Westpac and the Australian Stock Exchange have taken very different paths on their journeys with blockchain, but they both agree on one thing: the technology is way overhyped.
Blockchain has hit the “peak of inflated expectations”, according to Gartner’s 2016 hype cycle for emerging technologies, but is yet to reach the point of disillusionment, nor to achieve widespread adoption.
“Don’t believe everything you hear about blockchain. It is ridiculously hyped,” the ASX’s general manager of equity post trade services Cliff Richards told the FST Media Future of Banking & Financial Services conference last week.
“If you can solve your problem without distributed ledger technology, continue to do so. I’ve had people in large organisations say they need to put blockchain in the business case because that’s how they’ll get the money. Not a good reason.”
Blockchain technology is a “solution looking for a problem” - a “completely backwards” approach to innovation, Westpac Institutional Bank’s head of innovation and implementation Mike Baldwin said.
“Nobody really knows how long it’s going to take to get to [mainstream adoption]. And I think that’s the key for distributed ledger technologies - if they only make it a little bit better than what we have today, I don’t think any of us are going to be able to justify the cost, the time, and the effort to bring it to market,” he said.
Reinventing trade
The ASX’s disciplined approach to its own blockchain implementation is showing early signs that its cost, time and effort investment will pay off.
The stock exchange is emerging as the poster boy for blockchain in Australia, providing arguably the strongest example of a practical use-case for the technology to date. It has partnered with fintech firm Digital Asset to replace its CHESS post-trade cash equities system with a private, permissioned distributed ledger system.
It has completed development of a working solution and is now focused on building an “industrial strength platform” while working through the impact of such new technology within the heavily regulated finance industry.
The ASX spent a lot of time understanding the potential friction points and growth areas of the technology, Richards said, to make sure it was the right solution to the stock exchange’s problem.
Amongst a “laundry list of benefits” the ASX identified blockchain’s ability to handle two traditionally big problems with capital markets: double spending and fractured data.
The double spending issue has historically been mitigated by a central counterparty, an entity that sits in the middle of transactions to verify them and maintain a golden source of data so double spending can’t occur.
Blockchain protects against double spending by verifying each transaction added to the distributed ledger against all others to ensure the transaction has not already been spent.
This elimination of the need for a central counterparty in a blockchain environment is "probably its best known benefit," Richards said.
However the “real” problem with capital markets currently, according to Richards, is fractured data, or inefficiencies in reconciliation - an often manual process that frequently means organisations don’t identify errors in their books until year-end or during a periodic review.
“The ASX is the clearing house in the middle to which every other data store has to reconcile their books and records. They can send a message saying ‘please do this’ and we can send one back saying ‘we’ve done it’, but they don’t know whether we’ve done it until the end of day reconciliation is performed," Richards said.
The stock exchange's blockchain solution involves what it calls a “global sync log” where all separate data stores are kept in “perfect, real-time sync”.
“Imagine a world where you keep the same actors on the stage but you connect them through this fabric that gives them a real-time view of the golden source data,” Richards said.
"When you’ve got a real-time connection fabric that doesn’t need to be reconciled, you’ve got a very efficient distribution mechanism of the golden source of truth."
While the parties involved in a transaction will retain a copy of their own transaction data - as would the ASX - all that will be shared globally in the private blockchain is a “fingerprint” (or a one way cryptographic hash) of the transaction to provide cryptographic proof to the log.
Storage and maintenance of the blockchain data is a non-issue because all that is stored is a SHA256 hash, and “there’s only a few million of those a day”, equating to around 4-5TB of data, Richards said.
Once all participants have a real-time view of transactions passing through the post-trade cash equities market, other benefits begin to appear, he said.
“If we start to give listed companies a node .. suddenly it doesn’t take three days to a week to work out who owns your company, you can work it out much faster. If you’re issuing a proxy vote as a company secretary, real-time to all your investors, they can vote and you can see those votes coming back in real-time,” Richards said.
“This is a significant transformation from the way we work today - a message-based reconciliation system - to one where the golden source of truth is available in real-time, and where data privacy is protected.”
Read on to learn about Westpac's rocky journey with blockchain...
