Singapore‘s SGX: Blockchain, Meet Settlement Chain

Singapore’s stock exchange is working alongside the Monetary Authority of Singapore to instantiate blockchain as the backbone of the settlement process.

The goal for securities settlement has always been automation and straight-through-processing (STP), chiefly because of the high volumes and substantial risk involved. Large institutions like banks and exchanges prefer as few manual touchpoints as possible in process execution as this maximizes efficiency while minimizing instances of human error. A major bank’s back-office may have entire teams devoting hours of their week to manually fixing minor data inconsistencies in their trade flow. If IT can roll out an automated fix for these issues, it can free up those employees to focus on bigger and better things.

DVP settlement (delivery versus payment), the area in which the SGX is making moves, offers a compelling case for smart contracts. The point of the DVP/RVP system (as opposed to free delivery (DEL) and free receive (REC) trades) is to ensure that when securities change hands, the payment for those securities executes simultaneously. This is most commonly cash for shares (and vice-versa). The need for this assurance, as well as the value thereof, should be obvious.

The system is essentially a rudimentary smart contract, and one ripe for improvement. The settlement chain as we know it today involves a multitude of disparate touchpoints (banks, exchanges, transfer agents, depositories, and individual investors to name a few), and believe it or not, they don’t always all trust each other when transacting colossal amounts of cash and shares. Heck, employees at the same institution don’t trust each other half the time. A trustless system is a worthy exploration.

As always with these “we are going to do the blockchain thing” preliminary announcements, details are scant at the moment. According to CoinDesk’s report:

The goal is to develop a distributed network where financial institutions and investors can transact securities that have been converted into digital tokens through different blockchain platforms.
The partners said the technology will be engineered based on the open source code resulting from the latest development of Project Ubin, which the MAS initialed in 2016 [to] test out settling interbank transactions via distributed ledger technology.

The report further confirms the involvement of household industry names NASDAQ and Deloitte, as well as blockchain startup Anquan, whose website touts the “World’s first high-throughput private blockchain platform designed to scale to thousands of transactions per second,” which, like, sure. While Anquan may indeed be the first to do this (who knows?), they are probably about the thousandth to claim it.

A detailed report containing key design elements is slated for November, according to the release. We’ll keep our eyes open and let you know what develops.


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