ASIC Sues ASX Over Misleading Blockchain Upgrade Claims

Highlights:

• ASIC has sued ASX for allegedly misleading statements about its failed blockchain project.
• ASX claimed the blockchain project was on track for April 2023 but faced delays.
• ASIC’s actions highlight its commitment to market integrity, with ASX’s stock price reflecting investor concerns.

The Australian Securities and Investments Commission (ASIC) has filed a lawsuit in the Federal Court against the leading stock exchange, ASX. The lawsuit accuses the exchange of making “misleading and deceptive” statements about its now-abandoned blockchain technology project. ASIC asserted that ASX’s statements about the progress and expected launch date of its Clearing House Electronic Subregister System (CHESS) replacement project were misleading. 

ASIC has commenced proceedings in the Federal Court against Australia’s largest market operator, ASX Limited, for allegedly making misleading statements related to its Clearing House Electronic Subregister System (CHESS) replacement project https://t.co/yyruQ5PpFB pic.twitter.com/d3ZLUGMKSF

— ASIC Media (@asicmedia) August 13, 2024

ASX’s Blockchain Project Allegedly Misrepresented

ASX, handling about A$5 billion ($3 billion) daily trades, claimed that the upgrading project was “on track” and expected to be operational by April 2023. The lawsuit stated that ASX had been informed by its software developer for seven months that the project was falling behind. However, the regulator contends that by early February 2022, the project was not proceeding as planned, and ASX lacked a reasonable basis to suggest it would be ready by the stated date.

ASIC Chair Joe Longo stated:

“We allege that the true state of affairs as at 10 February 2022 was that the project was not ‘progressing well,’ contrary to ASX’s announcement. We believe this was a collective failure by the ASX Board and senior executives at the time.”

Meanwhile, ASIC has not yet decided on the penalty for ASX’s alleged violations. This case follows recent ASIC actions, including a $1,050,000 penalty imposed on ASX in March 2024 for market integrity rule breaches and enforcement actions against other market participants. Furthermore, the company’s stock price has fallen up to 4%, reflecting investor concerns about the future. ASIC sued the ASX, underscoring its commitment to maintaining market integrity, particularly given ASX’s role in corporate governance and national infrastructure.

ASX Aimed to Replace CHESS with Blockchain Technology

In early 2016, ASX decided to replace CHESS, the computer system introduced in the mid-1990s for managing share transactions and recordkeeping, with blockchain technology. In the lawsuit, ASIC stated that Digital Asset (DA), ASX’s original software vendor, warned ASX in July 2021 about ongoing delays in code delivery, which would impact future milestones. Moreover, ASX’s audit and risk committee was informed of the project’s “red” status a week before the February 2022 trading update.

Two days before the February 2022 update, the CEOs of ASX and DA met to discuss the possibility of DA providing a “descoped” version of the software for testing. The lawsuit notes that there is no record of their agreement. However, in the trading update, ASX reported that the project was on schedule and announced its CEO’s retirement.

The lawsuit claimed that although the exchange offers corporate governance recommendations to listed companies, its guidance on the software upgrade “undermined the principles it promotes for itself and others.” ASX CEO Helen Lofthouse, who began her role in August 2022, stated that the company is reviewing ASIC’s allegations and “recognizes the significance and serious nature of these proceedings.”

The lawsuit read:

“By the misleading conduct, ASX risked damaging perceptions of the integrity of the Australian financial markets and the confidence of investors.”