Removing the roadblocks to blockchain technology
The potential of distributed ledger technology (DLT) and blockchain technology have been attracting plenty of attention recently.
Expecting their use to grow exponentially over time, the Australian Securities and Investments Commission (ASIC) has released an information sheet (INFO 219) designed to help users meet their regulatory obligations.
In addition, Data61 (CSIRO) has published a report which examines some of the technical risks and opportunities in the use of blockchain technologies.
These developments follow news that the Australian Securities Exchange (ASX) is making good progress in replacing its CHESS system with DLT. Similar moves have been embraced by Nasdaq and the operator of the Toronto Stock Exchange.
As ASIC notes, interest in DLT, including blockchain, has escalated globally in the past few years. To date, ASIC has seen DLT used in foreign exchange remittance payments, securities settlement systems, debt issuance programs and digital identity initiatives.
Internationally, DLT is also being deployed in areas such as arrangements to support private securities transactions, interbank payments and netting services for repo and foreign currency markets.
Broadly speaking, ASIC says its regulatory framework already requires entities to have adequate technological resources and risk management arrangements, as well as the necessary human resources and organisational competence. These obligations are summarised here. ASIC has also set out six questions to help businesses with the use of DLT.
ASIC adds: ‘At this stage, we believe the existing regulatory framework is able to accommodate the DLT use cases we have seen. However, as DLT matures, we anticipate that additional regulatory considerations may arise.
‘These are most likely to be resolved with early and collaborative dialogue between ASIC and the industry. The information sheet is intended to form part of that dialogue.’
In its report, Data61 (CSIRO) notes blockchains are still a rapidly evolving technology, with ongoing developments, especially to improve scalability and confidentiality.
‘There is still much that is unknown about the development of trustworthy blockchain-based systems,’ it states.
‘Further research is required to improve our knowledge about how to create blockchain-based systems that work, and how to create evidence that blockchain-based systems will work as required.’
According to Data61 (CSIRO), the many financial services applications for blockchain technology include using it as a digital currency and for international payments and trade finance.
In the public sector, it says blockchains could also be used to improve government service delivery and to facilitate information sharing and process coordination across agencies.
However, the report notes: ‘The full potential of blockchain technology is likely to be realised outside financial services and government. Blockchains are a foundational horizontal platform technology that could be used in any industrial sector including agriculture, utilities, mining, manufacturing, retail, transport, tourism, education, media, healthcare, and the sharing/P2P economy.’
Nonetheless, the report cautions that blockchain can also be used for terrorism financing. ‘From a purely technical perspective, real-world identities are not necessarily required. For example, on Bitcoin, transacting agents (which are not necessarily persons) are only pseudonymously identified, with a cryptographic key.’
The report adds that other significant challenges remain. For example, it is a challenge and currently unknown how to best perform governance for blockchains and blockchain-based systems.
The report asks: How should relevant stakeholders influence and manage changes to the software and the operational infrastructure for blockchains and blockchain-based system, when there might be no central owner, and where the blockchain platform might be serving many purposes for different stakeholder groups?
In addition, the report notes that it is not possible to change the transaction history in most blockchains. ‘This is normally a good thing, but can cause problems if blockchain contains illegal content, or if a court orders content to be removed from the blockchain.’
It adds: ‘Regulators and enterprise should be aware of the typical technical risks and limitations of blockchain technologies, and pay particular attention to ensure that proponents for new blockchain-based systems provide sufficient evidence that the new systems meet requirements related to these risks and limitations.’