ASX blockchain project stumbles…again

The ASX blockchain-based replacement for its clearing and settlement system CHESS has been delayed yet again this week for the fourth time.

The major project undertaken by the ASX five years ago is still showing no signs of completion. Followed by delay after delay – it appears that this is one of the longest and largest running blockchain experiments with no end in sight?

The Clearing House Electronic Sub register System (CHESS) was first introduced in 1990 to record shareholdings and manage the clearing and settlement of equity transactions in Australia. It aimed to replace paper share certificates and provide name-on-register functionality and electronic communication.

The first mention of the reboot was in December 2017, when the ASX announced its plan to replace CHESS using distributed ledger technology (DLT) in a partnership with US blockchain-focused Digital Asset Holdings (DAH). Similar to how Bitcoin transactions are recorded on a blockchain, with transparency, efficiency and added security, the ASX hoped to replicate this and utilise it to manage clearing and settlements. One of the greatest benefits identified was the elimination of paper share certificates and postage used for every trade conducted on the market. 

Over the next year, the ASX went on a hiring spree and hired over 100 new staff, some of whom were to support the project and form a focused DLT Solutions team. 

In 2019, the ASX started to receive backlash with some concerns over the project’s cost, mostly from share registry companies who believed the new CHESS system would pose some competition issues. Although the ASX thought this would democratise data, many perceived it to be the centralisation of data which posed a considerable monopoly threat to the market.  

Boardroom Limited, Computershare and Link Administration Holdings bounded together and engaged with Deloitte to coordinate and conduct research to construct a consultation paper on the project. The findings from the report were of great interest to two regulators with oversight of clearing and settlements, the Reserve Bank Australia (RBA), the Australian Securities and Investment Commission (ASIC) as well as the Australian Competition Consumer Commission (ACCC). 

The report accused the ASX of not providing a business case setting out all the costs and benefits and not describing how any value created from the blockchain project would be shared and delivered to issuers and investors. The report concluded that the insight found a basis for concern and that the project’s scope may not be best suited for shareholders and participants. 

According to the AFR, the CHESS replacement was initially estimated to cost between $30m and $50m, with a completion date between Q4 2020 and Q1 2021.

In February 2020, the completion date was pushed back to April 2022. Then in October 2020, following a round of consultations, the ASX again moved the go-live date to April 2023.

The latest delay was announced in a project update this week and is the result of software release v1.3 not being received from the project technology provider Digital Asset Holdings. According to the ASX, the targeted date of April 2023 is no longer possible, with no new release date being issued. 

Another delay in the CHESS replacement would increase pressure on the federal government to separate the ASX clearing and settlement staff, systems and governance from the rest of the ASX.

Market participants will not react well to another delay in the project because it would mean even more costs imposed upon them, the risks of the current CHESS system breaking down, and the diversion of IT staff away from other business development projects.

The ASX isn’t known to be the most tech-savvy business out there. In October 2020, the ASX launched a new website that was expected to be more “modern and contemporary”, but the website faced immediate problems on the launch date. With over 2 million daily users on the site, no one could access market announcements which sparked an onslaught of criticism on social media, slamming the ASX for its incompetency. 

The integrity of the ASX was tested again on 15 November 2020, when a market-wide outage for Options trading was halted soon after market open, leaving trades worth billions of dollars in limbo. The outage was followed by intense investigation in preparation for a class-action lawsuit on behalf of market participants and investors who claim they lost money as a result of the glitch. The ASX became aware of “data issues” the day after the outage, where the company apologised to investors and market users for the disruption.

The ASX stopped short of offering brokers compensation, and ASIC says the ordeal proves the need for investors to have more options. Currently, the ASX remains a near-monopoly in Australian equities. The ASX disputed the title as a monopoly and claims it directly competes with Chi-X on trading in shares and securities. 

This begs the question; has the ASX monopoly position bred complacency, and has this led to bad outcomes for market participants?