Korea Exchange Talks Top-Down Approach to Blockchain Innovation

Though major stock exchanges in London and New York have garnered the lion’s share of major media headlines, their peers internationally are moving at a similar pace to investigate the potential of blockchain tech.

The Korea Exchange (KRX), South Korea’s only securities exchange, for example, announced it was moving to develop an over-the-counter (OTC) trading platform using the technology in February, a decision that could open the company up to entirely new markets if eventually launched.

According to Changjin Lee, head of IT strategy planning at KRX, the project isn't simply a response to international competitors. Lee indicated that KRX has been studying the technology since early 2015, and that the decision to start working on implementations came from the highest levels of the organization.

Lee told CoinDesk:

"Kyungsoo Choi, CEO of KRX, identified the importance and potentials of blockchain technology and ordered [the company] to find how to use that technology. After that, we decided to take action about the technology.”

Such a top-down approach to embracing innovation would appear to be uncommon, industry observers have asserted. Still, that's not to say that KRX isn't using similar tactics to peers such as Nasdaq, the London Stock Exchange and around 10 firms globally.

Lee said, for instance, that KRX has convened a blockchain task force that encompasses individuals working across the organization. This includes representatives from clearing and settlement, general strategy, and Lee’s group, IT.

KRX, Lee said, is even in the early stages of reaching out to to relevant members of South Korea’s financial system, including the Korea Securities Depository, the country’s central securities depository (CSD) in a bid to expand its efforts.

Lee further revealed the exchange has set up an internal task force that meets periodically, but irregularly, providing members of the company with "guidance and solutions" centered on the emerging technology.

"It is surveying technical trend of blockchain, use cases, considering how to apply blockchain into KRX information systems, and collaborating with other organizations," he said.

Electing OTC trading

KRX is also not alone in seeking to leverage the technology to move its operations into new markets. For example, BNP Paribas is seeking to determine how it might create a crowdfunding platform based on blockchain, a move that would extend its business lines.

Lee explained that using blockchain in the OTC markets would primarily enable KRX to offer investors "more convenient and faster services" by filling a gap in current market services.

This would be plugged by the KRX Private Market, a new effort that the company aims to build in collaboration with local blockchain startups.

"KRX is aiming at providing services in the private market positioning in between K-OTC and K-OTCBB," Lee said, referring to South Korea’s platform for unlisted stocks and the computer system that provides price quotes for these assets.

Lee explained that the Korea Financial Investment Association, a regional self-regulatory organization, now operates both K-OTC and its bulletin board service (K-OTCBB), but that bids and offers are executed on the systems differently.

"In K-OTC Market, orders are executed automatically by trading systems, but K-OTCBB only provides bulletin board service, where bids and offers are manually executed," he explained.

KRX has indicated it believes this will ease the ability of market participants to find partners while cutting costs. The decision comes after the exchange similarly moved into clearing OTC derivatives trades in 2014.

Collaborative approach

To integrate the technology more broadly into those capital markets, however, Lee said more collaboration will be needed among participants on R&D and proofs-of-concept, though he didn’t hint at what projects could emerge.

As for KRX’s thesis on the technology, Lee said that the exchange sees the potential for use cases to develop that leverage both shared, distributed ledgers, as well as new digital assets that could be created and managed with the technology.

Such a dual approach comes as many financial institutions are scrutinizing this question, as shared ledgers or messaging environments have generally proved more actionable for incumbents.

KRX, like many other existing financial institutions, he said, won’t be looking to interact with any public blockchains as part of services it launches – at least, yet.

"Because of the public blockchain’s limitations in financial market such as securities, KRX is considering private or hybrid blockchain for adopting the technology," he continued.

Lee said KRX plans to reach out to other market stakeholders and local governments as it continues pursuing blockchain applications.

Lee concluded:

"Collaboration among market participants is essential."

South Korean won image via Shutterstock