ASX’s complex chess moves
He flew to Australia in 2016 to attend a two-week workshop at ASX, which was then led by Elmer Funke Kupper. Shortly after Smith made his sales pitch, he hopped on a plane home.
When he landed in New York, he was told that ASX had already decided to go with Digital Asset Holdings, a company still involved in the project today.
Another reason Smith is a good sounding board for replacing CHESS is that he is arguably one of the world’s leading experts in the commercial application of blockchain-enabled digital asset technologies.
Symbiont is at the forefront of the use of blockchain in financial markets and wealth management in the United States. It is backed by powerful investors including NASDAQ and Citi.
He developed the first application in the corporate blockchain space – a data product for the Vanguard Group, a mutual that manages $ 7 trillion ($ 9.4 billion) under passive investment strategies. .
Vanguard uses the Symbiont product in the following way: it takes data from indexing product suppliers – S&P, MSCI, FTSE, CRSP, and Russell – ingest them into the blockchain, then use smart contracts to normalize the data to create trading signals.
Trading signals are used to rebalance Vanguard passive indices. This Symbiont network is now used to manage approximately $ 1.6 billion worth of Vanguard indices.
In financial markets, Symbiont is working with Citi to create a full blockchain lifecycle product in the fixed income market, starting with asset backed securities.
Essentially, Symbiont technology allows an issuer to take a pool of securitized assets, use a smart contract to manage cash flow, issue the securities directly over the network, and then trade them in the secondary market on a basis of equals. .
The first blockchain-based deal was struck earlier this year with a US $ 1.3 billion issue of asset-backed securities on auto leases by Ford Motor Company. Symbiont is developing commercial paper and money market products that will operate on the same network.
This example shows the disruptive nature of blockchain-type technologies. By enabling peer-to-peer fixed income trading, Symbiont technology removes an entire layer of fees paid to third parties in the supply chain.
The use of blockchain in the clearing and settlement of stocks has the potential to remove multiple layers of activity undertaken by a range of traditional businesses.
This is another reason why it’s worth hearing what Smith thinks about the CHESS replacement, which has come under criticism, much of which comes from those threatened by technology that cuts out middlemen. .
Currently, spot stock trading is based on “T plus 2” – settlement takes place two days after trade day. The delay arises from the use of third parties, such as brokers, custodians and share registers, who process the payment, settle the transaction and transfer ownership rights to the security.
A blockchain platform removes the need for intermediaries by introducing direct exchanges between investors. With no third party required to settle the trade, the trade can be settled immediately, reducing costs and potentially providing a more liquid market that operates 24/7, virtually eliminating counterparty risk.
“The largest system on the planet”
As part of the initial vision of replacing CHESS, Funke Kupper wanted to replace the two shareholding mechanisms – the issuer identification number and the holder identification number – with the tax file number of each person. . But it was all too hard.
ASX Managing Director Dominic Stevens said that with the replacement of CHESS ASX is investing in long-term market-leading infrastructure.
Smith says his company dodged a bullet by losing Project ASX.
“It was the best loss we’ve ever had because it’s a Herculean project,” he says.
“It was extremely intimidating and very visionary when it was presented in 2015. No one else thought like Elmer Funke Kupper or Peter Hiom (former deputy general manager of ASX) or anyone in the world at the time. to blockchain technology.
“They saw him very early on. But it was the start of a very difficult project, a project that was going to be fraught with pitfalls, and I think that is exactly what turned out.
At the time, Smith was running a small start-up with 25 employees.
“For us, we were able to look to other opportunities. Now, we’ve grown and matured, and we’re a very sophisticated blockchain company with working technology.
Smith says he still has the “fancy letter” he received from ASX for CHESS’s replacement contract with Symbiont, and the amount cited was less than a tenth of the $ 250 million spent so far .
“This includes the cost of the project and the investment in our business,” he says.
An ASX spokesperson said: “Less than $ 25 million is not an accurate estimate of the initial cost of the CHESS replacement project.
“ASX has no record of ever saying so. This can be a reference to one aspect of the project, but not to the whole project. Additionally, this issue comes from a letter that appears to be one to two years old before ASX and the industry began specifying the replacement version of CHESS.
“The $ 25 million improbability is further underscored by the fact that the first version of CHESS cost about $ 30 million more than 25 years ago.”
Smith says Symbiont avoided clearing and settling stocks due to the difficulties encountered and instead focused on financial instruments that originated on a blockchain.
He says that when the blockchain is the sole custodian, no external system is involved. Importantly, there is nothing to replace, as is the case with the CHESS project.
“Then you use very sophisticated smart contract technology to model these instruments, so that the terms and conditions and the way it behaves in financial engineering is completely automated,” says Smith.
“I think ASX did itself a disservice by using a monopoly position to kind of force the project.
“I think when Digital Asset failed, they should have just thrown it out – that would have been the smart thing to do.
“But to bring in VMware and have that kind of expense, I don’t see how they could, over the next decade, offset that kind of cost.
“In our projections in 2015, at a tenth of that, we were looking at 10 years to offset a cost. If you’re 10 times that, you’re talking 100 years to offset the costs. “
Smith describes VMWare, which is ASX’s chosen software vendor in the CHESS project, as “a great software company, great pedigree, great track record.”
He says if the ASX succeeds in replacing CHESS properly, it will be a world leader.
“I think when it is delivered – if it looks like what we have been asked to build – it will be the largest settlement and clearing system on the planet.”