Jan 2017

Blockchain DLT option to replace CHESS

By: Odyssey General
Tags: BlockChain, Disruption, securities

In the press last week was more about the changes about to affect the CHESS System.

As reported, the Australian Securities Exchange (ASX) has moved further down the track in developing a post-trade settlement system that will eventually replace the incumbent CHESS (Clearing House Electronic Sub-register System), and a blockchain-based system remains the front-runner. 

We’ve certainly been mentioning the disruptive ability of blockchain over the past year, including our article “Blockchain technology is going to change the face of finance forever” back in April 2016.

Back to a CHESS replacement, the ASX began working on a CHESS replacement (the system is over 20 years old!) in 2015, and in January 2016 selected Digital Asset Holdings LLC as a technology partner to develop, test and demonstrate to ASX a working prototype of a post-trade platform for the cash equity market using distributed ledger technology (DLT), which is commonly referred to as “blockchain.”

Late last year the ASX released a 21 page consultation paper for the replacement of CHESS with the implementation acceptance decision on DLT platform acceptance to be made in Q4 of 2017, with implementation design from 2018 onwards.

That basically means that by the time to 2017-18 tax year is done (just a year and a half away) there should be a firm date as to when CHESS will be retired, or what reduced functionality will still be supported by CHESS.

For most Australian accountants, this means that the CHESS system which we are probably all very familiar with, is likely to be retired / semi-retired over the next 12-18 months.

For those that are interested in a working platform, although ASX is the largest exchange to attempt a full clearing and settlement system replacement that uses a blockchain, Overstock.com CEO Patrick Byrne’s startup exchange t0 (t Zero) was the first to issue a security, in the form of a ‘crypto-bond’ over a blockchain. T0 was announced in late 2014 and has been open for trading just over a year.

Further in May 2015, Nasdaq started investigating blockchain technology for its Private Market. The testing resulted in an exchange platform named Linq, which was demonstrated in October 2015. Linq and blockchain technology provider Chain showcased how blockchain technology can “successfully complete and record a private securities transaction.” Nasdaq claimed Linq was the “first of its kind” to issue a security over a blockchain.

It’s 100% sure that Clients will be asking about the replacement DLT blockchain in discussions with accountants at some point in time. It is critical that Australian accountants have a good understanding of not only blockchain distributed technology, but also what is happening with CHESS/the DLT design.