20 March 2017

Navigating the blockchain path: Australia’s ASIC releases guidance

This article was written by Scott Farrell and Hannah Glass.

Australia’s securities and investments regulator, ASIC, has released guidance on the use of distributed ledger technology (including blockchain) in financial services and financial markets. Usefully, this guidance includes a framework to help the assessment of whether technology and risk management standards required by the regulator will be met. The technological neutrality expressed in this statement is likely to be welcomed by many. Also important is its broader-than-technological focus. By highlighting the importance of considering when and how blockchain “should” be used, and not just how it “could” be used, it gives real guidance to those planning to use the technology in financial services and markets (and in other sectors as well).

ASIC, the Australian Securities and Investments Commission, is no newcomer to considerations of digital transformation, distributed ledger technology or fintech.   Through its innovation hub, it provides assistance, guidance and information which is intended to foster innovation in the fintech sector. The latest information sheet on distributed ledger technology has been released to help users understand the regulatory considerations of the technology. ASIC expects that the range of applications of the technology will grow exponentially over time. This could have far-reaching implications that affect the way these entities operate and the structure of the market. 

As the ASIC guidance notes, the terms distributed ledger technology and blockchain are frequently used interchangeably as the technical difference between them is often not relevant to their practical use. In this Alert, we use the term “blockchain” as it is more widely known.

Regulatory starting point

In the guidance, ASIC notes the following on the use of applications in the financial services and the markets it regulates:

  • ASIC’s regulatory framework already requires entities to have adequate technological resources and risk management arrangements in place. 
  • ASIC’s approach has historically been that these types of obligations are “technology neutral” and this is the starting point for its consideration of blockchain.
  • Blockchain does present a new perspective on some of the issues in financial services, and ASIC provides a framework for considering those from a regulatory perspective (see below).

The information sheet is intended to prompt early and collaborative discussion between participants, entrants and ASIC.  The technology-neutral basis articulated by ASIC as its starting point should be welcomed by many participants and potential entrants to the sector.

Framework to chart the landscape

Usefully, the ASIC guidance contains a framework to assist those designing blockchain solutions for finance and financial markets to make sure that they meet technology and risk management standards (this framework is set out in detail here). This framework consists of 6 questions which can be asked in the context of a particular blockchain use:

  • How will the blockchain be used? ASIC would like to understand the problem which is to be solved by the use of the blockchain application and the assessment of the commercial landscape in which it is proposed. 
  • What blockchain platform is being used? ASIC notes that each platform has its own features, strengths and limitations.  Accordingly, ASIC would like to understand why one has been chosen and what work has been done to test it in the context of the use case.
  • How is the blockchain using data? ASIC notes that it is important to know where the data used by the blockchain application is coming from and the security arrangements which are in place to keep it private where necessary.
  • How is the blockchain run? ASIC notes that the blockchain application’s governance model is critical in understanding the risks those using it are exposed to, and how those risks are managed.  This includes the consensus mechanism which is used.
  • How does the blockchain work under law? ASIC notes that whatever the technological approach to disputes taken by a blockchain system, it remains subject to the applicable legal and regulatory framework.   This includes having the flexibility to respond to changes in processes when required by law, including when transactions need to be reversed or varied.  It is important to know how this is addressed by the blockchain application.
  • How does the blockchain affect others? ASIC would like to understand the possible impact which the service may have on others.  This can include how scalable it is and what risk trade-offs have been identified.  This is because a successful, highly-networked solution can affect others, beyond the users of the system.

Frameworks such as this are important in connecting the people building technological solutions to the people who need to manage their impact and interaction with the economy and society. It enables more complete “design-thinking” of a blockchain system which is essential to their success “beyond the lab”. For further thoughts on this, please see our Alert on design-thinking a blockchain health-check.

Next steps on the journey

The information sheet is an important addition to the growing library on blockchain because it helps in taking the conversation from what “could” be done by the technology to how it “should” be done. It complements the work of the Australian Standards Association on the creation of technical standards for blockchain and the forthcoming research paper of CSIRO’s Data61 on the technology.  

For those designing a blockchain system for use with a regulated financial service, market or activity, or those considering having one designed for them, the information sheet is valuable reading. Of course, it is intended as a starting point only, and there is more research to do. If you need help with this, please let us know.

Scott Farrell is a member of the Australian Government’s FinTech Advisory Group but this communication should not be taken to be connected with that role.

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