A mainFT scoop earlier this week might have prompted feelings of déjà vu for some readers:
The London Stock Exchange Group has drawn up plans for a new digital markets business, saying this will make it the first major exchange to offer extensive trading of traditional financial assets on the blockchain technology best known for powering cryptocurrency.
Once you’ve got past the whiplash of effectively hearing “I’m sceptical of crypto but blockchain has potential” rearing its head*, let’s look a bit closer.
LSEG is, certainly by the standards of its own stock exchange, an interesting company. It share price has risen dramatically over recent years amid its combination with Refinitiv and the company’s continued transformation from mere stock exchange (yawn) to a fully-fledged financial data giant (exciting). Its new slogan is hardly inspiring, but can’t really be argued with: “Others do some of what we do, but not everything we do.”
In fact, it feels like exactly the type of techy London-listed company that would currently be a flight risk, if it wasn’t for . . . well, you know. As a recent Jefferies note put it:
LSEG’s evolving equity story is increasingly driven by continued momentum in its subscription-income-generating business lines. The relative positioning of its index and enterprise data businesses is already strong, in our view.
The “weak link”, as Jefferies puts it, is Refinitiv’s “desktop franchise”, ie Eikon, ie the Bloomberg terminal competitor that is often invoked in the sentence “stupid f—ing Eikon”. That may change with the arrival of Workspace, its new platform (but Alphaville remembers similar chatter about Eikon when that launched back in 2010).
LSEG is also moving forward in other areas, including, natch, AI. As mainFT’s Nikou Asgari reported last month, it has found a friend with benefits in this area:
David Schwimmer, chief executive of LSEG, said the company was working with Microsoft to create “bespoke large language models” . . .
Microsoft took a 4 per cent stake in LSEG in December last year and secured a board seat as part of a 10-year strategic partnership, marking the latest in a series of incursions by Big Tech into the operation of global capital markets. Seattle-based Microsoft also invested $10bn in OpenAI in January.
Jefferies held an call with Paul Dragan, former head of market development at Eikon, in July. Here’s part of what he had to say about the Microsoft connection:
I think it’s fantastic. I think there were multiple layers of what was actually going through when we first heard about the partnership between Microsoft and Refinitiv. First of all, I think when you think about maybe the most obvious piece for some, which is the cloud, Microsoft Azure offering, etc., you have to understand the operational complexity and cost for Refinitiv of collecting all the financial data in the world, normalising it, cleansing it, structuring it, but also delivering it to their customers around the world. So you have customers in Sydney that love to receive their US market data really fast and really fresh and that’s expensive. You have a lot of manual work. You have a lot of infrastructure that Refinitiv has to manage in order to make that possible.
So having a player like Microsoft Azure and all their data centres, all their capabilities in the cloud, will definitely have an impact on the infrastructure costs. I think there’s some great cost-savings potential for Refinitiv just simply by leveraging what Microsoft Azure has to offer. Refinitiv’s cost of maintaining their own infrastructure is quite high and it needs to be refreshed. They own the data centres, they own the comm lines, etc. The cost of refreshing that is quite high and it has to happen every three years in order to be competitive, etc. It will definitely give LSEG and Refinitiv some cost-savings and allow them to be more competitive.
It all sounds pretty snug. But, uh, blockchain? Really?
We can confirm that Microsoft is involved — LSEG’s head of capital markets Murray Roos told mainFT in world exclusive, previously-unreported comments (h/t Laura Noonan):
We’ve been investigating some of the tech and engineering . . . for a number of months with Microsoft.
Plus Microsoft’s global Web3 lead just kinda tweeted it out:
watch this space 👇
more information to come soon 👀https://t.co/n6ZeUyN5Mo
— vassilis.eth (🌆 ,🌆 ) (@TziokasV) September 4, 2023
What do we know about Microsoft’s blockchain offering?
On the surface, not a whole lot. Chief executive Satya Nadella told Davos this year that he believed in the blockchain, but that it needed “killer apps”. We also know it had a home-made blockchain product on Azure, its web services platform, that got canned in 2021 in favour of a third-party offering.
There is this press release, from May (our emphasis):
Digital Asset and leading market participants announce their plans to launch the Canton Network, the industry’s first privacy-enabled interoperable blockchain network designed for institutional assets and built to responsibly unlock the potential of synchronized financial markets.
Canton Network participants include 3Homes, ASX, BNP Paribas, Broadridge, Capgemini, Cboe Global Markets, Cumberland, Deloitte, Deutsche Börse Group, Digital Asset, DRW, Eleox, EquiLend, FinClear, Gambyl, Goldman Sachs, IntellectEU, Liberty City Ventures, Microsoft, Moody’s, Paxos, Right Pedal LendOS, S&P Global, SBI Digital Asset Holdings, The Digital Dollar Project, Umbrage, Versana, VERT Capital, Xpansiv, and Zinnia.
Canton, the release says will provide a “decentralised infrastructure” that will connect between different applications built with Digital Asset’s Daml smart-contract language.
This feels a lot the kind of thing LSEG has in mind, and Microsoft are clearly involved. We can’t see another finance-oriented blockchain project that they’re in bed with. However, Deutsche Börse and CBOE are listed as Canton partners while LSEG isn’t — so we are heavily spitballing here. Indeed, it isn’t even clear that work has really begun on this blockchain project.
But if Canton is the framework . . . what’s Digital Asset?
[birdseye camera zooms out from London, planet pivots and spins backwards through time, camera zooms in on A Land Down Under]
From the Australia Financial Review last December:
Digital Asset, the start-up that was building the new settlement system for the Australian equity market, has declared the ASX [Australian stock exchange] must shoulder the blame because it changed the scope of the project and never created a plan to fix core issues as it began to unravel.
The retort from the New York-based company comes after ASX chief executive Helen Lofthouse earlier this week told a parliamentary committee that “escalating delays” in software development at Digital Asset were one of the key reasons behind the ASX’s decision to pull the plug on the project.
This triggered a $250 million write-down, set the critical market infrastructure upgrade back at least five years, and triggered a loss of faith in ASX’s capability to manage technology, infuriating the Reserve Bank and corporate regulator.
[FT coverage of the Australian exchange group’s hilarious blockchain misadventure here]
The ASX commissioned Accenture (who, it should be noted, are hardly independent in this context, given their involvement in pushing blockchain solutions) to conduct a review of the saga (PDF here). Accenture found only 63 per cent of the rebuild was provided to ASX for testing. A Reuters postmortem from late last year said:
People working on the project raised concerns that Digital Asset lacked after-market support and that the ASX had enlisted the company without testing its product for scalability, the person said, adding that the worries went unaddressed. Ultimately, ASX had 300 people working on the CHESS replacement project, about one-third of its headcount.
We’re quite far down a hypothesis hole here, but we think it would certainly raise some eyebrows in the City if LSEG does end up in bed with Digital Asset over this — regardless of whether or not the latter was to blame for the ASX debacle. But maybe Microsoft would be just the kind of chaperone to make such an arrangement work.
Wild speculation notwithstanding, the bigger picture is still remarkable. A year on from ASX’s embarrassing and ignominious blockchain blow-up, LSEG’s embrace of the same tech feels surprising to say the least. We’ll be watching how this develops with great interest.
Digital Asset declined to comment. LSEG declined to comment. Microsoft did not respond to a request for comment.
*This also isn’t the first time LSEG has made a blockchain push — in 2017, it partnered with IBM to make a blockchain-based platform for issuing private shares in Italian businesses through Borsa Italiana, using something called the Hyperledger Fabric frame. It’s not clear how that has progressed, although Hyperledger lists far fewer “premier members” than it used to.
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