Australian Stock Exchange Blockchain Failure Burns Market Confidence

By Byron Kaye

SYDNEY (Reuters) – In a Sydney hotel conference room in May, Tim Hogben, head of securities and payments for ASX Ltd, which operates the Australian stock exchange, told reporters. traders, stock registrars and clearing house representatives what they hope to hear. .

The rebuilding of the exchange’s aging software using blockchain-based technology is largely ready after seven years of development, bringing ASX to the brink of the world’s first transformation allowing it to grow in volume. trade and compete more strongly with global competitors.

“96% of the software is currently in an operational and testing environment. 96% of that software is live,” Hogben said at a conference of the Association of Investment Advisors and Stockbrokers, in footage that Reuters can see. “If it doesn’t work, you’ll hear about it, let me tell you.”

In November, ASX abandoned the project citing inefficient operations management, concerns about the complexity and scalability of the product, and difficulty finding specialist support. The criticism came after new CEO Helen Lofthouse conducted an Accenture (NYSE:) review that found rebuilding was only 63 percent achieved and nearly half of the code needed to be rewritten.

More than a dozen brokers, other market participants and people directly involved in the blockchain project told Reuters that the failure has shaken confidence in the Australian exchange operator. Some expressed frustration at the time and cost they had contributed to the ruined effort, and ASX iterately ensured that all was well with the upgrade, which had already faced 5 delays since the original launch in 2020 as scheduled.

The experience also raises questions about the mismatch between the promises and reality of the technology underlying cryptocurrencies. The use of distributed ledgers in Australia’s critical financial infrastructure will be one of the most important applications of blockchain-based systems in the mainstream enterprise environment.

Michael Somes, general counsel of Cboe Australia, a stock and derivatives exchange involved in the case, said: “ASX may have chosen a stable and stable clearing system (but) choose a cutting edge, unproven, untested technology.” plan.

“ASX’s selections have resulted in one of the largest significant service tools ever seen in the global financial markets.” In addition to the AU$245-255 million (US$164-171 million) fee ASX intends to cover for the incident, market participants estimate that they have collectively spent that amount again to prepare for deployment, including software upgrades, airline tickets, and employee hours. Attend webinars and consultations. At a congressional hearing this month, ASX apologized for the debacle but denied misleading the market or regulators. President Damian Roche, when asked by lawmakers about a statement in the company’s 2021 annual report that the project had “moved from the design and build phase to testing and delivery,” said: This statement refers to the “functional” parts of the software, not the “inactive parts” such as security and scalability.

An ASX spokesperson told Reuters in an email that the company updated the project based on the latest information available, and that some of the challenges “only become apparent as we reach a later stage.”

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ASX’s quest to replace its trading platform — called CHESS, for Clearing House Electronic Sub-Registration System — began under then-CEO Elmer Funke Kupper in 2005. 2015, when there was a global fascination with cryptocurrencies and blockchains.

After New York-based startup Digital Asset Holdings showed ASX executives a test transaction on its blockchain software, ASX in early 2016 signed a contract with the little-known company. to begin exploratory work on an overhaul. ASX purchased a 5% stake in Digital Asset.

Two months later, Funke Kupper resigned over bribery allegations related to his previous role; he was released. ASX continues to rebuild and raise its holdings in Digital Assets to 8.5%. Under Funke Kupper’s successor, Dominic Stevens, the exchange operator has moved from not consulting the market to being widely consulted, a person involved in the project told Reuters on condition of anonymity because of concerns about occupational consequences.

The range is also extended. From an initial plan to run about 12 of CHESS’s 400 transfers per transaction on the blockchain, ASX decided the new system would include all 400 transfers, the person said.

The person working on the project raised concerns that Digital Assets lacked after-market support and ASX joined the company without testing the product’s scalability, adding that the concerns that was not resolved. Ultimately, ASX employs 300 people on the CHESS replacement project, representing about a third of the company’s total employees.

“It hasn’t worked,” said William Slack, chief executive officer of Morrison Securities, which has two employees partially allocated to the ASX project and three or four employees at each ASX consultation. testing and testing entering Australia is unwise.” many years.

Funke Kupper did not respond to a request for comment. Attempts to reach Stevens were unsuccessful. When announcing his retirement in February, he told the Australian Financial Review that his successor would see the blockchain project up and running, and that “the next phase is swapping”.

When CHESS launched in 1994, it was considered innovative because it combined trading, clearing and settlement on one platform. But over time it becomes obsolete and harder to maintain. When a spike in trading in March 2020 prompted regulators to restrict transactions due to processing delays, the Reserve Bank of Australia said it was crucial to replace CHESS “with more modern technology” .

However, by seeking to duplicate all CHESS functionality on a single system, ASX risks undermining the advantage of blockchain, which is reducing touchpoints that slow down processing, those project participants said.

“I guess it would be easier to just build a new version of CHESS with a single instance of CHESS,” said Ramy Aziz, former ASX CFO who oversaw budgets, administration, and timetables related to the project. some other modern language instead of blockchain”. in its early stages.

“Perhaps the blockchain needs to evolve a bit more before it’s capable of doing what they want it to do for CHESS. It probably never will.”

Digital Asset declined to comment beyond a statement on its website agreeing with part of Accenture’s report highlighting “the need for consistent (and) simplified business requirements in solution design.” .

“Clear requirements, alignment of goals and manageable milestones with defined success criteria are paramount,” it said.

An ASX spokesperson told Reuters that distributed ledger technology is transformative and that the company chose Digital Assets after a “strong global” search.

Immediately after ASX shelved the project, AP Moeller-Maersk A/S and IBM (NYSE:) has ended its blockchain-enabled shipping platform, citing a lack of global cooperation.

FALLOUT Accusation was swift. The Australian Securities and Investments Commission, the exchange’s regulator, called the late disclosure of the matters “unsatisfactory” and asked the ASX committee for a special report explaining its plans to CHESS. , while the Reserve Bank of Australia called the failure “very disappointing”. Lawmakers want to extend ASIC’s powers to ASX.

Morgan Stanley (NYSE:) analysts cut their valuation of ASX stock by 10%, citing strategic uncertainty.

Meanwhile, ASX users want compensation for lost time and money on a project they say they can’t turn down.

Daniel Spokes, customer support manager for Morgans, a Brisbane brokerage, said: “ASX’s public announcements of that journey have certainly proven inaccurate, with some could be said to be misleading”. Vendors who have invested in the technology should “have some right to be compensated,” he said.

The CEO of a small broker that runs its own trading software, who spoke on condition of anonymity to avoid damaging relations with the exchange, told Reuters he hired four full-time software developers for three years, at a cost of over A$1 million, to meet ASX’s frequent update requirements.

The RBA and ASIC said they expect the ASX to offset the industry write-downs related to the incident. An ASX spokesperson said the company “is very understanding of its investment clients and other stakeholders who have (and) we will keep this in mind when looking at what work can be leveraged into a solution.” new”.

The spokesperson added that the exchange has “provided discounts to customers in the past” without elaborating.

For some companies, costs are difficult to measure. One of the largest third-party trading service providers, FinClear Pty Ltd, has postponed the integration of its software system with that of a company it purchased in 2021 based on a transition date. ASX is cancelled.

“That’s what our decision-making process means around other technology projects, all of which are interconnected,” said FinClear CEO David Ferrall.

“ASX may, intentionally or unintentionally, mislead the market. I’d like to think unintentionally.”

Chris Burrell, chief executive officer of Burrell Stockbroking, said he has employees who have delayed retirement after learning about the project’s launch schedule, “and then the date comes and gets pushed out”.

After that, ASX still has to determine how to update its core platform. Its spokesman told Reuters there was “no ready-made solution available to meet the needs of the Australian market”.

Aziz predicts the exchange will proceed more carefully in its next attempt.

“They will probably just build a new version of CHESS on top of the regular programming language, not on the blockchain,” he said. “That’s all they can do really.”