Insights / April 20th, 2017

Have you thought about Blockchain or DLT?

What is DLT?

With the emergence of the “shared economy”, new technologies are allowing for safe and secure peer-to-peer transactions and services. DLT is a technology which allows information to be recorded and tracked in a distributed manner, without the need for a central authority. A distributed ledger allows participants in the network the transparency to view the information on the ledger at any point in time (limited by private and public keys). Transactions are documented on the ledger and verified using an algorithmic consensus mechanism and are secured using cryptography.

The most common form of DLT presently is blockchain technology, which provides the base for immutable data records and applications such as ‘smart contracts’ (i.e. contracts that automatically execute themselves).

How is DLT regulated?

There are potential frictions between a DLT service and ASIC’s existing regulation of the financial services and credit industries. ASIC’s recent Information Sheet establishes ASIC’s position with regard to DLT. ASIC has noted that not all DLT business models will require regulation from ASIC.

ASIC commented that it will “work to harness opportunities and economic benefits, not stand in the way of innovation and development.” ASIC is primarily concerned with ensuring the appropriate risk management procedures are in place for businesses using financial technologies.

What do DLT start-ups need to consider?

ASIC will gain an understanding of how businesses will use DLT by asking the following six questions:

1. How will the DLT be used?

ASIC is interested in the business ‘issues’ that the use of DLT may solve for a business, and will use the regulatory guidance on established alternatives as a benchmark for potential regulatory requirements. It will also look at features of a proposed system such as permissions, security, time stamps and the use of smart contracts.

2. What DLT platform is being used?

ASIC is primarily interested in the reasons why a particular DLT platform is chosen (e.g. a ‘private’ or ‘public’ DLT platform), and whether that platform is appropriate from a risk management and consumer/investor protection point of view. ASIC is particularly concerned with a platform’s susceptibility to fraud.

3. How is the DLT using data?

ASIC wants to know the types of data that may be shared on the distributive ledger and what security arrangements are in place (such as private and public keys), and who can potentially gain access to certain data (including regulators).

4. How is the DLT run?

With the limited (if any) role of owners of DLT services, ASIC wants to know the governance model of the DLT service and the rules for interaction between users as well as arrangements in place of traditional ownership and control.

5. How does the DLT work under the law?

Although DLT can allow for transactions that are independent of external mechanisms for conflict resolution, DLT services will still be subject to relevant legal and regulatory frameworks. For instance, there are contractual laws in Australian jurisdictions that a DLT service will need to accommodate when, for example, using smart contracts. Other important laws to consider include anti-money laundering and counter-terrorism financing.

6. How does the DLT affect others?

ASIC is concerned with the use of DLT services in the scope of the broader market eco-system. It may be the case that a DLT service will directly or indirectly effect non-users of the service and other areas of the broader market. ASIC also wants businesses to consider the interoperability between DLT services and the broader market.

ASIC’s recent guidance is relatively tame and fails to put forward a definitive position on the use of DLT. This suggests that DLT is an inherently hard technology to regulate, and that ASIC is still coming to grips with how DLT will be practically used by businesses in Australia.

We are committed to assisting businesses in all industries that wish to use DLT and blockchain technology. We understand the features of the technology and the numerous benefits it will have for business. For more information, please contact us.

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