Australian Securities Exchange shareholders have raised concerns about how it will protect itself from hackers if it implements blockchain distributed ledger technology for clearing and settlements.
The ASX is currently prototyping an "industrial strength" platform, based on the distributed ledger technology that underpins Bitcoin, that could one day replace its CHESS post-trade equity services system.
It started dabbling with the technology in January this year via a minority investment in fintech firm Digital Asset.
The exchange is trying to work out whether blockchain technology can work at the scale of the Australian equity market.
It has completed a working solution and is now in discussions with regulators and stakeholders about how the technology might work in the finance industry.
Blockchain technology operates as a decentralised ledger of every transaction made, with transactions verified and shared by a global network of computers. The ASX would implement its own private network - rather than the publicly available blockchain underpinning Bitcoin - where parties will need permission to participate.
It will decide whether or not the approach is viable to replace CHESS at the end of next year.
In the meantime, however, the ASX's shareholders are getting edgy about the security of the untested technology, and the potential for the equities platform to become a target for hackers.
At its annual general meeting today, ASX chairman Rick Holliday-Smith said the technology the exchange was looking at differs significantly from the publicly available ledger underpinning Bitcoin.
"It's a sophisticated distributed ledger rather than [the Bitcoin blockchain] - we're not using it in that sort of environment. This is a tightly controlled, secure environment," he said.
Under the ASX's proposed model, there would likely be less than six distributed ledgers - possibly as few as three - that would reside with the ASX, the Reserve Bank of Australia, and ASIC as the financial regulator, he said.
"The integrity of the process would be overseen by the regulators, they would have oversight of everything that goes on within the blockchain," Holliday-Smith said.
"No-one will be able to get to the distributed ledger without their approval, and there will be encrypted mechanisms to get them in, and then very tight processes around what they do.
"No-one will be allowed to see all the steps on the ledger other than us and the regulators, except for the steps that they have a specific role in and give authority to.
"This is a very enterprise version ... a highly regulated solution that we are looking at."
A target for hackers
He admitted, however, that implementing such technology would make the ASX "fair game" to "every hacker in the world".
"There will be a heightened alert for us because we'll become a target, and we'll have to be careful with that."
The ASX chairman said the exchange was being advised by the various government agencies that are responsible for cyber security to ensure the platform was protected "to the highest level".
He said the Reserve Bank and ASIC - the exchange's two principal overseers - were yet to express their opinion on the viability of using a distributed ledger for the equities platform.
The ASX's plans could go out the window if it fails to bring the two parties over to its way of thinking, he noted.
"If we don't successfully carry them along on the journey, using this piece of technology won't ever go anywhere," Holliday-Smith said.
"If it does go somewhere with them, we then also have to convince the market users that this is beneficial for them as well. So it's a two-step process."