London, 1993. A big decision was about to be made, that would send ripple effects across Europe and forward through time, acting as a warning against ambition and consensus.
For the past 10 years, the London Stock Exchange had been working on a significant upgrade of its securities settlement system. With paper-based systems groaning under the 1980s boom in share ownership, pressure was building not only from nimbler competitors but also from the regulators across the Channel. If London wanted to maintain its role as the continent’s money centre, it needed to upgrade.
The new system was called Taurus, and its goal was to remove as much physical documentation from the system as possible. It also planned a move to rolling settlement, reducing the payment period for equities from three weeks to three days.
Yet things were not going well. The first sign was the rhythm of missed deadlines.
From the outset, the project was complicated. It aimed to include as many sector stakeholders as possible, in spite of conflicting interests. Institutional investors wanted a fast, reliable service, while private investors wanted lower costs. Also, the existing registrars (dominated by large banks) were given a say in the development of a centralized registry, even though it would undermine their business model. Well into the development cycle, they torpedoed the idea.
What went wrong?
In the haste to get development off the ground, the project allegedly started without a clear roadmap. And delays gave more time for the various stakeholders to add requirements.
Even with clear and stable stewardship, that scale of development would have been tough. Yet the project management structure was not clearly defined, and the lack of centralized control meant that interlocking pieces were being developed out of sync, with sections of the process at different testing stages, while other functions had not yet been designed.
Also, given the long lead time (which ended up being more than double the initial estimate), the system – if launched – would already have been behind the competition from day one.
The final straw came when an investigation in 1993 revealed that completion would take another two to three years, at double the cost-to-date.
The decision was taken to scrap the whole project. The exchange’s investment of over £70 million (over £140 million in today’s money) was lost. The London Stock Exchange handed over responsibility for the development of a new stock trading system to the Bank of England, and its CEO resigned.
It wasn’t just the colossal waste of money and the damage to its reputation that made many fear for the exchange’s future. Hundreds of brokers had based their systems development on the assumption that Taurus would be the main platform, and thousands of employees had been trained. The total cost to London’s financial centre was estimated to be in the hundreds of millions of pounds.
Of course, it’s easy to see in hindsight where things went wrong. And it’s easy to believe that today, big systemic projects would be managed with different principles.
While that may be the case, the fate of Taurus serves to highlight the colossal complexity of introducing a new systemic platform. Throw in a technology that has yet to be tested “in the field”, and you have a potential powder keg of risk.
I’m talking about the decision of Australia’s primary securities exchange, ASX, to upgrade its clearing and settlement platform to one based on distributed ledger technology.
Announced late last year, the news sent waves of excitement through the blockchain sector – it would be one of the first major public-facing applications of the technology, which many have touted as having the potential to decentralize finance.
Introduced with bitcoin, the blockchain offers a way of sharing data that removes the need for validation from a central authority. The elimination of redundancies and the speed with which information can be transmitted and acted on present significant cost reductions, especially intriguing in an era of diminishing margins and increasing competition in the financial sector.
It’s not yet clear whether the technology that ASX will use (developed with blockchain startup Digital Asset) will technically be a blockchain, in which information is stored in blocks that are irrevocably linked to previous blocks, ensuring data integrity. The official press release referred to “digital ledgers”, and while the two terms are often used interchangeably, some distributed ledgers don’t rely on linked blocks to share and verify inputs and outputs. However, since the boundaries of the new technology are being blurred as the concept evolves, the announcement was treated as a triumph by blockchain sector participants – official, public validation of the potential benefits.
And yet, it is by no means the windfall that the headlines proclaimed.
First, it isn’t happening anytime soon. At the end of March, the ASX will reveal a potential live date for the new platform – it will most likely be years away. We won’t get a clear indication of the expected timing until the end of June.
And, as we saw with Taurus, in complex undertakings, deadlines are often extended. Hopefully the new system will be revealed within a much shorter timeframe than the failed British attempt’s estimated 13 years…
If it gets revealed at all. The ASX platform does need to be replaced – known as CHESS, it is 25 years old and is struggling to keep up with newer and nimbler competitors. But the decision to build on top of a relatively untested technology with uncertain scaling and bottlenecks is a brave one. And few development projects progress without setbacks.
It’s fair to assume that the planning will be meticulous and thorough. But will it manage to avoid the pitfalls of overwhelming systemic change?
Learning from the mistakes of Taurus will help. But the leap forward in technology with this development adds a new layer of complexity.
A large part of the problem will be managing expectations. While “blockchain” has been hailed as “the next industrial revolution”, we are not going to see a new decentralized stock exchange emerge before our eyes. As far as the public is concerned, things will continue pretty much the way they are.
For the financial and technology sectors, though, it is a big deal. If all goes well, back office costs will be reduced, new efficiencies will be explored and distributed ledger technologists will learn much from the real-world rollout.
The true change, however, will come years down the road, as other exchanges around the world take a look at their own clearing and settlement processes, as regulators encourage compatibility and connectivity, and as frictionless cross-border trading finally begins to look like a possibility.
But first, the ASX system needs to be successfully launched. And, as we’ve seen, it’s nowhere near as easy as it sounds. While the decision to migrate a country’s main securities settlement and clearing platform to a distributed ledger is good news for the blockchain sector, it is too soon to celebrate.