What a difference a year makes.
“The work we have done with ASX to date indicates that Australia has a unique opportunity to be a world leader in the adoption of Distributed Ledger Technology. We expect the solution that Digital Asset can deliver will bring significant benefits and exciting new business opportunities to ASX and the Australian market.”
At that, ASX management duly rolled over to have their tummies tickled and coughed up some A$14.9 million to take a 5% stake in Digital Asset, which works out valuing the company (which had no real products at that stage) at a whopping A$300 million.
But what is $15 million, when the savings to the industry on the whole are potentially in the billions, the opportunities appear limitless. And the government were overjoyed that the ASX had joined its innovation revolution. The euphoria for all things Blockchain was palpable.
The reason that ASX signed up for the Blockchain revolution was that it has for years been delaying the replacement of its 20 year old CHESS clearing system and, according to all of the hype, the new technology looked a certain winner.
And in June, happy with the progress of their proof of concept tests on CHESS the ASX went boots and all and ponied up another A$7 million and a seat on the board of Digital Asset. Meanwhile one of the big supporters of the deal, ASX CEO, Elmer Funke Kupper, resigned in March for an unrelated reason. However, his replacement, Dominic Stevens, stuck with the program.
But why Digital Asset?
Last January Digital Asset and its high-flying CEO, Ms Masters, were the best game in town, despite having no real products to sell yet. But as the song says, “On Broadway (or at least Wall Street) there is always magic in the air.”
In January 2016, Digital Asset was working with one of the biggest players on Wall Street, the Depository Trust & Clearing Corporation (DTCC) which is the major clearer of US, and increasingly overseas, securities.
But by September, teensy weensy clouds began to appear as ASX experienced technical problems with its current trading systems. The exchange’s one and only regulator, ASIC, was not happy. If you cannot manage the shop today, why embark on a wild-goose chase was the none too subtle message.
2017 is already proving to be the year of surprises, not all welcomed.
Just a few days into the New Year, the DTCC dropped a bombshell – for its own clearing systems “replacement” the DTCC was going with an almost unheard of start-up called Axoni – who? Who indeed.
And the replacement described was not really a replacement for its existing clearing systems, which were to remain substantially as is. Rather it was a new way for market participants to connect to the DTCC, and those that didn’t want to join, could just continue as usual anyway. Hardly the revolution envisaged.
But worse, the Blockchain envisaged by the DTCC had been so mangled that it wasn’t even Blockchain lite, resembling more an existing software pattern known as a “message bus.”
What of Digital Asset? Well they got a runner’s up prize, continuing to work with DTCC on a proof of concept on clearing repurchasing agreements (REPOs) - always the bridesmaid?
And what of the ASX?
ASX management took a punt on Digital Asset becoming the major player in the Blockchain clearing systems market, but they were upstaged by a novice. What does that say about their ability to deliver their vision? At best the ASX stake in Digital Asset is on an outsider with a bad barrier draw.
As the song, says “On Broadway, the glitter rubs right off and you’re nowhere”.
Having wasted yet another year putting off replacing the ageing CHESS clearing system, ASX management have a tough decision to make – where next?
Let’s hope they don’t fall in the trap of the “sunk cost fallacy” - the management tendency to throw good money after bad in the (often vain) hope that a problem can be solved with just a little more effort.
Authors: Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University