Nasdaq, HKEx: Blockchain’s Disruptive Potential Overstated

The potential for blockchain technology to disrupt the exchange market is a “bit of an overstatement”, the heads of two major exchanges have said.

In a virtual discussion at the Hong Kong FinTech Week 2020, Charles Li, chief executive of Hong Kong Exchanges and Clearing (HKEx), and Adena Friedman, president and CEO of Nasdaq, agreed that blockchain has been overhyped and that the decentralization of exchanges is unlikely.

The two executives said the idea that distributed ledger technologies could “change everything in the exchange world,” as Friedman put it, has been exaggerated. “There are a lot of practicalities to implementing blockchain that make it a long-term evolution [rather than a short-term disruption],” she said.

Friedman believes that while blockchain can create better and immutable records, it isn’t a panacea for all operational inefficiencies and will not render intermediaries irrelevant by decentralizing markets. However, the technology would be a good grounding for a new market built from scratch, she said, as it provides an efficient structure from trading through to settlement.

Li said exchanges are unable to progress unilaterally with innovations and technological developments because they perform the critical function of a centralized market. They must therefore operate with consensus and involve market participants at every step of the way, he said.

“I used to say that an exchange is like a pack of wolves moving in snowy mountains. The stronger guys [market participants] are at the front, and the exchange is the strong wolf at the very end, because we have to move the slower members along. We can’t just abandon them in the field.”

However, he added, blockchain technology does offer the potential for innovation in non-core operations and processes that the exchange or market participants don’t rely on day to day.

“It’s very hard to change the core operations when everybody else is still using a particular older technology. You can’t really force everybody to change overnight,” he said. 

Li added that for new initiatives or additions to HKEx’s services, such as its Stock Connect programs, the exchange has started experimenting with using blockchain. “[This is to see] whether we can do the new reporting so we can comply with the Chinese onshore rules more effectively. That seems to be a welcome change, but we are still on the journey of trying to see how to make it happen,” he said. 

Nasdaq’s Friedman said that a complex web of participants are involved with incumbent exchanges in the highly regulated securities markets, and it’s only natural that some are more technologically advanced than others.

“Also, there are all these offline systems that record all of the information back into the banks’ and asset managers’ systems. You have to bring that full ecosystem along in order for the blockchain to really make that change. That is a long journey, as we’ve seen in Australia. It takes a long time to change from traditional technologies to something new, and at the same time you have to say, ‘Well, what is the benefit that the end-users are getting?’” 

The Australian Securities Exchange (ASX) has been working since the end of 2017 to replace its equities clearing and settlement system (CHESS) with a blockchain or DLT-enabled platform developed by Digital Asset. It was initially set to go live by the end of this year, but was later put back to April 2021. 

Then, after Covid-19 hit, the exchange decided to review its implementation timetable to allow market participants to focus on their day-to-day operations. In June, it set April 2022 as the go-live date to replace CHESS. After consulting with the industry, ASX said that as of August 4, 91% of CHESS users who made submissions could meet the revised date. 

Since then, however, the exchange has delayed the launch until April 2023, saying many CHESS users have asked for extra industry testing and more time to prepare. 

As time has passed, many in the industry have soured on the promises of blockchain. Bill Murphy, long-time CTO of Blackstone, who left in March and who joined Cresting Wave this summer, recently said on a Waters Wavelength podcast that he still has not seen good use of blockchain outside bitcoin. “It’s a solution searching for a problem. I think we will continue to see lots of noise, but no real results from blockchain,” he said.

At the end of the day, said Murphy, blockchain is just a database: “The only reason you need blockchain is when you have truly anonymous transactions that need to be trusted in a way that can enable that. There aren’t that many of those use cases in the world.”