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Six questions from Australian financial services regulator for entities using or planning to use Blockchain technology

The Australian Securities and Investments Commission (ASIC),  Australia’s corporate, markets and financial services regulator, has released an information sheet on distributed ledger technology (DLT) or Blockchain technology. It is designed to help both ASIC and interested parties evaluate whether the use of DLT would allow an entity to meet its regulatory obligations. It will help fast track discussions between those entities and ASIC about their potential regulatory obligations. It is applicable for both existing licensees and start-ups that are considering operating market infrastructure, or providing financial or consumer credit services, using distributed ledger technology (DLT) or blockchain

The sheet sets out six questions (Detailed information on the questions is available here) on the basis of which ASIC is likely to assess whether the use of DLT by a service provider or infrastructure operator would allow the person to meet their regulatory obligations.

  1. How will the DLT be used? - This would include information on the problem the DLT is trying to solve, the entity’s assessment of the commercial landscape and context in which it is proposed, the proposed rules for users to access the DLT-based service and other design features, including what information will be held on the DLT ledger and whether smart contracts will be used.
  1. What DLT platform is being used? - The entity would have to explain why they have selected a particular DLT platform, what work has been done to test it in the context of the use case proposed and answer questions on whether risk controls ensure that the interests, rights and liabilities of investors and consumers can be accurately determined at any time and if the DLT mitigate the risk of susceptibility to fraud.
  1. How is the DLT using data? - This includes questions on where the data validated distributed ledger is coming from and what are the rules and security arrangements in place to enable certain users (including, potentially, regulators) to see it, and where appropriate, to keep it private from others.
  1. How is the DLT run? - This question deals with the governance model of the DLT-based service, including the rules for the interaction of users, as well as the arrangements in place for ownership and control (for instance the type of consensus mechanism proposed for participants to determine the true record of information when there is inconsistency.)
  1. How does the DLT work under the law? - The DLT-based service will remain subject to the legal and regulatory framework of the relevant jurisdiction. The DLT will have to  be flexible enough to accommodate scenarios where the legal system does not permit enforcement of a contract solely on its terms. The example given is the provision of clawback of transactions in certain circumstances under insolvency laws.
  1. How does the DLT affect others? - This aims to evaluate the scalability of the proposal, the potential impact of its success or failure on the broader market environment and on people who do not directly use the service. The entities will also be expected to answer whether any steps have been taken to enable ‘interoperability’ between the specific service and others, and whether consideration has been given to the management of a default by a customer, participant or the service provider.

The finance industry has been at the forefront of exploring and adopting this emerging technology. DLT is one of the drivers behind the burgeoning FinTech industry. The ASIC information sheet lists a range of use cases for DLT, domestically and internationally, including foreign exchange remittance payments, securities settlement systems, debt issuance programs, digital identity initiatives, private securities transactions, interbank payments, and netting services for repo and foreign currency markets.

Like other financial industry regulators, ASIC is attempting to mitigate risks, without obstructing innovation and development.  It has established an innovation hub for FinTech start-ups, released two class waivers to allow eligible businesses to test specific services and/or products for up to 12 months with up to 100 retail clients without holding an Australian financial services (AFS) or credit licence, established the ASIC Digital Finance Advisory Committee (DFAC) drawing members from FinTech firms, academia and consumer group and signed a number of fintech-related memoranda of understanding (MOUs) with overseas regulators.

ASIC believes that the existing regulatory framework can accommodate the DLT use cases that have been seen till date. However, additional regulatory considerations are anticipated as the technology matures and its applications grow exponentially. ASCI hopes to resolve these issues with early and collaborative dialogue between ASIC and the industry, with this information sheet forming part of the dialogue.

In addition to ASIC, a host of other regulators, such as the Reserve Bank of Australia, Australian Tax Office, Australian Prudential Regulation Authority and more, might be interested in the impact of DLT and the firms considering its use.

Read the information sheet here.

Featured image: Davidstankiewicz/ Creative Commons Attribution-Share Alike 4.0

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