ASX Ltd. had a choice. The operator of Australia’s main stock exchange could develop a new version of Chess, its faithful but aging clearing and settlements system introduced in 1994, or it could build for the future.
The company chose the latter, confirming this week that it will develop a blockchain-style distributed-ledger platform with Digital Asset Holdings LLC, the software firm led by former JPMorgan Chase & Co. banker Blythe Masters.
The news shouldn’t be a great surprise. ASX has been examining replacement options for Chess since 2015 and last year started working with DAH, in which it holds an 8.5 percent stake, to test digital ledger technologies.
But the decision has put blockchain technology front and center amid the hullabaloo surrounding bitcoin’s incessant rise. If nothing else, the announcement serves as a reminder that bitcoin doesn’t equal blockchain — it’s merely one implementation of the technology.
Managing securities settlements and clearing is a far more productive use of distributed ledger technology, or DLT, than buying CryptoKitties or funding aquariums. There are risks, too. For ASX, these are both technological — the system may not work as expected, causing problems in its post-trading systems — and financial. UBS Group AG analysts Kieren Chidgey and Wilson Nghe this week reiterated concerns that ASX’s relatively high clearing fees could be hard to replace if DLTs reduce barriers to entry in the post-trade business.
In truth, that ship sailed some time ago. ASX’s monopoly on clearing was ended by Treasurer Scott Morrison last year, and revenues from clearing and settlement are well below their levels a decade earlier. With antitrust authorities prepared to take a more aggressive approach to any signs of excessive fees, the benefits of clinging to the past have dropped sharply.
Fortune favors the brave, and being bold enough to lead the charge into blockchain technology has every chance of paying big dividends for ASX. Many are still befuddled by blockchain, unsure why it’s even necessary. But asking today what problem digital ledger technology solves will one day look as naive as questioning the purpose of email in 1994 when fax was already adequate.
Choosing to work with DAH and its CEO Masters gives important street cred to ASX and its foray into this new frontier. Masters’s resume is long and impressive, including her stints as chair of the Securities Industry and Financial Markets Association and Global Financial Markets Association.
That’s why the major upside goes beyond hopes of reinvigorating trading volume at Australia’s primary exchange. Should ASX and its partner pull off this transition, they may become the global benchmark for exchanges. And if ASX can get in front of existing investors such as Goldman Sachs Group Inc. and JPMorgan to up its stake in DAH, it has every chance of reaping dividends from selling that know-how to other exchanges.
With other market providers, including one-time suitor Singapore Exchange Ltd. and Hong Kong Exchanges & Clearing Ltd., also dipping a toe in the blockchain water, it’s possible that ASX could become a service provider to these rivals.
That’s surely a far better use of blockchain then selling virtual cats.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Matthew Brooker at email@example.com