- Bitcoin and other applications of DLT
Holley Nethercote previously released a three-part blog series called " Bitcoins 101", which describes Bitcoin and provides an overview of the key legal issues.
DLT, also broadly known as "blockchain" technology, is at the heart of how Bitcoins work (i.e. it verifies ownership of each unique Bitcoin). Bitcoin is just one way to apply DLT.
Outside of Bitcoin, ASIC reports having "seen DLT used in foreign exchange remittance payments, securities settlement systems, debt issuance programs and digital identity initiatives ... arrangements to support private securities transactions, interbank payments, and netting services for repo and foreign currency markets", and ASIC "expect[s] that the range of potential applications of DLT will grow exponentially over time".
The European Securities and Markets Authority states in its report "The Distributed Ledger Technology Applied to Securities Markets" (dated 7 February 2017) that "Many market participants are experimenting with [DLT] and we expect that a number of targeted applications could come to market in 2017".1
The United States Federal Reserve paper "Distributed ledger technology in payments, clearing, and settlement" (dated around December 2016) states "Although there is much optimism regarding the promise of DLT, the development of such applications for [payment, clearing, and settlement] activities is in very early stages, with many industry participants suggesting that real-world applications are years away from full implementation. Even so, given the industry momentum in developing new proofs of concept (PoCs), this timeline may accelerate. In some cases, there have already been announcements that the technology will be used within the next year or two in actual production environments".2
- ASIC Info Sheet 219
Currently, ASIC's belief is that the existing regulatory framework is able to accommodate the uses of DLT seen so far. However, as DLT matures, ASIC anticipates that additional regulatory considerations may arise.
Therefore, Info Sheet 219 is intended to form a part of early and collaborative dialogue between ASIC and the industry in regard to DLT. It is also intended to help both ASIC and interested parties evaluate whether the use of DLT would allow an entity to meet its regulatory obligations.
Rather than largely setting specific guidance from ASIC, the bulk of Info Sheet 219 comprises a set of six main questions to help a business evaluate whether and how to use DLT. The six main questions are:
- How [and why] will the DLT be used?
- What DLT platform is being used?
- How is the DLT using [and protecting] data?
- How is the DLT run?
- How does the DLT work under the law?
- How does the DLT affect others?
In Appendix 1 of Info Sheet 219, ASIC allocates sub-questions to each of the six main questions above, which indicate the questions ASIC might ask a business that it regulates when considering the use of DLT. Some of the more notable questions in Appendix 1 are:
- Is there an existing [and approved] service provider which performs these functions [(i.e. the proposed functions of the DLT software)] already?
- How can regulators view the data [and information consumed and recorded on the DLT]?
- Which legal systems [(e.g. foreign and/or cross border)] apply to the DLT-based service?
- Does the DLT-based service create property rights?
- Are the workings of the DLT-based service legal?
- Are there plans for managing service failures?
In Appendix 2 of Info Sheet 219, ASIC provides a brief summary of licence obligations relevant to DLT for financial service and credit businesses and market infrastructure licence holders (e.g. operators of clearing and settlement facilities, financial markets and derivative trade repositories). (This summary is relatively brief and its focus is described in our next blog in section 3.)
at page 2.
2 See https://www.federalreserve.gov/econresdata/feds/2016/files/2016095pap.pdf at page 3.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.