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Distributed ledger tech's unchained melody
Blockchain suffered a series of setbacks as the collapse of FTX and ASX’s move to suspend its post-trade project based on the technology bring out the blues
Daniel Yu 18 Nov 2022

Like a major music recording artist, the hits keep coming for blockchain during the past fortnight. The decision by the Australian Securities Exchange (ASX) to take a “pause” in a project intended to replace its ageing post-trade infrastructure, called Chess, with state-of-the-art technology incorporating the use of blockchain, otherwise known as distributed ledger technology (DLT), is the latest to play a shrill note.

This comes in the days following the collapse of FTX, a cryptocurrency exchange, where some of the smartest investors in the world – BlackRock, Tiger Global, Sequoia Capital, SoftBank, Temasek, Paradigm and Ontario Teachers’ Pension Plan – have had to write down their investments to zero in what was valued at US$32 billion at the start of 2022.

Bitcoin, meanwhile, the king of the cryptocurrency world powered by blockchain, is trading at a third of its value from where it was at the start of the year, despite claims by bitcoin evangelists that it would have served as a hedge to a world swamped by fiat money this past decade.

Bitcoin’s slide, however, was not a concern to the more than 62,000 participants from over 115 countries who converged in Singapore for the island-state’s seventh Fintech Festival in early November, the largest gathering since its launch in 2016. The Asset also hosted an exclusive event in Singapore the following week entitled “What next for digital assets” that extensively discussed blockchain and DLT applications.

But the shock of the FTX collapse and ASX’s decision to reassess all aspects of the Chess replacement project, which followed the completion of an independent review conducted by Accenture - the uncanny collision of traditional and digital assets exchanges - are surely going to trigger plenty of debates and soul-searching among industry practitioners on whether the music has stopped for the promise of blockchain.

“There are inherent risks whenever we invest, divest or hold our assets, and whenever we operate,” says Temasek, the Singapore sovereign wealth fund, in a statement following its decision to recognize a loss of US$275 million of its equity in FTX. “While this write-down of our investment in FTX will not have significant impact on our overall performance, we treat any investment losses seriously, and there will be learnings for us from this.”

Several finance industry executives have taken a rather conservative view on digital assets, especially on cryptocurrency. Nevertheless, they have been avid fans of blockchain and its potential to underpin the financial infrastructure of the future. The ASX decision will likely leave many them shaken by how difficult it will be to commercialize blockchain technology in finance.

The Chess replacement project started in late 2018 with bold promises: offering richer functionality, adopt global standards, and use of contemporary technology. Using DLT, ASX blared at the time, it will "deliver information more efficiently and stimulate competition by enabling anyone to build new services".

In the announcement to suspend the project, ASX chairman Damian Roche relates: “We began this project with the latest information available at that time, determined to deliver the Australian market a post-trade solution that balanced innovation and state-of-the-art technology with safety and reliability. However, after further review, including consideration of the findings in the independent report, we have concluded that the path we were on will not meet ASX and the market’s high standards. There are significant technology, governance and delivery challenges that must be addressed.”

Helen Lofthouse, managing director and CEO at ASX, adds: “Replacing Chess is a large and complex undertaking. While ASX is keen to embrace technology that benefits the market, it’s clear we need to revisit the solution design as well as validate and test the feedback from the independent review to assess changes required to bring the project to market safely, efficiently and for the long-term.

ASX will be taking a charge of A$245 million to A$255 million (US$163.5 million to US$170 million) pre-tax in the first half of 2023. In announcing its decision, ASX’s Roche apologized for the disruption experienced in relation to the Chess replacement project over a number of years.

“ASX provides critical market infrastructure,” he states. “ What we do matters. We must do it right and we will. Importantly, our current Chess system is performing well and investment in it will continue, giving us flexibility to reassess the various pathways for its ultimate replacement.”

Industry participants such as Alessio Quaglini, CEO and co-founder of Hex Trust, a Hong Kong-based digital asset custody platform isn't shocked by the collapse of FTX. “What has happened in the past few months is unfortunate but should not be surprising for market observers,” he suggests. “In fact, all the typical elements of late-cycle expansionary euphoria were evident in the last part of 2021 and Q1 2022: growth at all costs, easy money, high valuations, lax credit underwriting standards, the cult of personalities and, more importantly, the belief that certain companies had found the magic recipe to make risk-free money.”

FTX's collapse, he continues, is stunning because of its scale and its public image in certain power circles. “But it falls within well-known patterns that have occurred several times before in both traditional finance and the newer digital asset financial market. These lessons continue to reinforce why we set up Hex Trust in the first place.”

Quaglini reckons FTX is not going to be the last one to fall. And in the coming weeks, he adds: “We will see an acceleration of defaults in the industry, exacerbated by the liquidity stress that FTX's collapse is causing to participants with direct and indirect exposure to the exchange and its ecosystem.”

Temasek, in its statement on FTX also explained its blockchain strategy: "Innovative technologies, including blockchain technology, are enablers with the potential to transform sectors and create a more connected world. The nascency of the blockchain and digital asset industry presents innumerable opportunities as well as significant risks."

Despite the past week's noise sounding like a rap on blockchain, the music will play on for now. As The Righteous Brothers' 1955 hit ballad Unchained Melody goes: A long, lonely time; and time goes by so slowly, and time can do so much.

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