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CHESS Replacement

ASX commenced a process of evaluating replacement options for CHESS in 2015.

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Technology solution

As part of the CHESS replacement project, ASX is evaluating the use of distributed ledger technology - DLT.

DLT uses an append-only database of transactions that has two key elements:

  1. a shared, replicated ledger and
  2. a distributed database synchronising mechanism. Each transaction must reference a balance received from a previous transaction and must be cryptographically signed by the legal approver of the transaction. The solution forms an exact chain of title over time.

ASX will be implementing a DLT solution that is not open or public. This is because regulated markets require participants to be appropriately licensed and known to regulators - for there to be rights of reversal and error correction, and high levels of privacy and security; and for the operational benefits of net settlement to be retained in a system in which legal entities are responsible for the perfection of title to, and legal standing of, financial assets.

The replacement of CHESS with any DLT solution would be within ASX security perimeters on a private, permissioned, secure network where only known, licensed participants would be authorised to access the system, much like today. Private contractual information will be segregated and will not be shared with all participants, encrypted or otherwise. The shared and replicated aspect of the solution serves as a transaction notification and synchronisation mechanism and includes only hashes (one way cryptographic functions). This is very different to the open Internet-based, 'permissionless' blockchains such as Ethereum and Bitcoin.

Public Blockchain vs ASX Private Permissioned Ledger

Public Blockchain ASX Private Permissioned Ledger

Not applicable to highly regulated markets

  • Unregulated
    • No restrictions on ability to join and transact
    • Users are anonymous or pseudonymous
    • Limited rules and regulatory oversight
  • Operated on the public Internet
    • Access gained through downloading software
    • Exchange and user security not subject to scrutiny
    • If compromised, holder can unilaterally transfer cryptocurrency anywhere in a public network
  • Data integrity
    • Access to cryptocurrency controlled by private keys
    • Underlying technology has inspired new applications tailored for financial markets

Similar to today, but an enhanced database architecture

  • Highly regulated market
    • Infrastructure providers with licences to operate
    • Rule book defines market operation
    • Participants identified and meet regulatory standards (e.g. KYC and AML)
  • Operated on a system within a private network
    • Technology controls retained
    • Securities exist digitally only within the ASX register
    • Cash remains within banking system
  • Enhanced data integrity
    • Equivalent or better security of data (cryptography)
    • Multiparty authentication and authorisation
    • Creates a secure single source of truth
    • Could provide significant benefits to the industry

ASX's use of a DLT solution would be in conjunction with other ‘traditional' technologies to ensure that the most appropriate technical solution is applied.

By way of background, in January 2016, ASX selected Digital Asset 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 DLT.  This initial phase of work was completed in mid-2016.  From this work, ASX concluded that DLT:

  • has met initial capacity tests for ASX’s scalability, security and performance requirements for a replacement system when deployed in a permissioned private network. Further testing of the technology will be conducted as part of the next phase of development
  • offers potential benefits for issuers, investors, intermediaries and regulators through improvements and innovations in operational processes

For further information concerning Digital Asset and to download their White Paper, please visit their website: https://digitalasset.com/

Contact us

You can contact the ASX CHESS Replacement project team on the following email address:

ASX CHESS Replacement