Episode 40: Forging the Future of Finance…One Blockchain Link at a Time

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At the heart of it, blockchain is about trust, transparency, and security. Right now, companies spend endless time and money establishing and maintaining trusted, secure relationships and transactions. Blockchain has the potential to streamline these processes, eliminate redundancy, and enhance security. On this episode, Australian Securities and Exchange CIO Dan Chesterman offers a rare down-to-earth, practical look at what blockchain is, what it does, and how to implement it.

Listen In To Learn

  • How blockchain can streamline financial transactions
  • A long-term investment plan for blockchain implementation
  • Practical use cases for blockchain technology

The Australian Securities Exchange Is Getting Real with Blockchain

Of all the exciting new technologies on every business leader’s mind, blockchain may be the most discussed and least understood. Experts say it has the potential to transform every type of transaction. It’s said that blockchain could make banking obsolete and streamline your supply chain. There seems to be endless potential, but not a lot of clarity. And even fewer practical implementations to use as models.

The ASX is building a blockchain implementation for finance, a platform where a trusted network can explore the possibilities. Dan Chesterman is the CIO of the Australian Securities Exchange (ASX) and he’s had to cut through the hype to create something that actually works on the ground level. In this episode, Dan explains exactly what the ASX is working on – how it’s built and what it will do when it’s done. It’s a rare and fascinating practical look at a technology that is frequently more sizzle than steak.

Featured Luminary: Dan Chesterman, Chief Information Officer, ASX

Dan Chesterman was appointed Chief Information Officer in July 2017. In this role, he leads ASX’s technology teams and is responsible for the delivery of technology solutions and services aligned with ASX’s business strategy.

Dan has extensive domestic and international financial services experience and familiarity with technology infrastructures from a strategy, delivery, regulatory and operational perspective.

Prior to ASX, Dan was CIO for the Commonwealth Bank of Australia’s CommSec and Private Bank, led the technology teams supporting CBA’s International Financial Services businesses in Asia, and worked as a management consultant with Accenture and Whittman Hart. He has lived and worked a significant portion of his career overseas, including in China, Indonesia, Singapore, France, USA, UK, Germany and New Zealand.

“I’m quite sure we’re on a good path that will actually give benefits back to, ultimately, the issuers and investors. And those are the people who are at the end of the value chain who really do need to see value out of this.”

— Dan Chesterman, Chief Information Officer, ASX

Luminaries Hosts

  • Mark Schaefer Author, Consultant, College Educator. Mark is a leading authority on marketing strategy, consultant, blogger, podcaster, and the author of six best-selling books, including "KNOWN." He has two advanced degrees and studied under Peter Drucker in graduate school. Some of his clients include Microsoft, GE, Johnson & Johnson and the US Air Force
  • Douglas Karr Technologist, Author, Speaker. Pre-Internet, Douglas started his career as a Naval electrician before going to work for the newspaper industry. His ability to translate business needs into technology during the advent of the Internet paved the way for his digital career. Douglas owns an Indianapolis agency, runs a MarTech publication, is a book author, and speaks internationally on digital marketing, technology, and media.

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WOMAN: Luminaries– talking to the brightest minds in tech.

MICHAEL DELL: We are technologists, and we share an awesome responsibility. The next three decades will hold even more progress, coming more quickly than ever before. A new age of miracles is literally just around the corner.

WOMAN: Your hosts are Mark Schaefer and Douglas Karr.

MARK SCHAEFER: Hey, everyone. This is Mark Schaefer. Welcome to another episode of Luminaries. I’m here with my co-host Doug Karr. How you doing, man?

DOUGLASS KARR: Fantastic.

MARK SCHAEFER: You know, something about this episode, I want to cue the song Money by Pink Floyd– dun-doo-doo-doo–

DOUGLASS KARR: Oh, no, you’re going to get us in trouble.

MARK SCHAEFER: I know. That’s why I can’t do it. I think it’s going to– it would cost too much. But this show is all about money and technology. And upon reflection, money is one of my favorite things. Is that weird? Is it weird to say that?

DOUGLASS KARR: It might be, a little bit.

MARK SCHAEFER: Well, we’re going to meet, today, Dan Chesterman. He’s actually sitting here being patient. He’s the CIO of the Australian Securities and Exchange, one of the world’s leading financial markets. As the first major financial market to open everyday, ASX is a world leader in raising capital and consistently ranks among the top five exchanges globally. It has a total market capitalization of about $1.5 trillion. That’s trillion, with a T. Dan is the CIO of this organization. Welcome, Dan, to Luminaries.

DAN CHESTERMAN: Thank you very much for having me.

MARK SCHAEFER: Now one of the themes of this show over the last couple of years is security. And that’s got to be a big issue for you. Being responsible for keeping an exchange like this safe, secure, and efficient seems like that would be a significant burden on the organization. So tell us a little bit about the scope of your organization. How are you organized to protect the exchange?

DAN CHESTERMAN: Yeah, sure. I mean, maybe one thing I would just– I always say I think if not as a burden, but as a really important purpose. And that’s quite a big difference. For the team, we’ve got a very relatively small team in the context of large organizations. There’s roughly 700 people total in the exchange, around 240 in technology.

So it’s not a big team, but it’s a very committed team, that, if you look at the employee engagement surveys, reports a very high level in terms of people who are proud to work there. So I think people at the exchange understand that security, trust, integrity, resilience, these are all the things that we’re valued for. So it begins and ends with security in some respects.

MARK SCHAEFER: Have you had good stability on your team?

DAN CHESTERMAN: Yeah, there’s a lot of people who’ve been there for quite a long time. And they’re involved in creating some the applications that run critical infrastructure. So no, there’s a lot of good stability. We’ve got a new influx of people in the last year or so. Because really, the exchange has been at around 550 people for about 10 years. And we’ve grown quite substantially in the last year and a half. And that’s really on the back of understanding and recognizing that we actually need to modernize some of our infrastructure to stay ahead of the game, to stay in the position which our market and our customers require us to be in.

MARK SCHAEFER: Specifically for your organization, is that requiring new skill sets at all? Or is it just an iteration of what you had?

DAN CHESTERMAN: It is new skill sets. Technology continues to evolve. I think all of us know that, 15 years ago, we didn’t talk about data scientists, or data ethicists, or data stewards. And those are new skills that we need to bring into the organization. We’re doing work with blockchain and distributed ledger technology. Those are new skills.

Interestingly though, what I’ve certainly found is that there are people within our organization who can absolutely be trained and developed into those new skills. It doesn’t mean you necessarily always have to hire from outside. But there are– there is a re-imagining of all the skills that you need to have within a technology organization, definitely.

DOUGLASS KARR: The exchange is described as a vertically aligned market. Can you share what that means with our listeners?

DAN CHESTERMAN: So yeah, a vertically integrated exchange really means that we do everything from listing– we’re a listing venue for 2,300 companies in Australia– trading– we’re the primary trading exchange in Australia– clearing and settlement across both equities and also debt, cash-debt, and then options and derivatives. So in a lot of other markets, those roles are taken up by a lot of different participants, whereas in Australia, the market has remained with, really, a vertically integrated and horizontally diverse exchange.

MARK SCHAEFER: Awesome. Now reading your bio and some of the things that you’ve been interested in, you certainly seem to have a special interest in blockchain.

DAN CHESTERMAN: Yep

MARK SCHAEFER: And one of the things I read recently was that, in the quarterly earnings report a year ago, I think the number was 80 out of the Fortune 100 companies mentioned blockchain in their earnings discussion. And I think last year, it was 8. So is that an indicator that blockchain is maybe somewhere on the downcycle of the hype cycle? Or is it just starting to become part of everyday business? So what’s your take on where we are with blockchain and the adoption, the widespread adoption, of blockchain?

DAN CHESTERMAN: Sure. There’s a couple of different questions involved in that. So maybe the first one around– I think, as a term, it’s been quite overused and ill-defined for a long period of time. And maybe where there was that peak of companies reporting it, it might have been in that era when bitcoin was on its way up, and people were asserting bitcoin with blockchain, and therefore, good news, and potentially using it in areas where it might not necessarily be used as a relatively famous case of a company that changed its name to include blockchain in the title. And the share price went up substantially on that day, despite it having no contracts or background. So there certainly was–

MARK SCHAEFER: Welcome to the Luminaries blockchain podcast, everyone.

DAN CHESTERMAN: There was a period where– exactly, the ratings just went up. But there was a period where I think that that hype was probably unworthy.

MARK SCHAEFER: Well, normal.

DAN CHESTERMAN: Yeah.

MARK SCHAEFER: Normal– everybody wants to get on board.

DAN CHESTERMAN: But the reality is– and we see it– we used, often, the term “distributed ledger technology” deliberately to try and distinguish ourselves. We’re not doing cryptocurrency. We’re not doing a bitcoin blockchain. In fact, we’re doing a private permission network that will help make clearing, and settlement, and financial markets in Australia safer, more transparent, but also preserve privacy and confidentiality, which sometimes can be in conflict with transparency.

I would say it is, actually, also though, a technology that’s naturally going to take a while for adoption to actually be widespread, and primarily because if you’re one organization trying to introduce a blockchain or a DLT solution, what network are you connecting to? And who’s going to join your network. If you’re a dominant provider? There’s a lot of, actually, non-technical questions which get raised which I think make it hard–

DOUGLASS KARR: So there’s not a universal network right now?

DAN CHESTERMAN: No, there’s not a universal standard. But equally, if one participant within a natural network tries to introduce a blockchain– and that might in any context– it’s very hard for other participants in that network to see why they would join one person’s network. Whereas I think what we’re trying to do is, actually, we’re addressing a known network which already has 130 participants tied into it for clearing and settlement. And we already have CHESS gateways in their environment. So adoption is less of a challenge where you actually have an existing network would be the way I’d see it.

And so I think distributed ledger technology will take, I think, a longer time for adoption. It’s not a technology you can implement by yourself. It’s almost like learning the bass guitar. It’s good if you’re in a band. But if you’re not in a band, you might find you want to pick up a different instrument.

MARK SCHAEFER: So are your partners– going forward, have they been fairly receptive to that idea?

DAN CHESTERMAN: I think there’s definitely benefits that are clear in some context. But any change comes with some challenges as well. I would say this project is, in part, building an application, in part, building a network and a ledger technology. And in a significant part, it’s a change management exercise for a whole industry. And that comes with its challenges, but also with its opportunities. What we’re concentrating on at the moment is– just this week actually, we’ve announced the opening of a customer development environment, which will be, actually, a DLT environment that our customers can connect to start to use the technology to understand how we could actually benefits within their own environment.

And this isn’t a business case that can be written within one organization. It actually requires investments to be made by multiple participants within a network. So it is definitely a long change management journey. And we’ve been at it now for three and a half years. And we’ve still got another couple of years to go before we get to even live. And I would say a lot of the benefits will come after the go-live date. So it is– you need to be committed for the long haul.

MARK SCHAEFER: I like that. You’ve created a blockchain sandbox.

DAN CHESTERMAN: Exactly right. And there are blockchain as a service– or blockchain as a service technologies– available right now. Not all of them are connected to that many participants. Not all of them are connected to that assets that you talked about before, the 1.7 trillion dollars of– Australian dollars of– assets that are actually in the CHESS environment. So I think what we have announced and are creating is quite important.

And it is being watched by the exchange community globally and, I think, other financial services in general. But I’m quite sure that we’re on a good path that will actually give benefits back to, ultimately, the issuers and investors. And those are the people who are at the end of the value chain that we’re part of who really do need to see value out of this.

DOUGLASS KARR: And let’s talk about that value. So fast-forward, let’s say, five years, where the adoption is going from sandbox to throughout the exchange. What is the value, to an investor, of having a distributed ledger?

DAN CHESTERMAN: So primarily, it’s around the fact that, today, if there’s one share transaction– you know, I sell my shares to you, for example– there will be an echo of that transaction in multiple different back office systems, stored in a different database, stored in a different data model, and without, really, the opportunity for there to be multi-party workflows built on top of that. So immediately, by having a single fabric with a harmonized data model available in near real time, but with privacy and confidentiality secured, you can do away with some of the reconciliation activities that everyone is doing at the moment to check that, is your version the same as what I think your version is. So that’s one level of benefit.

There’s a second, which I think comes after that, which is that, with a deterministic application model on top of that that allows you to build multi-party workflows, you can actually start to see how things like proxy voting, or corporate actions, or potentially even rights issues could be handled in a much more efficient way than today. Now it’s important to state, the ASX is not trying to compete with the participants or people who use our network at the moment. We’re trying to create an environment where those workflows can be executed more reliably, more predictably, more transparently, and still safely. And really, what we’re trying to do is make Australia’s capital markets, financial markets the best in the world. And that seems like a noble goal.

DOUGLASS KARR: Yeah. I know there are concerns, obviously, about the computing power necessary to incorporate distributed ledgers. What advancements have been made on that front to help mitigate?

DAN CHESTERMAN: So again, I suppose answer in a couple different ways. There are still, obviously, advancements happening which are making blockchains and distributed ledger technologies more efficient. And some of that, we will take advantage of. But one big, fundamental change that we have in our architecture is that we don’t require a distributed trust mechanism operating in multiple different environments, which is often what causes that large drain on energy from some of the public bitcoin or ethereum blockchain.

So realistically, the architecture that you choose is going to be one which influences how much the energy drain or the energy consumption actually will be. In the first instance, we’re going to be offering nodes as a managed service within our environment within our data center. And there won’t be distributed consensus, which means the computational load is significantly lower.

DOUGLASS KARR: Incredible. Yeah, I never even knew that that was an option.

DAN CHESTERMAN: Yeah, well, you know, it’s a trade-off, and it’s something you couldn’t do in every use case.

DOUGLASS KARR: Right.

DAN CHESTERMAN: So there are use cases where distributed consensus would be required. It’s just not– we weren’t trying to set off to solve a trust problem. We are actually the clearing participant for every trade. So we are actually becoming the buyer for every seller and the seller for every buyer. So we’re not trying to solve a trust problem. We were trying to solve a problem of data synchronicity and transparency while retaining privacy and confidentiality. And that’s a different problem.

DOUGLASS KARR: Yeah.

MARK SCHAEFER: So I imagine, in this exchange, which really depends on discretion, and speed of transaction, and security, that cybersecurity must be a big deal for you. And it sounds like blockchain’s at least part of the answer. But can you talk about your emphasis on security for the exchange? What are some of your strategies with cybersecurity?

DAN CHESTERMAN: So it’s a good point. And I would say that blockchain, while an important part, isn’t at all the cybersecurity strategy at the exchange. We’ve got a much broader and more holistic– and in fact, even when you deploy a DLT solution, you still have to think about all the same sorts of things, like endpoints, and protection, and firewalls, and PKI, and HSMs, and all of the usual activities.

What I would say is, maybe coming back to that original purpose that we spoke about, cyber, and trust, and integrity, and resilience are all central to our value proposition. So we’ve got a small but really, really effective cybersecurity team that really, I think, punches above its weight in terms of its scale for protecting the important assets that we’re responsible for. It’s also a whole-of-organization issue. So we regularly run phishing tests, and playbook exercises, and scenarios to really understand, what are the potential risks, not just from your expected sources, but unexpected sources, internal or external.

And cyber is one of the areas that the board and the executive committee would never seek to de-prioritize, if that makes sense. So really, we set our agenda based on what we can actually execute on. And the cyber team has grown substantially. And we see it being a critical enabler for our organization.

DOUGLASS KARR: I’ve read, when we were doing the research about the exchange, that you’ve made it your mission to be sustainable and responsible. Can you talk about some of the initiatives that the exchange has underway?

DAN CHESTERMAN: Yeah, sure. So obviously, we’re not a primary producer or a massive organization with a significant environmental footprint. But we do measure and manage the consumption, the energy consumption, at our two data centers and our corporate office. We use recyclable consumables and items like that. So we’ve taken those steps in terms of our own internal footprint.

One thing worth noting, I suppose, is we also convene a group which is actually represented– has representatives on it from all of the big industry associations in Australia, like the Investor Relations Association or stockbrokers, the custodians, the top 100 companies, Property Council of Australia, amongst many others. And that group releases corporate governance principles that all of the listed companies in our market report against on a do they comply benchmark against, do they comply with that principle, and if not, why not. So it’s not obligatory, but it’s, if not, why not.

And in this latest release, which was just released in February, for the first time, there is actually an expectation that listed companies will report on all of their major risks, including environmental risks or climate change. And if they have those risks, what are they doing about them? And so on an if not, why not basis, I think that’s an important one that’s shifting a whole market towards being more transparent about their activities and [INAUDIBLE].

DOUGLASS KARR: And accountable, yeah.

MARK SCHAEFER: Yeah, we see that trend coming in America too–

DAN CHESTERMAN: Yeah.

MARK SCHAEFER: –definitely– new expectations of what it means to be in business.

DAN CHESTERMAN: Correct. I would emphasize that it’s just to the point that that isn’t actually something that the ASX has as a rule. It’s that the corporate governance principles put together by Australia’s industry associations has come up with that as a recommendation.

DOUGLASS KARR: Which is great. That’s proactive, yeah.

DAN CHESTERMAN: Yeah, yeah.

DOUGLASS KARR: Dan, when we were doing the research for the show, Mark and I were talking. And one of the things that I had mentioned was, your optimism for blocking is incredible. And now your explanation of distributed ledger really starts to paint that picture. Maybe you talk a little bit about what direction you guys are going, and why, and why you’re optimistic.

DAN CHESTERMAN: So maybe one thing worth noting is [INAUDIBLE] blockchain, as a term, maybe has been overused. And one thing we’ve recognized as we’ve been at this for a few years is that we entered this whole problem space, maybe from a different position, not necessarily seeking to use a technology and find a problem, but actually with a real use case in mind. We have CHESS, which has been a solution which has been in place since around 1994.

It’s COBOL it’s on Itanium servers. It’s performed very, very well, but it’s increasingly hard to maintain. And there are some inherent architectural limitations, because it’s a message-based architecture with proprietary messages built specifically for Australia.

So we had a use case. We knew we needed to modernize this this solution. It was, at this time, peak blockchain height, I’d suggest. So the board and the organization made, I think, a very sensible decision to– if you’re only going to change a solution once in a generation, you should absolutely understand whether the technology could be used to actually help make the environment better. But the other big difference that we had is that we had an existing network of customers who connect to CHESS, whereas, I think, some proof of concepts, I wonder, who is the network that this is meant to address? And how are you going to drive adoption? And how are you going to make sure that that group feels like they’re part of the process of defining the requirements and building this?

Whereas implementing network-based solutions is something that the ASX has been doing all of its life. Each project that we do is essentially a change management exercise with the whole industry. So I think those three big differences– one, we had a real use case. Two, we had a customer base, and we knew that we could help potentially solve some of their problems. And three, we have, in our DNA, the ability, actually, to execute on an industry-wide change.

And so that’s why I probably am optimistic, not necessarily about all blockchain initiatives–

DOUGLASS KARR: Right.

DAN CHESTERMAN: –but that what we’re trying to do is a meaningful use case with a sensible application of technology, which we’ve satisfied, ourselves, can meet our non-functional requirements, which remain very high for obvious reasons.

MARK SCHAEFER: We’ve had the opportunity to interview so many interesting thought leaders on this program. And one of the things that always fascinates me is how someone like you, who’s really at the epicenter of this hurricane of change, keeps up with what’s going on. What’s your personal strategy to stay on top of what’s going on and stay relevant and, really, superior in your industry?

DAN CHESTERMAN: It’s an excellent question, because I think there are so many– there’s so much information out there. And if you were just keeping up to date, that could take up your whole day. I do find that subscribing to a number of different types of alerts and bulletin boards helps me. I do use podcasts. I think they’re a great source. Particularly when you’ve got idle time in the car, you can you can catch up on a lot.

I use all the tools like LinkedIn, the Factiva, a bunch of news and alert services. But I think there’s no replacement for conversations. And really, the network that you have and the connections you make at events like this, where you actually get to meet practitioners who are– have scars on their back and they’re doing real work, that’s where I think you make a lot of the really valuable learnings.

MARK SCHAEFER: Well, I’m making a big assumption here. What would be your second-favorite podcast?

DAN CHESTERMAN: You know, it’s interesting, it’s not a business one, I’d have to say. I listen to The Moth a lot. Because I just think there’s something beautiful about storytelling.

MARK SCHAEFER: That’s a very popular one.

DAN CHESTERMAN: It is. It’s fantastic.

MARK SCHAEFER: Yeah. Well, you heard it here, folks. So thank you so much, Dan. It’s been so enlightening, and interesting, and inspiring talking to you today. We sure appreciate having you on the program. Thank you.

DAN CHESTERMAN: Thank you very much for the opportunity.

MARK SCHAEFER: And for everyone, we appreciate you every day. Thank you so much for listening, for your nice comments, for your reviews. This is Mark Schaefer and Doug Karr signing off. We’ll see you next time on Luminaries, where we talk to the brightest minds in tech.

WOMAN: Luminaries– talking to the brightest minds in tech– a podcast series from Dell Technologies.