A Blockchain Blow-Up You Missed Much Closer to Home (Spoiler: Not FTX)
Car crashed as it tries to fit between narrow concrete walls

Over the last week, everyone has been talking about the spectacular blowup of FTX. I don’t have too much to add to that story, so I’ll use the words of their new CEO, John Ray: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here” – for context, this is from the guy who oversaw the Enron and Nortel bankruptcies

While you may have thought that was the only major blockchain story this week, there was an equally interesting story out of Australia involving the ASX. What you may or may not know is that the ASX was attempting to use ‘distributed ledger technology’ (aka blockchain) to overhaul its settlement and clearing systems (the CHESS system). It hasn’t gone to plan, and ASX may have to write off $250 million internally, with another $100 million of external compensation.

A little bit of background: ASX has a legacy system called CHESS which handles settlement and clearing and is very much at end of life. ASX had two choices when it came to replacing that system: an evolutionary approach, leveraging the latest best practices using known and tested technologies in the industry, or a revolutionary approach, using something new and exciting, but untested in the industry. They chose the latter.

Back in 2017, ASX selected Digital Asset Holdings to build the distributed ledger technology to replace its legacy system. To quote one article, “the consideration of blockchain came amid huge hype at the potential for the technology to create efficiencies in the markets by reducing the role of intermediaries.” Theoretically, it made sense. By having a distributed ledger, there was no need for a centralized clearing house. Everyone had a record of who owned what, and settlement and clearing would be revolutionized, both in cost (dramatic reduction), and in speed (dramatic increase). Theoretically. In reality, it seems that the ASX blockchain approach suffered the same challenges that many blockchain networks face: throughput is very hard to scale, and it becomes very expensive if you want to scale, and have transactions process quickly. 

You can read the full write up here

As someone who has been building technology for the capital markets for over a decade now, there is a clear lesson here that I believe the entire industry needs to appreciate: evolution is often much safer than revolution. It can be exciting to focus on the new technologies and tools, but it’s amazing how often it’s simply ‘a solution looking for a problem’. It’s been fascinating watching the hype cycle of new technologies and buzz words throughout the entire industry over the last few years, only to see them now dying a quiet death: AI, ML, Blockchain, VR/AR, etc. were all touted as ‘industry revolutionizing’ technologies, but the applications have been narrow at best.

Case in point: I was talking to the CEO of a major financial technology provider who said their marketing team simply added “AI driven” to all their marketing material, even though there were no changes to the underlying technology. It just sounded cutting edge. 

That was pre 2022. There is nothing like a market slow down (or recession) to separate out the wheat from the chaff. There have been numerous vanity technology projects of the last five plus years where companies sought to leverage the latest technologies simply because… they were the latest technologies. I’m all for exploration and experimenting, but that is a totally different mindset and approach than what I’ve seen in the industry. Let’s be clear: most of the time it’s better to leverage the solutions that already work, and to focus on making them incrementally better, which is ultimately a better ROI. It feels great to hit a grand slam every now and then, but if Moneyball taught us anything, if you really want to win, you should focus on hitting lots of singles.

I speak from a somewhat self serving perspective: that’s what has always attracted us to email. It’s an application and communication tool that the industry has been using for 30+ years, it’s a known platform, and broadly distributed. No one is worried that email will ‘stop working’ tomorrow. Every firm has figured out how to manage compliance and audit needs around email. It’s low cost. There is almost zero technological risk. 

I suspect as we move into the start of 2023, we’re going to see a lot more of these Blockchain/AI/ML/VR/AR/insert buzz word of choice projects decommissioned/canceled in favor of a more pragmatic approach. That’s just what happens in uncertain times – people fall back on what works, and what can be done incrementally. 

Back to basics.

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