The Australian Stock Exchange plans to base its new post-trade platforms on distributed ledger technology, or blockchain, after becoming one of 13 global financial services companies to make a minority investment in fintech firm Digital Asset.
The move forms part of the ASX's $50 million, four-year systems overhaul detailed last year, which involves the replacement of all the technology underlying its trade and post-trade systems.
Phase one involves the replacement of the ASX's existing trading and risk management systems, based on Cinnober and NASDAQ technology.
An overhaul of post-trade services, such as cash market clearing and central securities depository services, forms the second phase of the program.
The ASX currently uses the aged CHESS platform for clearing and settlement services to the local equity market.
But the stock exchange is keen to avoid replacing the platform with a new version based on the same legacy processes currently available in the market.
"We should aim to re-engineer and simplify those processes to deliver significant benefits to the users of the market," ASX managing director Elmer Funke Kupper said in a statement.
The stock exchange today said it had paid $14.9 million for a 5 percent equity interest in Digital Asset and to fund the company's development of a post-trade solution for the stock exchange using distributed ledger technology.
The money also allows the ASX to purchase further equity and appoint a director to the Digital Asset board if certain conditions are met.
Initial plans are to test whether distributed ledger technology can work at the scale of the Australian equity market.
Blockchain technology for the bitcoin digital currency works as a decentralised ledger of every transaction ever made, with the transactions verified and shared by a global network of computers.
The CHESS platform will continue to operate until a final decision is made on the technology that will underpin the ASX's post-trade technology in 2017.
The ASX pointed out that its planned distributed ledger technology would differ from the publicly available blockchain underpinning Bitcoin due to regulatory restrictions.
It will instead be based on a private network where all parties involved will have permission to do participate.
"Distributed ledger technology may be able to significantly simplify and speed-up post-trade processing," the ASX said in a statement.
"For ASX clients this could remove risk and reduce back-office administration and compliance costs, while investors could experience significantly faster settlement of equity transactions – potentially in near real-time."
US-based Digital Asset has raised more than $50 million from the likes of Accenture, Citi, JP Morgan, CME Ventures and others in the global financial services industry.
The company launched last year and promises to improve "efficiency, security, compliance and settlement speed" for financial services companies while reducing costs.
Australia's banks are also playing around with distributed ledger technology, with the Commonwealth Bank and National Australia Bank participating in the global R3-led initiative to trial ways blockchain technology can be used in financial markets.
