The Australian Securities Exchange CHESS blockchain: seven years of sunk cost fallacy

Enterprise blockchain never made any sense. A slow data store was never going to magically make your business or bureaucracy more efficient. Because magic doesn’t happen.

That didn’t stop the fierce and dedicated pursuit of the dream — nor setting millions of dollars on fire in the process.

In 2015, the Australian Securities Exchange’s CEO-before-last, Elmer Funke Kupper, got a blockchain bee in his bonnet. “Every now and then, something comes along that might just change everything. And this is one of those moments,” he told the Sydney Morning Herald. [SMH, 2016]

In 2022, ASX finally shut down its blockchain trading system project — after seven years of no results and AUD$250 million up in smoke.

The magic of blockchain

When I was writing Attack of the 50 Foot Blockchain in 2017, Blythe Masters’ company Digital Asset Holdings was in talks with the ASX to replace their ageing Clearing House Electronic Sub-register System (CHESS) with … something descended from blockchains.

CHESS was launched in 1994. It works and it’s reliable enough. But it’s thirty years of legacy COBOL code, and maintenance has long been trepidatious.

Unfortunately, Digital Asset sold the ASX on the idea of a “digital ledger.”

The CHESS replacement system — it never had a real name, just “the CHESS replacement system” — was based on Hyperledger. ASX would administer it centrally. The functionality would be smart contracts written in DAML — a functional, formally-provable and non-Turing-complete language — though DAML hadn’t actually been finished by the time ASX accepted it.

In enterprise computing, “smart contracts” are called “database triggers” or “stored procedures.” They’re a nightmare, because they’re very hard to reason about or maintain, and they’re prone to unexpected and spooky effects. You only use them if you absolutely have to for performance.

Even cryptocurrency exchanges don’t use blockchains for their internal systems. They run their trading engines on a conventional database system.

The CHESS replacement system used the wrong approach, with the wrong technology, from a company who’d never done a real system at all — let alone a huge one.

Circling the drain

Digital Asset spent January to June 2016 pitching a prototype system. ASX invested US$17.4 million into Digital Asset in 2016 for 8.5% of the company and engaged them to build the replacement for CHESS in December 2017. [FT, 2016, paywalled; press release, 2017, PDF]

Funke Kupper quit ASX in 2016, but his replacement as CEO, Dominic Stevens, stuck with the blockchain plan. Stevens said the blockchain system would “put Australia at the forefront of innovation in financial markets.” [BBC, 2017]

Digital Asset’s prototype blockchain system was built and rebuilt, with increasing delays. Perfectly sensible and capable IT people were working on the project — I saw a presentation in early 2018 that impressed me with how sane and reasonable it was — but it could barely deliver even contemporary CHESS speeds, let alone the promised improvements.

Other market participants hated the new system. It didn’t work properly, they were spending a fortune building and rebuilding their interfaces to it, and they complained repeatedly to the regulator that the ASX was ignoring their problems.

The other participants were also unhappy that the project would make the ASX a new centralised controlling octopus, to a degree it wasn’t before. This is a blockchain project failure mode I detailed in chapter 11 of the book. The users asked that the project be delayed further, as it just wasn’t ready to go live. [FT, 2020, paywalled]

The system moved from Hyperledger to VMWare Blockchain in 2019. This didn’t help matters. But ASX launched Synfini, giving customers DAML on VMWare Blockchain as a service! ASX got crypto firms DigitalX and Zerocap running pilot systems on Synfini. [VMWare, 2022; ASX; AFR, 2022; Cointelegraph, 2022]

And flush

Finally in 2022, the ASX got a new CEO, Helen Lofthouse. She looked at this shuddering zombie and killed it in the most effective possible manner — she got Accenture to write a report on it.

Even Accenture couldn’t see a way to cash in on this thing, and said it needed killing. [ASX CHESS Replacement Application Delivery Review, PDF, 2022]

Accenture found four key issues:

  • The blockchain system “introduces higher latency” to the ASX as a whole;
  • You need concurrent transactions — but this can cause contention issues;
  • Batch processing didn’t fix contention issues;
  • DAML wasn’t suited to batching transactions.

The blockchain replacement initiative was declared paused on 17 November 2022. The ASX wrote off AUD$250 million. ASX’s users had themselves spent tens of millions of dollars building interfaces to the failed system. [AFR, 2022]

The regulator, ASIC, started an investigation into how all of this happened and whether ASX had violated the ASIC Act or the Corporations Act. [ACS, 2023]

Parliamentary inquiry

The ASX blockchain was enough of a fiasco to get the full attention of the regulators. A statutory inquiry released its report in April 2024: “Competition in clearing and settlement and the ASX CHESS Replacement Project: The CHESS Replacement Project is too important to fail.” [full report, PDF; executive summary]

The inquiry found that ASIC and the Reserve Bank of Australia should have been more alert to the risk of ASX bungling the CHESS upgrade and should have stepped in earlier. ASIC spoke of ASX’s “hubris.”

To this end, the inquiry recommended that the regulators get fully up to speed on the technology behind market infrastructure so that they could meaningfully audit systems such as CHESS as part of their regular audits of ASX compliance. It also recommended promoting competition in clearing and settlement and focusing on CHESS interoperability.

The way forward

A new CHESS Replacement System was planned out through 2023 and is currently in the consultation stage. The new system will be built by Tata and is planned to launch between 2026 and 2029. [ASX; Global Treasurer]

ASX took pains to reassure the world that the new system would definitely not involve any sort of blockchain. [Reuters, 2023]


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3 Comments on “The Australian Securities Exchange CHESS blockchain: seven years of sunk cost fallacy”

  1. what? you call that a parliamentary inquiry? no call for heads on stakes?! i think Blyth, Funke and Dominic would all look good on wood sticks outside parliament. or better yet, throw some bronze paint on them and wheel them into the parliamentary chamber. come on … whatever happened to my badass kick butt Aussie’s? At least Helen stepped up she didn’t need Accenture to make the obvious’pull the plug’ call. Gee!

    1. Helen Lofthouse did not ‘step up’ she was (and is) lost but has a big payout already so will be happy

  2. No doubt the next vendor project will go just as well. Best let Accenture know soon they’ll need to be on hand to take notes on whatever the next report needs to say.

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