ASX’s executive chairman Rick Holliday-Smith has reconfirmed ASX’s commitment to developing the blockchain, the distributed ledger technology, and commented that this technology “offers a unique opportunity for Australia to be a leader in the assessment of innovative market solutions.”
Blockchain technology is developing and expanding rapidly. With quite a few new entrants to the market for blockchain and vast amounts of recent investment, the early results have been seen as ‘very promising’ by the current ASX executive chairman.
What is a blockchain?
The new technology is essentially a new tool for the management of information. A blockchain is an electronic ledger of digital records or transactions that are authenticated and maintained through a distributed, shared network of participants using a group consensus protocol. A well-known example of this is Bitcoin.
Different sets of transactions are considered to be different blocks in the chain, and the register itself acts as a whole blockchain.
The most ‘disruptive’ aspect of the new technology is its potential to eliminate the need for third party intermediaries in transactions, or the ability to create trust between two parties that are willing to transact. The new technology is expected to cause significant changes to industries relying upon guarantors, authentications and ‘trusted third parties’.
It is important to understand that one crucial aspect of record keeping is the record’s trustworthiness. The measure for trustworthiness is arguably based mostly on reliability, accuracy and authenticity of the record. However, the blockchain technology does not provide solutions to the reliability and accuracy of a digital record.
It offers only a fast and reliable way to address a record’s authenticity by confirming the parties submitting a record, the date and time of the record, and the relevant contents.
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This is to say that the blockchain technology will not provide assistance in terms of bad data input, false information or distinguishing between a transaction by an actual user and a malicious transaction by someone who is unauthorised to submit certain records.
The excitement in the capital markets
There are many potential applications for blockchain, in both private and public sectors. In the financial markets, blockchain technology will alter the ways in which financial assets are transacted, causing huge impacts on capital markets, clearing houses, broker-dealers and banks.
The financial industry has demonstrated huge interest in this new technology and committed itself by investing large amounts of money in it. Certain functions within the financial sector have begun utilising this technology in transferring ownership or custody of financial assets.
Currently, securities clearing and trading operations will generally take two days to settle a trade, causing risks in credit and liquidity. The blockchain technology makes real time transaction and settlement possible, as evidenced by its application in the Bitcoin system.
Faster transactions will significantly reduce purchaser default, and eliminate the illegal practice of ‘naked short-selling’, increasing the overall stability of the system.
As a major participant in the new technology, ASX has indicated its hope that the new technology will allow real time settlement and tracking of financial transactions by all parties involved, collapsing the two-day delay in closing a transaction. Despite questions regarding its enthusiasm for this new technology given the potential of forgoing $55 million in revenue from its clearing house businesses, ASX has reasserted its commitment to this revolution.
For now, the new technology is still in the early stages of adoption. Its impacts on various industries will be assessed mostly by its implementation in practice. Without proper implementation and regulatory structure, its efficacy may potentially be compromised.