutsche Börse Group, ICAP, J.P. Morgan, Santander InnoVentures, the Depository Trust & Clearing Corporation (DTCC) and the PNC Financial Services Group.
In February last year ASX announced a plan to upgrade all of its major trading and post-trade platforms over a three to four year period. The first phase, which is expected to run to the end of this year, involves replacing the ASX’s trading and risk management systems.
The second phase is focussed on post-trade services, ASX said in a statement.
The ASX’s CHESS system that providers clearing and settlement services will potentially be replaced with a distributed ledger developed by Digital Asset.
During development CHESS will operate as normal and a final decision on post-trade technology will be made in 2017.
The best known use of a blockchain is as a decentralised register of all transactions involving the Bitcoin cryptocurrency.
The ASX’s statement said that in contrast to the public blockchain employed by Bitcoin, its distributed ledger will be based on a private network.
Adopting a private blockchain will potentially simplify and speed-up post-trade processing as well as spur third parties to develop new services, ASX said.
“There has been very little innovation in the post-trade services that operate around the world for the better part of 20 years,” ASX CEO Elmer Funke Kupper said in a statement.
“Rather than replace CHESS with a new version that is based on the same legacy processes that operate in the market today, we should aim to re-engineer and simplify those processes to deliver significant benefits to the users of the market.
“The initial phase of work is designed to bring the benefits to life and to test if Distributed Ledger Technology can work at the scale of the Australian equity market.
“By building a solution alongside the existing CHESS system, all stakeholders can participate fully in the innovation process and have confidence in the clearing and settlement processes that underpin one of the top 10 equity markets in the world.”
Although Bitcoin has faced an uphill struggle for adoption in Australia in the face of unfavourable tax treatment, other potential uses for blockchain technology have drawn interest in the financial sector.
The Commonwealth Bank has conducted simulated blockchain-based trades with 10 other large banks.
In 2015 the bank joined an international partnership led by R3 that seeks to bring the blockchain to the banking sector. CBA last year helped stage a series of Sydney workshops to examine the potential of blockchain-based technology.
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Westpac last year through its Reinventure VC fund made a "strategic investment" in bitcoin-focussed startup Coinbase.
Greg Medcraft, the chairperson of Australia's corporate regulator, the Australian Securities and Investments Commission (ASIC), has argued that the blockchain could fundamentally change markets and the Australian financial system.
The blockchain "potentially has profound implications for our markets and for how we regulate," Medcraft said in a speech at the Adelaide campus of Carnegie Mellon University.