The ASX asked to look at offshore markets for blockchain hours

The executive, who asked not to be named, said Hong Kong is using Digital Asset’s technology to solve a defined problem related to northbound trading on Stock Connect in Hong Kong, which provides access to shares listed on Chinese exchanges in Shenzhen and Shanghai.

The technology helps speed up confirmation of trade settlements for investors in Europe and the US, given different time zones. The Digital Asset software, and its smart contract development framework known as DAML, accelerate global institutions by using links to institutional trade processing services developed by DTCC, the US clearing house.

The so-called HKEx Synapse project has also been subject to delays related to mainland China’s “delivery versus payment” rules, but is expected to be operational next year.

Older infrastructure

“HKEx has taken a different approach with Synapse, only trying to capture a part of the market, which is related to Stock Connect,” the custody chief said.

“Their problem was different. Obviously, the ASX was legacy infrastructure and its legacy platform.”

Germany has decided to use Digital Asset technology in a new digital asset market, known as D7, which involves issuing an electronic security after the German government made legal changes allowing electronic issuance in mid-2021. The first version does not use blockchain, but Germany plans to adopt this in a third phase of the rollout.

The custodian said ASX’s problems were not related to the underlying technology itself, but its approach to implementation. The ASX was embarrassed last week after an independent report by Accenture identified several problems with the project, including uncertain timelines, excessive complexity and poor management.

“When you want to replace an entire market infrastructure, it’s obviously complex,” the executive said.

“When you have registries, brokers, clearers, custodians, there are many different participants. When you’re offshore and looking at Australia, CHESS as it stands today is proprietary and there are so many different parties, which makes it very complicated in how the technology was designed to work.”

Gilbert Verdian, founder and chief executive of Quant, a London-based provider of blockchain technology to the financial services industry, said the ASX needed to rethink how it designs the CHESS replacement in light of Accenture’s criticism.

“For similar projects, we suggest a different tactic. Instead of a big bang, or a similar replacement of the entire infrastructure, they need to complement the existing platform with digital assets, Verdian said.

“By integrating an overlay, you can avoid disrupting current capital market flows and trade digital assets alongside traditional asset classes. Finally, you can migrate to the new technology when critical mass is achieved.

“We would also recommend using established distributed ledger technologies rather than building blockchains from scratch.”

Mr Verdian, who has also worked for the UK Treasury, EY and HSBC, said capital markets around the world were undergoing fundamental transformation and it was right for the ASX to explore blockchain because it allowed assets to be “tokenised”. This can reduce costs by offering faster trading and ultimately cheaper clearing and settlement.

But rather than forcing the design onto the market, he urged the ASX to collaborate in a “sandbox” environment, to allow participants and counterparties to speed up implementation. Markets in Europe, including the UK, have recently established development sandboxes as they consider new infrastructure.