A $250m blockchain blunder down under: What can we learn?

The last few weeks have not been good for the reputation of blockchain industry. The collapse of the crypto exchange, FTX, has put bad actors and the unregulated trading of cryptocurrency into the spotlight. In more regulated spheres, we saw the $250m write-off by the Australian Securities Exchange (ASX) that pulled the plug on its supposed, world-leading blockchain project. This seven-year initiative was meant to replace its ageing CHESS system, which manages the clearing and settlement of equities, with new and improved distributed ledger technology (DLT).

Whilst these events have tarnished parts of the industry, and it's disappointing to see ASX's ambitious project fail, the attempt to put Australia at the forefront of innovation in financial markets should not be dismissed. Capital markets worldwide are undergoing foundational transformation by embracing digital assets. The digital ledger technology that underpins digital assets can harness new operational efficiencies and significantly reduce costs. In addition, it can enable 'zero trust' transactions to reduce the dependence on legacy intermediary processes and counterparties. 

Tokenising or fractionalising equities, funds, bonds and private equity into digital assets as securities remains highly promising. These instruments offer greater liquidity for issuers and, in the case of investors, a democratisation of asset classes and financial products that were previously unavailable to them. The legal and regulatory framework for digital assets as securities is coming to pass. We soon expect new rules from the U.S. regulators such as the SEC and CFTC, the U.K.'s Financial Conduct Authority, and the finalisation of the E.U.'s Market in Crypto-assets Regulation (MiCA) to provide better clarity on how to operate digital asset securities, crypto assets and tokenised money within a regulated environment. 

So, it's no wonder many exchanges are ready to push the button. As fewer SPACs and IPOs are offered due to recent regulatory and market changes, they see a clear rationale to bring to market new issuance products that are native digital assets and asset managers tokenising their funds to access more liquidity pools. This is already happening, with many of the world's largest investment banks and asset managers readying their operations in anticipation as financial services evolve.

The ASX project is far from over, however. It's reported that it may have to compensate trading firms $100m for their upgrades for the experimental project. Exchanges are left in a difficult position; whilst they see opportunity, they are also keen to avoid a costly, failed project. It leads to the question: what could have been done differently? A few things...

Instead of a big bang, like-for-like replacement of the entire infrastructure, a more effective approach would be to complement the existing platform with digital asset capabilities. By integrating an overlay, you can avoid disrupting current capital market flows and trade digital assets alongside traditional asset classes. Eventually, you can migrate to the new technology once critical mass is achieved, and sunset your legacy system without impacting day-to-day operations.

At Quant, we recommend using an established DLT rather than building a blockchain from scratch. Many public blockchains are collectively tested using open-source collaboration and further validated in production environments to be resilient and fit for purpose. Similarly, many commercial or permissioned blockchains exist which are specially built for financial services applications. These are scalable and work very well. According to your specific project requirements: goals, transaction types and volume, participants, cyber-security and privacy needs, you can choose the appropriate DLT.

On top of that, an API-based blockchain gateway can perform much of the functionality needed for tokenisation, interoperability and settlement needed by exchanges. We recommend using a reputable tokenisation platform rather than an ad hoc approach. Low-code solutions available that create enterprise-grade tokens with templated, highly secure smart contracts that are externally validated. This technology lowers the cost and delivery time of blockchain projects and reduces the need to bring in highly skilled (and expensive) specialist software developers.

Also, by working collaboratively in a pilot sandbox environment with participants and counterparties, you can better achieve timely and effective project implementation. With emerging technology, start small, test and iterate and then go bigger. This is the approach of many successful central bank digital currency pilots, which run on a variety of DLTs. These are getting more complex and experimental, taking on an increasing number of participants and solving ever more challenging issues.

While blockchain technology is nascent, its impacts will be profound. As our society becomes increasingly global and digital, in many cases, DLT offers a better solution to designate ownership, move money and trade assets. So, no wonder it’s the technology of choice that capital markets are turning to.  While we won’t always get the implementation right the first time, we shouldn’t confuse our missteps with the opportunity at hand.