ASX confirms blockchain-inspired distributed ledger to replace CHESS

The ASX intends to replace its decades-old Clearing House Electronic Subregister System (CHESS) with blockchain-inspired distributed ledger technology (DLT) developed by US software firm Digital Asset.

CHESS has been used to record shareholdings and manage the clearing and settlement of equity transactions in Australia since it was introduced in 1994. Although it continues to be “robust and reliable”, the ASX said, the exchange is taking the opportunity to replace it with “a next generation post-trade platform using contemporary technology”.

Benefits of the new system include reducing complexity for customers by having a distributed ledger that represents a single source of truth, and lowering access barriers to non-affiliated market operators and clearing and settlement facilities.

The new system will be operated by ASX on a secure private network where all participants are known, ‘permissioned’ to have access, and must comply with ongoing and enforceable obligations.

The announcement this morning follows two years of suitability testing by ASX and Digital Asset, two independent third party security reviews, and months of stakeholder consultation.

“The testing confirms ASX’s confidence in the functional, capacity, security and resilience capabilities of DA’s application of DLT to meet the needs of Australia’s financial marketplace and maintain the highest regulatory and operational standards,” the ASX said in a statement.

The scope of ‘day one functionality’ for the new system and proposed timing for transition from CHESS will be released in March.

“ASX has been carefully examining distributed ledger technology for almost two-and-a-half years, including the last two years with Digital Asset, in order to understand its potential application. Having completed this work, we believe that using DLT to replace CHESS will enable our customers to develop new services and reduce their costs, and it will put Australia at the forefront of innovation in financial markets,” said ASX managing director and CEO, Dominic Stevens.

Meaningful proof

The ASX acquired a 5 per cent equity interest in Digital Asset for $14.9 million in 2016. 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 are also investors in the in New York-headquartered firm.

It later upped it's stake to 8.5 per cent with an additional $9.5 million.

“ASX has also formed a strong partnership with Digital Asset over the past two years, and we’re confident we have chosen the right partner. Together, we look forward to continuing to work with the industry as we finalise the requirements and the roadmap for implementation of the new system,” said ASX deputy CEO Peter Hiom.

The ASX said it will exercise its pro rata right to participate in Digital Asset’s Series B fundraising and subscribe for US$3.5 million convertible notes.

“After so much hype surrounding distributed ledger technology, today’s announcement delivers the first meaningful proof that the technology can live up to its potential. Together, DA and our client ASX have shown that the technology not only works, but can meet the requirements of mission critical financial infrastructure,” said Digital Asset CEO Blythe Masters.