The Australian Securities and Investment Commission (ASIC) has published an information sheet outlining regulatory considerations for startups and existing licensees who intend to make use of distributed ledger technology to develop new solutions for their businesses.
ASIC’s regulatory framework requires financial services companies to have appropriate technological resources and risk management system as well as organizational competence and the necessary human resources to operate. Hence, it is important to ASIC to evaluate future implementations of distributed ledger technology within Australia’s financial system so that it can meet its regulatory obligations of safeguarding Australian financial markets participants and financial services consumers.
The information sheet (INFO 2019) targets startups and regulated financial institutions that “are considering operating market infrastructure, or providing financial or consumer credit services, using distributed ledger technology (DLT) or blockchain.”
The information sheet is there for companies to assess whether their use of distributed ledger technology allows them to meet ASIC’s regulatory requirements. As not all business models will fall under ASIC’s regulatory scope, ASIC’s also recommends companies to consider what other regulatory bodies they may have to liaise with to receive the right regulatory approvals to operate.
There are six questions that need to be addressed to assess whether a startup or financial institution's use of blockchain technology can meet its regulatory obligations:
How will the DLT be used?
Firstly, ASIC wants to know what problem the firm’s distributed ledger technology is seeking to solve so that is can assess any potential regulatory issues that require addressing. ASIC also wants to know who will have access to the blockchain, whether it will involve the use of smart contracts and what data it stores.
What DLT platform is being used?
Secondly, ASIC wants to know which blockchain is in use and why, and whether there have been any testing in the context of its planned future use. That way, ASIC can assess whether the chosen blockchain technology is reliable, secure and robust so that it can carry out its proposed functions accordingly in line with regulations.
How is the DLT using data?
Thirdly, ASIC wants to know where the data that the blockchain will use is coming from and what security measures are in place so that certain users, including regulators, can safely access the data. Regulatory oversight of the data will help ASIC to evaluate whether the data on the blockchain is appropriate and effective.
How is the DLT run?
Fourthly, ASIC wants to know what governance model is in place for the blockchain-based service so that it can assess the risks faced by those who are using it and how to best mitigate them. The answer to this question should also involve details on user interaction rules as well as ownership and control arrangements such as what type of consensus mechanism the blockchain uses to ensure a true record of information.
How does the DLT work under the law?
Fifthly, ASIC wants to ensure that the company’s use of blockchain technology is legal under current laws. Blockchains that leverage smart contract technology can allow entities to transact without the need for a third-party mechanism for conflict resolution. However, in Australia, the law does not permit enforcement of a contract purely on its terms and conditions. The company's blockchain must be flexible enough to accommodate this legal requirement.
How does the DLT affect others?
Finally, ASIC wants to assess how the company’s distributed ledger technology may affect other financial markets participants and the consumer. ASIC wants to determine how scalable the blockchain solution is and what risk trade-offs there are if any; this also includes how interoperable the DLT solution will be with the systems and processes of other market operators as the solution will likely have an effect on the broader market environment and its stakeholders.
ASIC is taking a very accommodative approach to blockchain innovation through publishing these guidelines. As there are no clear laws or regulatory guidelines on blockchain technology use yet, as it is such a new technology, the regulator is proactively seeking interaction with FinTech startups and established financial institutions that are developing blockchain solutions for the financial services industry.
“This info sheet is for both existing licensees and start-ups. It will help to fast track our discussions with stakeholders, and we want to use the framework as a conversation starter as the technology continues to evolve,” ASIC Chairman Greg Medcraft stated.
Australia is Becoming a Leader in Blockchain Technology
ASIC decided to publish an information sheet on distributed ledger technology as the increase in blockchain projects and DLT implementations in the Australian financial services industry has been substantial in the last few years.
ASIC has recognized that “the range of potential applications of DLT will grow exponentially over time. This could have far-reaching implications for our stakeholders, and affect the way these entities operate and the structure of the market in which they offer their services. Although DLT is still an emerging technology, we have given and will continue to give, considerable thought to regulatory issues that may arise,” for companies contemplating the use of distributed ledger technology for their businesses.
In Australia, distributed ledger technology is in use in the financial industry in securities settlements and clearing processes, international remittances, and debt issue programs. The country’s two leading stock exchanges, the Australian Securities Exchange and the Sydney Stock Exchange, are both trialing blockchain technology to make their equities settlement processes more efficient. The Queensland Treasury Corporation (QTC) issued a prototype bond using blockchain technology in cooperation with Commonwealth Bank of Australia to test the blockchain application as an issuing platform for government debt securities and banks, such as NAB, have completed international money transfers using the technology.
Given the Australian financial regulator’s open stance regarding blockchain technology and its willingness to engage with both established firms and FinTech startups to ensure smooth implementation of distributed ledger technology in the financial system, it looks like Australia is setting itself up to become a leader in blockchain technology adoption in the years to come.