In current times, blockchain is one of the most promising means of innovation and advancement for certain use cases that are to do with transactions, even though it is commonly misconstrued as technology. DLTs (distributed ledgers) and smart contracts have immense potential to successfully change capital markets, making the transactions involved more cost effective, transparent and flexible.

Singapore Exchange Limited (SGX) is known to be Asia’s leading market in terms of infrastructure, fixed income. Operating equity and derivative markets. Being an exchange having multiple assets, technology is the key factor which could bring about transformation in important market enterprises.

SGX (Singapore Exchange) has conducted various experiments to test blockchain technology. Operating a blockchain infrastructure in a majorly administered and mission-centric environment is a difficult job. We worked with Amazon Web Services (AWS) Professional Services team and were able to evolve our subsisting Hyperledger Fabric application into Amazon Managed Blockchainwithin a few days. Amazon managed Blockchain allowed us to be customer-centric and eliminated a big amount of effort required to configure and manage the infrastructure stack.

The Evolution Process

Traders used to record transactions on paper for more than 500 years until the early 1970s. All of them used to be written on scraps of paper and compiled into a ledger book. People would gather at specific venues where orders were shouted by hand gestures.

In the last century, automation and ticker tapes came into existence. Computers were invented which led to markets moving online for exchanges and trading. The age of couriers, physical ledger books and print transaction records was gone and was replaced by giant computers.

Today, exchanged have evolved in such a way that they are highly organised and regulated on electronics, so as to allow transactions across all asset marketplaces –from infrastructure to fixed income to equity and currency derivatives.

Now, finally, exchanges rely on the business of trust, and our main goal with the technology is to create a platform that is trusted by the customers. Companies, banks, business enterprises, and other market participants trust us enough to provide us with a fair, orderly, transparent venue for price discovery.

The business would be lost between us in the absence of this trust. We have digitalized transactions and information with the help of electronic trading, particularly Blockchain. Blockchain could be the new generation through which trust itself will be digitalized, codifying obligations in a consistent and compatible way, creating a completely digitalized marketplace.

The Journey of Cloud

We have migrated away from the traditional architecture and decommissioned them onto platform which support open APIs. Our next mission is to leverage cloud technologies to make our infrastructure more advance, but most importantly, to be able to provide our customers with services and market data all the more effectively.

Many financial industries still to this date operate on very heavy datacentre footprints, unlike many of the e-commerce ecosystems. Through the years, the necessity for a secure and mission-centric environment has led to overbuilt infrastructures that operate to meet the demands but work at a very low efficiency.  

At SGX, we have decommissioned our mainframes and migrated away from legacy architecture onto modularized platforms supporting open APIs. The next step for us is to leverage cloud technologies to optimize and scale our infrastructure, but more importantly to be able to distribute our services and market data more effectively to our customers. 

Batch processing and manual reconciliation still do afflict maximum types of financial transactions and restrict the growth and advancement required to be in par with the constantly changing needs of the investors.

Careful planning and experimentation are required for transforming on-premise infrastructure to be cloud-ready. AWS has partnered with us to help with our cloud journey, but what can we do more for our customers?

Changing The Ledger Altogether

Blockchains cannot be used for certain cases, but they hold massive potential for many kinds of market transactions. Smart contracts are suitable for digitally modelling the complex business relationships between market participants, with proper reconciliation built in itself and an unalterable record chain. Blockchain could be the solution for the next era of evolution, just how the computers before proved to free exchanged from print processes

We have also been taking an integrated effort with the Monetary Authority of Singapore (MAS) on Project Ubin, which is a number of industry-level projects that explore the uses of blockchain in the settlement and clearing of transactions for digital money.

SGX helped with the development of Project Ubin DvP(delivery versus payment) in the previous year. DvPis a clearing and settlement mechanism which is applied when payment is required before or upon delivery of security. In modern times, it needs details to switch across different systems and parties.

We successfully accomplished inter-ledger connectivity and settlement finality with the help of Project Ubin DvP, proving that DvPof a digitalized currency and tokenized asset on two different ledgers, like a digital Singapore Dollar against Singapore Government Bonds and Chinese Depository Receipts.

The design of the Project Ubin DvPallows a trusted RMO (Recognised Market Operator) like SGX itself to persevere an important role in monitoring and facilitating a network, and furthermore, allowing the financial institutes to join in the same blockchain network so as to share a common, transparent ledger for carrying out trade-related transactions. 

SGX, along with the industry, has recently transformed from T+3 to T+2, decreasing the settlement cycle by simplifying post-trade settlement processes and preventing many risk exposures. Blockchain could also allow us to constrict the settlement cycle even more for specific cases, retaining the flexibility to cater to customers at the same time.

Blockchain as a Managed Service

Initially, when we started testing blockchain and researching more about Hyperledger Fabric and smart contracts, we utilized the nodes onto actual severs, connecting them with Ethernet cables together to form a network. But we realised in no time that running an architecture of this type made us vulnerable to all kinds of problems of our existing world and would be very difficult to manage and operate. Operating and managing such blockchain network would consume a lot of valuable resources for an exchange business like SGX, and provides very little value to customers.

The true differentiator is not in the mechanics of the ledger but in the application of Blockchain. Coding the smart contracts to efficiently and accurately depict the real-world business transactions is the fundamental factor that will lead to transformation in markets.

Such factors led to our collaboration with AWS for moving out current investments in Hyperledger Fabric to using Amazon Managed Blockchain. Amazon Managed Blockchain allows businesses to eliminate the heavy-lifting, which was often typically necessary in settling the infrastructure. This offers SGX to focus on increasing business value and not worry about operation of underlying platform. We can have a working blockchain network set up and functioning in just a few clicks and efficiently invite other participants to join a certain network. This takes blockchain a step closer to being adopted widely.

Challenges Ahead

The potential of Blockchain and distributed ledgers have proved to work well on most cases. Even though, there are a lot of factors that suggest that we are on the verge of moving forward, certain challenged still persist ahead of us before blockchain becomes to be a disruptive technology, specifically in financial markets. Some of whose categories include; technical capability, adoption, and regulatory acceptance –listed in increasing order of difficulty.

The technical challenges of creating astable, determined, and consistent consensus mechanisms will eventuallybe resolved. We have also witnessedthe results of recent experimentsthat representa blockchain network’s ability to withstand largetransaction workloads. Encryption by itselfis not enough in maintainingprivacyof data, so new advancementsare being developed. Using channels like Hyperledger Fabric can ensure secure transaction between the parties so that data is not susceptible to all members in the network. Amazon Managed Blockchain does prove easy to create and manage networks, increasing the rate of adoption.

Codifying the rights and obligations into small contracts will need a different administrator. Some of which has nothing to do with blockchain, but digitalization in the broader perspective. Others are directly related to the effective operation and managing digital money. The one thing that’s certain is how supervision of blockchain networks place a much higher potential on the technical capability of all parties that are involved.

Adoption is a bigger problem in financial market. As of today, there are no recognised standards for blockchain technology. No established consensus has been derived, even though many working groups are trying to, partially due to various interests and lack of common agreement over blockchains potential. In many ways, it is quite obvious as of now that there will exist many blockchain networks, each catering to a specific purpose for a specific target customer group. Although, we perceive Hyperledger Fabric as a potent blockchain framework to develop many financial services, based on our tests. 

Conclusion

In conclusion, blockchain in financial markets not only allows efficiency in transactions, but also creates digitalization that can change the way of raising and distributing funds, allowing liquidity and also facilitating worldwide transaction in less time. Even though progress has been made on many factors, we will need to still rectify standards, operability, and regulation, as we inch towards greater blockchain adoption. These factors will allow for more collaboration in the future. SGX is persistent on adopting emerging technologies, working together with big technology partners and also to bring value to the customers