Myanmar’s new Stock Exchange using Blockchain to solve unique problems

Myanmar’s nascent Yangon Stock Exchange (YSX) will be using blockchain technology in its settlement platform, and putting it into practical use within two years. Having only opened for trading this spring, two stocks are currently trading on the exchange with four more on the way.

“The stock market needs to be developed to a regional and international standard, and [the Securities Exchange Commission] is responsible for managing this. It’s important to boost the capital of our companies.”
— – U Maung Maung Win, Chair of the Myanmar Securities Exchange Commission

Many see the December 2015 opening of the Yangon Stock Exchange as a major milestone in the country’s development. The joint venture between Myanmar Economic Bank, the Japanese Daiwa Institute of Research (DIR), and the Japan Exchange Group started trading on March 25 this year.

The YSX was built to be a world-class stock exchange, with investments and guidance from the DIR. The institute helped implement and test the system during early development, from June until September, using off the shelf server hardware. The testing specifically looked at how the system would work when the YSX is hit by power and phone line outages, which remain a major problem in the area.

During WWII the Southeast Asian country Myanmar, then known as Burma, was held and bombed extensively by both sides of the conflict, leaving the country without any major infrastructure nor production facilities. After a brief period of peace, a coup in 1962 left Myanmar with a military dictatorship until 2011. By the time the military relinquished control of the country, the population was down to 51 million and the country’s infrastructure was among the very least developed in the world.

According to estimates by the Asian Development Bank’s 2015 power sector development report, Myanmar had an electrification rate of only 31 percent as of December 2013, making it the least-developed infrastructure in Southeast Asia. Around 10 to 15 million people there have no access to electricity at all, and about 12 million rely on biomass for lighting and cooking. The capital city of Yangon isn’t fully electrified yet either, according to the report.

“Yangon Region consumes a lot of power. It can now generate about 400MW by itself though it consumes more than 1,200MW. The region needs to upgrade its own power-generating plants. When we have an alternate national grid, there would be fewer power outages.”
— – San Yu, Myanmar Electric Ministry Assistant Secretary

The YSX, like the rest of Yangon, is prone to frequent power losses, which have been known to cut the work day short. The DIR and Japanese blockchain startup Consensus Base, which was consulted for the YSX blockchain testing, are leveraging the decentralized nature of blockchain technology for data redundancy amidst the power supply problems.

While records saved to the blockchain cannot be referenced when local power or communications infrastructure fails, the transactions can still be recorded somewhere. When failures occur at the YSX, checking balances and past transaction records will still be achievable, although newer transactions can’t be checked.

The YSX can also make the most of blockchain technology due to its size, as the technology can limit trading. For example, Bitcoin can only handle three to seven transactions per second, although blockchains configured in different ways can significantly improve that rate.

The exchange currently matches buy and sell orders twice each day, at 11 a.m. and 1 p.m. High-speed trading at major exchanges, like the NYSE, create orders of magnitude more transactions.

"Venture firms have the best understanding of the core technology, we’ve been meeting them much more on the things some major (IT) vendors can’t do, like blockchain."
— – Yoshiaki Ito, Daiwa Institute of Research

DIR’s parent company, Daiwa Securities Group, is an early investor in Myanmar. The group is an investment bank and Japan’s second largest securities brokerage. The firm holds an underwriter’s license at the YSX, according to the Myanmar Times.

The company  has been involved in developing a local stock exchange since 1996, when the country was still under military rule. The group helped create the Myanmar Securities Exchange Centre, an over-the-counter market. The YSX replaced the Centre when it opened.

In July 2012, the Central Bank of Myanmar chose Daiwa Securities Group to lead a US$380 million project to help build a modern IT network for the brand new Myanmar government. Despite the poor infrastructure, a modern cloud system was designed to connect government ministries, schools and hospitals, as well as a secure online banking system.

The company has since paid increasing attention to blockchain technology and cryptocurrencies. DIR recently released a very detailed industry report on how virtual currencies are going to change the global economic and financial systems.

“Expectations are increasing for the blockchain to obtain technology. But the reader should not neglect the development potential of virtual currency.”
— – Daiwa Institute of Research

Although its conditions are unusual, the YSX isn’t be the first securities exchange to explore blockchain. Several other exchanges are either testing or implementing the technology for securities settlement.

Overstock.com’s t0 was the first public exchange integrate a blockchain, in August 2015, although the first security to be traded on the platform is due to arrive next week. Nasdaq’s Linq, an interface for their startup-focused Private Markets exchange was launched soon afterwards, but was first announced in May 2015, already trading some of its own private securities.

The Australian Stock Exchange (ASX) ran several blockchain securities tests with Blythe Masters’ Digital Asset Holdings in August,  and they state that the system may be able to replace their aging CHESS settlement system sometime after 2017.

A considerable number of Japan’s top banks, led by the Japan Exchange Group, the minor shareholder of the YSX, recently ran their own battery of tests on blockchain technology. The group concluded that blockchain technology is, “Extremely attractive as an infrastructure technology with high availability, immutability, and high resiliency from system failure at a relatively low cost.”

“Through our research and PoCs, we have concluded that DLT has the potential to transform capital market structure by encouraging new business development, improving operation efficiency, and contributing to cost reduction.”
— – Applicability of Distributed Ledger Technology to Capital Market Infrastructure