The use of blockchain and distributed ledger technology
(DLT) has fast become one of the most talked about
technological advances in the finance sector over recent years. On
Monday, ASIC released Information Sheet (INFO 219) which gives
existing licensees and start-ups guidance on ASIC's regulatory
framework and the questions ASIC will ask interested parties to
ascertain whether the particular use of DLT will meet regulatory
Put simply, DLT is a decentralised secure database that keeps a
record of digital information or transactions that is visible to
anyone within the network (as opposed to having a central
administrator tracking transactions, such as a bank). It has
numerous applications in the finance space, most notably; foreign
exchange, cross border payments, securities settlement systems and
debt insurance programs.
In light of the increased utilisation of DLT, ASIC has set out
six questions to assist interested parties and ASIC in evaluating
the use of DLT in the context of Fintech and other businesses.
These questions are:
How will the DLT be used?
ASIC requires details of what the problem is that DLT is trying
to solve and an assessment of the commercial landscape in which it
is proposed to operate. ASIC also requires information on the rules
to access the DLT service, its design features, the information to
be stored on the DLT and whether smart contracts will be used as
part of the service.
What DLT platform is being used?
ASIC requires details of why the particular platform was chosen
for the DLT service and what testing has been undertaken. In this
regard, ASIC seeks confirmation that the DLT platform is robust,
reliable and secure.
How is the DLT using data?
As a DLT essentially creates a validated distributed ledger of
information from data, ASIC requires details on where the data is
coming from and what security arrangements are in place to enable
users (including, potentially, regulators) to see it, and where
appropriate keep it private from others.
How is the DLT run?
ASIC requires details on the rules in place for the interaction
of users as well as the arrangements in place for ownership and
control of the service. For example, the type of consensus
mechanism proposed for participants to determine the true record of
information when there is inconsistency.
How does the DLT work under the law?
ASIC requires details on whether DLT is flexible enough to fit
in with the legal and regulatory framework of the relevant
How does the DLT affect others?
ASIC requires interested parties to look at their DLT service
within the broader market environment and consider how its success
or failure would affect those not directly engaged with the
service. In this regard, ASIC requires details on whether any steps
have been taken to enable the exchange of information 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.
In the Information Sheet, ASIC recognises the wide application
of DLT and blockchain noting that the uses of DLT will grow
exponentially over time. One application of DLT that is currently
being considered by the Australian Securities Exchange
(ASX) is the potential to replace CHESS (the
system which underpins post-trade processes of Australia's cash
equity market) with a platform using DLT.
ASX has conducted testing throughout 2016 and published a
consultation paper in September 2016 to provide the market with an
update on ASX's evaluation of DLT in the context of replacing
On current timetabling, ASX expects to make a final decision on
its commitment to replacing CHESS with a DLT by the end of
ASIC's recent implementation of the sandbox licensing
see our previous article here) its Innovation Hub together with
its various consultation papers highlights the corporate
regulator's appetite to engage with Fintech generally and
provide a regulatory framework which fosters innovation and growth
of the industry while minimising risk.
If you require any information as to whether you are operating
with the appropriate authorisations or on the legal and regulatory
framework for Fintech generally, please get in touch with
Corporate Advisory & Governance team.
An AFSL is required if a person carries on a financial services business in Australia, unless an exemption applies.
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