By Robb M. Stewart
MELBOURNE, Australia--Australia's main securities exchange is betting on the record-keeping technology that underpins bitcoin to process stock trading in the country.
The decision to adopt the technology to replace ASX Ltd.'s current decades-old system offers a significant foothold in mainstream finance for blockchain. ASX expects the shift will make the sharing of vast volumes of data more efficient and lead to cost savings for its customers.
ASX on Thursday said it would replace its system for recording shareholdings and managing the clearing and settlement of equity trades with blockchain ledger technology developed by Digital Asset Holdings, a financial-technology company led by former JPMorgan Chase & Co. executive Blythe Masters.
The exchange, which has been looking to replace its existing system for more than two years, said it aimed to disclose the proposed timing of the change and the functions the new technology will initially have by the end of March. The cost of developing the blockchain-backed system wasn't disclosed.
"This puts us ahead of other exchanges, which we know are watching this closely," ASX Deputy Chief Executive Peter Hiom said.
Commonly called blockchain, distributed ledger technology is an electronic record of continuously maintained and verified transactions that is shared by users on computer servers and protected by cryptography. Financial companies around the world have ramped up investment in the technology in recent years in the hope it can simplify and reduce the cost of back-office processes.
Several other exchanges have been experimenting with blockchain technology. In May, Nasdaq Inc. and Citigroup Inc. said they would introduce a system using blockchain technology to record and transmit payments.
In late 2016, Deutsche Bundesbank and Deutsche Börse presented a prototype for blockchain technology-based settlement of securities. Earlier that year, International Business Machines Corp. said it was working with Japan Exchange Group to test the potential of blockchain technology in trading in low-transaction markets.
Although similar ledger technology is used to track digital currencies, the system proposed by ASX would operate on a secure private network where users are known, have permission to access and must comply with enforceable obligations. The platform would synchronize and standardize the exchange's database of equity trades.
"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," Ms. Masters said.
Ms. Masters, who helped pioneer credit-derivatives markets in the 1990s, said Digital Asset and ASX have shown the technology works and can meet requirements for "mission-critical" financial infrastructure.
Last year, Wall Street banks including JPMorgan and Citigroup Inc. successfully tested blockchain ledger technology on credit-default swaps. JPMorgan in October rolled out its latest pilot program to use blockchain to enable faster, more secure transfers of cross-border payments between it, Royal Bank of Canada and Australia & New Zealand Banking Group Ltd.
In July, ANZ and fellow Australian bank Westpac Banking Corp., along with IBM and shopping-center operator Scentre Group, said they had successfully tested the ledger technology to eliminate the need for paper-based bank guarantee documents, which could reduce the potential for fraud and offer a single source of information.
ASX bought a small stake in Digital Asset early last year, lifting it to an 8.5% interest for a further US$7.2 million a few months later when it also appointed the company as its preferred partner to develop blockchain ledger technology. It said Thursday it would exercise its right to take part in Digital Asset's recent fund raising, buying US$3.5 million in convertible notes.
The exchange has been looking at the possible adoption of the technology for more than two years as an alternative to developing an update for its Clearing House Electronic Subregister System, or Chess, which was introduced more than 20 years ago as a replacement for paper share certificates. The company and Digital Asset have been testing "enterprise-grade" blockchain technology for post-trade functions to ensure it has the capacity and security to manage Australia's financial marketplace and meet regulatory standards, ASX Chief Executive Dominic Stevens said.
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