1. 4 6 | K A N G A N E W S A U G / S E P 2 0 1 6
FEATURE
Chain
reactionBlockchain is a big deal. Governments, policymakers and institutions globally
are evaluating ways the technology can streamline finance and business. Like
self-driving cars to taxi drivers, the unintended consequences of moving to a
futuristic fintech world for financial-markets incumbents are unclear. Australia’s
blockchain experts offer some clarity.
B Y H E L E N C R A I G
T
he innovative approach to data management
offered by the technology most famous for
underpinning the digital currency, bitcoin,
has piqued the interest of financial-markets
participants. According to a report published in
December 2015 by Magister Advisors, financial institutions (FIs)
are expected to spend more than US$1 billion on blockchain
projects in 2017, which they say makes it one of the fastest-
developing enterprise-software markets of all time.
As well as the advantages blockchain may offer the banking
and financial-services industries in general, blockchain – or
distributed-ledger technology – has been identified in the debt
capital markets arena as presenting a solution for the many
inefficiencies in some current procedures.
Processes are complex and convoluted and some argue
blockchain technology will speed up or even eliminate clunky
or labour-intensive practices, via a redesigned architecture which
will enable all market participants to have access to transparent,
common datasets in real time.
The obstacles to overcome are significant, but leading figures
in Australia believe the new world is just around the corner.
Technology leaders in fintech start-up companies and incumbent
market-infrastructure providers are working together to identify
the potential uses of the new technology. Blockchain experts
insist it will be in mainstream use in five to 10 years.
But with a groundswell of digital-disruption competition
already beginning to reshape the financial-services sector, there
is considerable uncertainty around whether specialist technology
firms or market incumbents will lead the move to the new
technological paradigm. Given the extent to which distributed-
ledger technology can eliminate manual processes and thereby
speed up transactions, there is also a question mark over whether
incumbent intermediaries can withstand competition from their
technological counterparties in a new, blockchain-led, debt capital
markets industry.
BLOCKCHAIN’S BACKERS
Blockchain is the latest buzzword in financial services and because
of the way it works (see box on p48), some argue that it has the
potential to revolutionise financial transactions.
The technology’s champions claim there are many advantages
to blockchain being implemented into financial-markets
processes. For this reason it is hard to find a large-scale financial
company around the world that has not initiated some level of
exploration into distributed-ledger technology.
In Australia a full suite of market incumbents – including
intermediaries, regulators, lawyers, clearinghouses, issuers and
investors – have identified the potential advantages of blockchain
to their businesses. Although it is difficult to determine the exact
extent of the research that has been done – in part because there
“Having greater access to data at a potentially lower industry
cost is something in which regulators can see considerable value.
Being able to rely on a centralised source of data at the same
time is a very important factor.”
O L I V E R H A R V E Y A U S T R A L I A N S E C U R I T I E S A N D I N V E S T M E N T S C O M M I S S I O N

2. 4 7
is an element of secrecy to many projects in progress – what is
publicly known is that a few institutions are testing the concepts
to the extent that at least one working prototype has been
commissioned. Market sources say they would be surprised if a
working piece of blockchain architecture was implemented in the
immediate future, but certainly more conversations around how it
is going to work are already well under way.
It is not just private companies that are interested in the
potential benefits of blockchain, though. Australia’s federal
government is leading the charge, having formed a fintech
expert advisory group. Announced by Australia’s prime minister,
Malcolm Turnbull, in February, the 13 members of the group
are drawn from incumbent banks, venture-capital firms, fintech
start-ups and specialist advisers. The group is aimed at making
Australia the leading fintech market in the Asia-Pacific region
and is part of the Turnbull government’s A$1 billion (US$762.9
million) commitment to innovation and entrepreneurship.
“Financial services is an enormous industry… in which
Australia has many competitive advantages… We are in the
same time zone as the big markets of East Asia and we have
already seen great examples of innovation in the sector,”
Turnbull said in February.
The government is also financially backing fintech
development more generally via its digital and innovation group,
Commonwealth Scientific and Industrial Organisation. It has
injected A$75 million of funding into a new research unit,
Data61, which is said to be Australia’s leading capability in cyber-
security research outside the country’s defence department.
Data61 has proposed that the government undertake a study
which aims to understand the potential impact of blockchain
technologies on the Australian economy – including, but not
limited to, financial services.
Mark Staples, Sydney-based principal software researcher
at Data61, tells KangaNews there are two parts to the firm’s
blockchain research programme, which began in July and runs
for approximately nine months. One is a technology foresight
study, which will involve looking across the Australian economy
to understand potential scenarios for the potential impact of
blockchain. The second investigates the technical risks and
opportunities for blockchain through proof-of-concept systems.
“The blockchain technology that people are most familiar
with is bitcoin but there are more general kinds of blockchain
systems that are now becoming better known, such as the
Ethereum blockchain,” Staples says. “These kinds of systems
are able to store more general data that are not just about
financial transactions, but can store details of asset transfers.
This opens up the possibility that blockchain can support other
kinds of industries.”
In addition to the government’s ongoing projects, a global
consortium of banks is investigating how to use blockchain
technology in financial services in conjunction with R3 CEV,
a financial innovation firm based in the US. Several Australian
banks are involved in the study, including Commonwealth Bank
of Australia (CommBank), Macquarie Bank, National Australia
Bank and Westpac Banking Corporation.
It therefore comes as little surprise that in Australia, fintech –
and particularly blockchain – is firmly on the radar of regulators.
“Having greater access to data at a potentially lower industry
cost is something in which regulators can see considerable
value,” the Australian Securities and Investments Commission
(ASIC)’s Sydney-based senior executive leader, financial market
infrastructure, Oliver Harvey, tells KangaNews. “Being able to
rely on a centralised source of data at the same time is a very
important factor.”
CHANGE DRIVERS
The very real regulatory constraints on banks, and on the banking
system in general, which are clearly having an effect on the cost
of capital in the contemporary environment, is potentially driving
blockchain further up the priority list. According to Scott Farrell,
Sydney-based partner at King & Wood Mallesons (KWM) and
member of the government’s fintech expert advisory group, there
is also a significant contribution that can be made by blockchain
with regard to cost control.
Farrell explains: “This obviously needs to be weighed up
against the cost of implementation, in other words the extent
to which regulatory processes and costs can be made more
efficient simply by using technology. The benefits are not just
that by making things happen more quickly and safely any kind
of operational capital or risk weightings could be lessened. It is
also possible to automate processes where otherwise there could
be risks. In addition, it is possible to automate processes so that
humans cannot break the law.”
The fact that blockchain is an immutable database of
what has happened, which can be seen in real time, is another
important reason regulators are steadfastly behind the new
“Distributed-ledger technology allows financial institutions
and market-infrastructure providers to mutualise database
technology. This is nothing but good news for existing service
providers which adapt quickly.”
B L Y T H E M A S T E R S D I G I T A L A S S E T H O L D I N G S

3. 4 8 | K A N G A N E W S A U G / S E P 2 0 1 6
FEATURE
technology. “There could be regulatory encouragement to
use the technology in circumstances where there is a need for
transparency or there are risks which can be very easily managed
by automation,” Farrell says.
AUSTRALIA’S PERFECT STORM
While blockchain is clearly a focus around the world, there is a
suggestion that a combination of factors may allow Australia
to produce a working blockchain solution ahead of its peers.
According to Blythe Masters, chief executive officer at Digital
Asset Holdings (Digital Asset) in New York, comfort around
fully electronic markets, as well as a clearing and settlement
system that is widely acknowledged to require upgrading,
means Australia provides the near-perfect test environment.
The Australian Securities Exchange (ASX), which controls
Austraclear, has shown its hand by purchasing an 8.5 per cent
stake in Digital Asset.
Local blockchain experts agree that the condition of
Australia’s post-trade framework means it is well suited for
modernisation – and that doing so via blockchain technologies
may be appropriate.
For instance, Sophie Gilder, blockchain innovation manager
at CommBank in Sydney, says: “The ASX’s CHESS [clearing
house electronic subregister system] requires some updating.
In addition, Australia has a background of a strong legal and
regulatory system and regulators that are willing to facilitate
technology. This is the perfect storm to have a test case for the
huge promise of post-trade savings. I think [Australia] is being
touted around the world as a really interesting example and one
that will likely lead the space in terms of how this technology can
be deployed.”
Gilder believes that, more generally, Australia is ripe for a
blockchain boom. Both she and KWM’s Farrell agree that post-
trade processes do not represent the full extent of blockchain’s
usefulness. Farrell comments: “This is a technology where we
have no comparative disadvantage against other countries, where
we have a knowledge base which could potentially lead the world,
and which would be very important for keeping Australians here,
as well as allowing for growth of jobs.”
Adding further weight to the potential for blockchain
to bolster the Australian economy, ASIC has established an
innovation hub that enables innovators to speak to the regulator
about the extent to which their technology developments fit
into the regulatory framework. The nature of ASIC’s work gives
it a sound and centralised view of what is occurring in financial
markets, including a sense of people who have an innovative
proposal.
The “soundbox” consultation is a proposal around instituting
a short-term period where innovators can explore the value of a
business model to see if their proposal has the kind of traction
and value that would prompt them to expand their business with
a more formal regulatory framework around it.
According to a Morgan Stanley
research report from April
2016, blockchain is software
that“enables data sharing
across a network of individual
computers.A blockchain
describes computers
transferring blocks of records
in a chronological chain”.
The block is the‘current’
part of the blockchain which
records some or all of the
recent transactions and
once completed goes into
the blockchain as part of the
permanent database. Each
time a block is completed, a
new block is generated.And
so the‘blockchain’grows.
The blockchain works through
“shared software infrastructure,
and trust”, the Morgan Stanley
researchers write.“Users
agree to a software protocol
describing the rules for the
type, quality and transferability
of data in addition to rules
for authorisation, verification
and permutation. Users trust
that information entered
into and transactions
conducted over the blockchain
software are valid.”
Even though the blockchain
relies on trust, which some may
not have immediate confidence
around, blockchain specialists
insist that the opportunity
with a blockchain is that
parties can transact around
the world without having to
rely on a third party.They say
reliance on an external party
might, of itself, in fact be the
inherently risky approach.
“Some do not want the risk of
their business or transaction
being disrupted by a third-party
organisation, and instead they
prefer to rely on technology
and market mechanisms,”
argues Mark Staples, principal
software researcher at Data61.
“From this perspective, some
people see the blockchain
as being far more reliable.”
BLOCKCHAIN FOR BEGINNERS
In 2016, blockchain has dominated the headlines as the new world of fintech
takes hold. But what is blockchain and, more importantly, is it safe?
“Some do not want the risk of their business or
transaction being disrupted by a third-party organisation,
and instead they prefer to rely on technology and market
mechanisms. From this perspective, some people see the
blockchain as being far more reliable.”
M A R K S TA P L E S D ATA 6 1

4. 4 9
FAD OR FACT
The fact that ASIC has established its soundbox around
blockchain implies there is a lot of interest in the technology. But
there is also certainly a lot of hype. Staples confirms Data61 sees
a plethora of businesses wanting to develop a blockchain system
“just for the sake of it” when in many cases a straightforward
centralised database would be more appropriate for the business
model.
“In a sense there is a bit of a ‘fad’ notion,” Staples
acknowledges. “But I also think it is part of the process of
understanding the risks and opportunities for these new
technologies. There is potential for blockchain to disrupt existing
industry structures or facilitate new kinds of products and
services. It is not the solution to every problem, but trying to
understand what the risks and opportunities are from a technical
perspective is a part of the research we are focused on.”
The strengths of blockchain technology are well beyond this
being just a ‘flash in the pan’, Gilder insists. “Venture capitalists
are invested in blockchain to the tune of around US$1.1 billion,
and other FIs around the world have plenty going on in-house,”
she tells KangaNews. “They are taking a similar approach to
CommBank – they believe they must be up to speed with this
technology and must endeavour to understand it themselves.”
The interest in blockchain by regulators around the world,
and the interaction between regulators on this topic, also hints
that this is not just a fad. “We have a collective objective to push
forward and make the environment support the right business
cases for this technology, while at the same time readily being
able to identify the challenges and complexities that may need
to be explored further,” ASIC’s Harvey tells KangaNews. “We
share notes, perspectives and ideas with our peers. Distributed-
ledger technology is clearly not an Australian phenomenon and
it helps everyone if the high-level principles the regulators are
applying in value-adding their perspectives on this technology are
internationally consistent.”
Perceived fad or not, Digital Asset’s Masters insists the
technology is looming. “FIs face a challenging cost, capital,
revenue and cybersecurity environment which is forcing
them to entirely rethink the way they do business,” she
tells KangaNews. “Distributed-ledger technology allows FIs
and market-infrastructure providers to mutualise database
technology, by allowing straight-through processing and
eliminating reconciliation requirements. This reduces costs,
latency, risk, errors and capital. The same infrastructure can
provide transparency to regulators and auditors and offers a
powerful platform for the development of new services. This
is nothing but good news for existing service providers that are
able and willing to adapt quickly.”
BLOCKCHAIN AND BONDS
With the arrival of blockchain virtually unavoidable, its supporters
claim, debt capital markets incumbents are starting to consider the
details of how the distributed-ledger technology can specifically
be applied to individual tasks or processes within the bond
market.
The focus is likely to be in simple products and processes
to begin with. This is because there is a wide range of existing
systems in place that are interrelated and not all driven by
technology. In many cases, these processes are simply the
way things are done and they also provide a clear framework.
Changing these would not only be time consuming and onerous,
it could almost become self-defeating.
Starting with simple processes also means less data has to be
held on the blockchain. Even though blockchain technology is
designed to handle vast amounts of information, in the relatively
early stages of development market participants insist simple and
straightforward is in the best interests of the technology achieving
the optimal outcome.
On the simple side, bond processes such as interest payments
could easily be calculated, and paid, via a piece of code on the
blockchain. But complex decisions or ones that require human
thought – such as whether to extend the life of a bond or
terminate it early – are very difficult to automate.
“In the same way that interest-rate swaps would be the
simplest transactions to automate in the derivatives market,
blockchain would probably be most easily applied to commercial
paper or simple corporate bonds. There is enough complexity in
trying to design a blockchain, even a simple one, without making
it harder by choosing something complex,” says KWM’s Farrell.
The application of blockchain to capital markets in a practical
sense will therefore likely be to automate and improve. “Areas
that cause problems at the moment include the need to triple-key
transactional details. These are particularly problematic because
errors and discrepancies creep in,” Gilder explains.
She adds: “These issues can be enormously expensive in
terms of both time and resources to trace who said what. We
have some quite archaic methods for trading in capital markets
that would benefit from a single source of truth. Blockchain
“Areas that cause problems at the moment include the need
to triple-key transactional details. These are particularly
problematic because errors and discrepancies creep in. We have
some quite archaic methods for trading in capital markets that
would benefit from a single source of truth.”
S O P H I E G I L D E R C O M M O N W E A L T H B A N K O F A U S T R A L I A

5. 5 0 | K A N G A N E W S A U G / S E P 2 0 1 6
FEATURE
LEADERS OF THE PACK
Commonwealth Bank of Australia (CommBank) is understood to be
on the verge of bringing working distributed-ledger technology to
the Australian capital markets. Meanwhile, the Australian Securities
Exchange (ASX)’s decision to embark on assessing the extent to
which blockchain technologies could move the dial in terms of its
settlement and clearing capabilities is being watched around the world.
provides a clear, transparent transaction log. It doesn’t mean there
will never be disputes, but these will be reduced.”
REAL-WORLD DEVELOPMENTS
Developments may be moving faster than many appreciate.
As well as the ASX very seriously exploring ways to replace its
settlement system using a blockchain-based solution, there is at
least one working prototype of a ‘bond blockchain’ in Australia
(see box on this page) – being developed by CommBank.
Even the big leaps should be practically invisible to end
users, though. The development in this technology is interesting
to blockchain specialists but the end product should really only
smooth the edges. Gilder explains: “Today we all use the internet
every day and we do not necessarily understand how it works –
only the features it can deliver. It is like an iPhone – I really didn’t
know how much I needed one until I had one.”
The fundamental concern among incumbents about moving
to any new platform, process or system is not only what happens
to the existing platform, process or system, but also what occurs
to the people that have been at the helm for so long. Headlines
around fintech developments are dominated by innovations
like self-driving cars. To those who drive to make a living these
inventions may be both seemingly preposterous and terrifying at
the same time.
“Financial-markets users across the world face
substantial headwinds to their profitability. To many,
blockchain represents a potential solution to structural
and not cyclical problems.”
P E T E R H I O M A U S T R A L I A N S E C U R I T I E S E X C H A N G E
Housed within its Sydney-based
innovation lab, CommBank’s
blockchain development
team is building a working
prototype of a‘bond blockchain’.
So reveals Sophie Gilder,
CommBank’s blockchain
innovation manager.The
bond blockchain will enable
a company to issue bonds in
the primary market and allow
investors to buy these bonds via
blockchain technologies.The
experiment is currently taking
place in a closed network and
therefore carries no capital risk.
“Initially we are effectively
using‘monopoly money’to
both digitise and pay for the
asset on a blockchain,”Gilder
tells KangaNews.“This means
settlement can be effected on a
delivery-versus-payment basis
via the technology rather than
a central counterparty.We are
working on facilitating a more
efficient settlement process –
not necessarily in real time as
this will not suit everyone, but by
offering the flexibility to choose
a settlement period.”
Prototype under way
Gilder says CommBank aims
to collaborate with the buy and
sell sides to demonstrate the
technology it is developing.The
bank has had initial discussions
with some institutional
investors in association with
its prototype, even if, in the
main, understanding how the
technology works will likely be
of less relevance to investors
than whether or not it delivers
efficiencies.
“The end user, or asset
manager, will simply want
technology to simplify their user
experience and for it to allow
them to analyse risk better
and be more in touch with
the market, as well as to fully
experience enhanced liquidity
as better secondary trading is
facilitated,”Gilder argues.
On the sell side, Gilder
reveals that CommBank is
collaborating with various state-
treasury clients.“We believe
vanilla issuance is the best place
to start with a prototype like
this. Because semi-government
borrowers are programmatic in
their issuance it makes sense
to develop an industrialised,
streamlined issuance process,
because they are ripe for this
type of functionality.”
Gilder also suggests it is
interesting that governments
– bodies people might think
of as being conservative and
traditional – recognise that
blockchain is a technology
development which could
offer significant efficiency and
productivity gains.“When you
drill down into this at state level,
every government has a vested
interest in making their state-
government departments more
efficient.They are therefore
very open-minded about this
technology. Most already have
in-house blockchain experts
who are upskilling and they are
willing to work with an institution
that is as eager to learn about
this technology.”
Currently in phase one of a
three-stage project, Gilder says
there will be no hard completion
date. Phase two will be to begin
to work with other service
providers, such as law firms, to
gain their perspectives around
what should be on – and off –
the blockchain.
“We would like to carry out
some more work around the
documentation process to see
if it can be streamlined,”Gilder
adds.“We would also like to
consider blockchain’s use for
other products we think can
be significantly streamlined –
such as repos and syndicated
loans – and where the many
counterparties involved
could benefit from increased
coordination and therefore
added efficiencies.”

6. 5 1
Gilder does not expect any existing roles to be entirely
eradicated. “There will always be a role for intermediaries
with specialist capital-markets skills to advise on timing, tenor,
“People are very enthusiastic about how much can be placed on
a blockchain and forget about all the flexibility and functionality
that exists in the current marketplace. So questions around
whether roles can be replaced by computers aren’t questions
about blockchain – they are about what people value beyond a
mechanical process.”
S C O T T F A R R E L L K I N G & W O O D M A L L E S O N S
structure and market appetite. But the market will become more
transparent and efficient as users see what is on the blockchain.”
The most thought-provoking potential outcome of the
new technology is the fact that it may provide the chance for
incumbents to self-appraise, and in doing so contemplate
fundamental questions they probably have not yet considered.
“People may begin to question why they are in business and then
what their business is,” Farrell says. “Take a bond originator. To
the extent that they are simply acting as a conduit for requests
for and the provision of funds, nearly any piece of automated
technology could do this. But to the extent that an originator’s
business requires discretion, judgement, persuasion and
structuring, artificial intelligence will not reach this point – at least
not in my practising lifetime.”
Blockchains, Data61’s Staples argues, are a new kind of
financial-technology infrastructure that will support and enable
all kinds of business transactions to be delivered more efficiently,
and by not relying on a single market maker or mechanism.
Where systems and processes are ingrained and historic,
the real value of the services provided by people – rather than
through the mechanics – can be overlooked. “People are very
enthusiastic about how much can be placed on a blockchain
and forget about all the flexibility and functionality that exists in
the current marketplace,” Farrell tells KangaNews. “So questions
around whether roles can be replaced by computers aren’t
questions about blockchain – they are about what people value
beyond a mechanical process.”
The idea of working out the value of humans in the process
is not just self-preservation, Farrell continues. He claims it is vital
to assess the value of services offered and believes that people
will be pleasantly surprised when they realise what they actually
provide. “One aspect of commerce that probably won’t change is
around areas like judgement, persuasion and discretion. Humans
like dealing with humans. And a blockchain is not a human – it’s
a hard-coded register of the past, an engine for truth. Although it
may have logic it has no reason whatsoever.”
Therefore, Farrell says it would be “extremely surprising”
if the marketplace moved to a different framework where the
entirety of raising funds was a mechanical or computational
process. He argues that if this were desirable it would have
happened already. “Since the financial crisis, we have seen a clear
desire to make the US derivatives market work in this way. But it
has not taken off, even though there has been regulatory impetus
to do so. In other words, there must be a value in what financial-
market participants do beyond just making money flow.” •
ASX out ahead
Blythe Masters, the former
banker who now runs Digital
Asset Holdings (Digital Asset),
in which the ASX owns a 8.5 per
cent stake, believes the project
that the ASX began in January
this year has the potential to
be one of the first successful
blockchain ventures in the
world. Digital Asset is working
with the ASX on what Masters
describes as one of the earliest
deployments of blockchain
technology“in the wild”.
The ASX announced a
technology-transformation
programme to upgrade its
major trade and post-trade
platforms in February 2015.
“Financial-markets users
across the world face
substantial headwinds to their
profitability and, to many,
blockchain represents a
potential solution to structural
and not cyclical problems,”
Peter Hiom, deputy chief
executive officer at the ASX in
Sydney, says.
He adds:“Costs are increasing,
the capital and collateral
required to do business is now
higher and revenues are under
continuing pressure.The ASX
was one of the first exchanges
to publicly acknowledge
the possibilities of this new
technology and to commit
to a programme of careful
exploration.”
The fact that Australia already
has a fully dematerialised
market means the‘mental leap’
has already been taken towards
having purely electronic
records of ownership.The
ASX’s clearing house electronic
subregister system (CHESS)
system also happens to be
quite old and nearing the end of
its useful life.
“The tech transformation
programme includes
consideration of a replacement
for CHESS. CHESS continues
to serve the Australian equity
market remarkably well – and
is still the envy of many of
our global peers. But as a
piece of critical post-trade
infrastructure it is around 20
years old.When we started
considering how we might
replace CHESS, we came upon
blockchain,”says Hiom.
However, he insists that the
ASX does not underestimate
the task of replacing CHESS.“It
is a functionally rich platform
on which our customers have
barnacled their own processes
and bespoke technologies. Its
replacement will take several
years to complete – whatever
technology we use.”
Masters believes it will take
a couple of years for early
adopters to implement
blockchain technology and
around five to 10 years for
mainstream use. Gilder
predicts that“certain
applications”will be using
blockchain within three to four
years. In developed economies,
where more entrenched
systems exist, she expects
adoption to be incremental.