By David Ferrall, Founder and CEO, FinClear
Those laying into the ASX about CHESS replacement are missing some important points. First, Australia’s unique market microstructure – that will enable rapid uptake of digitised securities – is a direct result of ASX’s decision 30 years ago to promote direct ownership of listed securities via the HIN. Second, the real prize in shifting to DLT is the shift away from custody, which represents a huge step change in the way we invest and delivers massive benefits to end investors. And thirdly, the most vocal critics are those that will lose the most – what we call the wagon wheel of service providers sitting around financial markets adding layers of fees.
HIN was a very early form of a direct individual investment capability. The current blockchain and crypto frenzy is an interesting period in our history but it is masking the real prize – shifting assets away from custody and into directly held tokens sitting on the DLT.
Today, ASX has around USD $2 trillion of assets on HIN. But this is not the norm. Zoom out, and you’ll find $250-300 trillion of securities held in custodial solutions around the world in markets where there is no HIN capability. When the DLT revolution comes – and it is coming – the savings to end investors from moving out of custody will be truly mind boggling.
Upgraded distributed ledger messaging capability will bring efficiencies and capabilities that allow direct ownership of listed securities to challenge the traditional custodial platform. These efficiencies will ultimately challenge the traditional revenue streams for custody platforms. The bps fees charged on notional value of listed securities – which rise as the securities rise in value even though the platform is not performing any further value-added services – will become a thing of the past.
Let’s not kid ourselves – custody is a massive global industry, owned by the big global investment banks and financial institutions, catering to an industry that is addicted to fees. Custody, as a solution to reporting assets on a consolidated basis, evolved to meet a genuine need many decades ago. It has served advisers well, and likely will continue to for some time.
But digital, tokenised and direct investments are the way of the future, and investment banks know this. Most are now (as a priority) building for the future, while protecting their current revenue streams until they have worked out how to monetise the new world.
At the moment, tokenised assets are mostly confined to crypto and NFTs, but there are many fintechs, particularly in the gaming and derivatives industries, looking at the current listed markets as a huge disruptive opportunity.
The problem? Regulation. Listed markets are, thankfully for retail investors, incredibly tightly regulated. Regulators are still only beginning to think about a new, decentralised, digital economy which is only now being fully comprehended with Web3. So, until regulators work out how to regulate, oversee and protect this new world, current infrastructure will remain. But for how long?
Here in Australia, we are very fortunate to have a major head start. To go back to my first point about the ASX and CHESS, digital, direct securities have been a capability for over 30 years here, albeit with the world of custody platforms also built up alongside. Now, with CHESS 2.0 pending, and the resulting capability to tokenise securities into a centralised, trusted, regulated environment, Australia will once again be at the forefront of financial markets innovation.
This article is general information only.