'An interesting beast: ASX Ltd', page-6

Hi Horsetrader1,

What makes the Bitcoin Block chain so incredibly secure and incorruptible is essentially the first component shaved off the ASX version of Block chain. To quote Pat McConnell, Visiting Fellow, Macquarie University Applied Finance Centre;

"But there again a power station may still be needed to keep the hype pumping out." ​

First, in the proposed solution, ASX is very firmly the single ‘central authority’, controlling all aspects of the design, implementation and operations of whatever the solution will be. It is also a permissioned DLT on an ASX-owned network, with little information on whether there will be any of the much-vaunted transparency claimed with blockchain. In addition, though not disclosed other than in early whitepapers by software supplier Digital Asset (DA), it is probable that to achieve the necessary throughput/latency, consensus is based on a Byzantine Fault Tolerance (BFT) model rather than a pure Proof of Work (POW) as in Bitcoin. But such climb-downs are pretty much par for the course for practical, as opposed to theoretical, proposals to implement a blockchain solution. In this case, not much is left from the purest of blockchain but a sub-standard shadow of the technology.

But what about ‘trust’ and the holy grail – ‘single source of truth’? Gone too, I am afraid.

Anyone who understands blockchain very quickly comes to realise that to implement such a solution across an industry a firm will have to recognise the reality that the solution cannot just be switched on. It must be implemented gradually with some users ‘on’ the blockchain and some not. In fact, the reality is that some users will never ‘get with the program’, because they are too small (or alternatively, too smart?). This is the ‘chicken and egg’ problem with all DLTs - unless and until all data is on the ledger, the promised benefits, of trust, transparency, immutability etc., cannot flow.

The ASX has been dragged kicking and screaming into recognising this reality, but appears not to have considered the implications very deeply (or if they have, they haven’t let the rest of us into their thinking). What exactly does it mean if some users of ASX’s post-trade services are on the DLT and some not? First, out goes the ‘single source of truth’ for a firm that chooses the DLT route, since its trades will be in two places, on the chain and off the chain. To create a ‘position’, then, a firm will have to merge two sets of data - from the chain and from elsewhere. Such duplication destroys the claim that DLT will bring untold savings to the industry in back-office, in particular in reconciliations. In fact, such an approach will add costs to the industry, since firms will have to handle both existing and new transaction flows.

One of the claimed benefits of DLT is that clearing settlement will move to real time at some time in the future. But a moment’s thought will make one realise that too is untenable. For example, assume that I believe the share price for BHP is going up and buy 100 shares from Broker A. Being prescient (or lucky) the price goes up and I then sell the 100 shares to Broker B. This is a set of transactions that happens hundreds of times every day, albeit that clearing and settlement will be delayed by up to two days. But consider the very real situation where Broker A is not on the DLT, but Broker B is. I buy from A and sell to B, but that second transaction will not clear and settle in real time because I don’t have the stock yet from Broker A, nor will any transactions that Broker B has subsequently done with other users on the assumption that the 100 shares will be available. This is the classic ‘knock-on settlement failure’ that central clearing and settlement depositories (CSDs) are designed to circumvent to prevent markets from slowly grinding to a halt.

Of course, the very real potential for settlement failures opens the can of worms of ‘blockchain immutability’, as transactions will have to be backed out of the DLT someway. Another strike against this Blockchain-Lite? So, in summary, by having two classes of users – on and off blockchain - the ASX solution provides no financial benefits to firms (in fact increases their costs), and no technical benefits, yet introduces significant operational risks, especially during implementation.



This proposed project has all of the hallmarks of the, unfortunately very crowded, IT project management Hall of Famous Disasters. Even after many months of work, the project has: no clear objectives; no plan; hence, no detailed costs; no well-defined benefits; is complex; involves many external stakeholders; is using novel technology; and has engaged a small software house that has not successfully implemented their software in a live situation yet and has little experience in developing the business, as opposed to technical, solution.

In a recent speech, Michael Bodson, President and CEO of DTCC and a (probably the) leading proponent of DLT in post-trade processing , when talking about shortening the clearing and settlement cycle, said [the added emphasis is this author's]

"We have a similar story at DTCC - the recent change in the US settlement cycle to T+2, which occurred this past September. We used existing technology to shorten the cycle and align our processes with the European markets. The driver of this initiative was client value - capital efficiency, risk reduction and a globally harmonized settlement cycle. The fact that we used the same technology that we’ve employed for many years to achieve this was a benefit to our clients, who didn’t need to rip and replace their existing systems. The lesson - don’t conflate improved process with new technology. Even when you consider the hottest, newest technologies in financial services today, such as distributed ledgers, the initial predictions of dramatic transformation have since been right-sized because the business cases have not been compelling enough to move forward. That is likely to change in the future, but I tend to believe that, at least for the short-term, the value proposition of DLT lies in addressing industry pain points in targeted areas that remain highly manual and with relatively low volumes".

Remembering that ASX are proposing an industry-wide, high volume implementation, do they know more than someone actually living the problems of DLT implementation?

ASX - Actually a failure of blockchain


About the author:

After over 30 years working for, and consulting to, major banking and insurance companies in the US, Europe and Australia, Pat transferred to teaching courses in Risk Management at Masters level and to industry. His main areas of research are in Operational Risk (People, Systems, Process and Legal risks) and banking regulation. He has published widely on this topic, including: a book on People Risk Management http://www.koganpage.com/product/people-risk-management-9780749471354; a book of Systemic Operational Risk, which covers banking scandals such as LIBOR and FX manipulation, Misselling of mortgages and insurance products and tax avoidance. http://riskbooks.com/systemic-operational-risk-theory-case-studies-and-regulation. In 2016, he published a book on Strategic Risk Management on managing the risks to corporate strategy. http://riskbooks.com/strategic-risk-management-1
His latest book (2017) is on Strategic Technology Risk Management or the risks of not linking technology strategy to corporate strategy . http://riskbooks.com/strategic-technology-risk