Blockchain is a secure technological tool for managing information.

It is a generalised electronic ledger of digital records/transactions that are authenticated and maintained through a distributed, shared network of participants using a group consensus protocol.

Each record is a separate “block” in the chain with the central register itself known as the Blockchain.

The Blockchain is a growing list of records that is never reset, with each new block being added to the Blockchain. However, once the block has been added, the entry cannot be amended. The Blockchain is recorded on separate computers globally which prohibits the altering of information. Each participant in the Blockchain is able to view any record in the chain at any given point in time. These viewing rights are limited based on the participant’s access rights. In practical terms, this means that a Blockchain is a central list of records that is shared instantaneously with participants. Each participant’s version of the Blockchain is updated with current information, in real time, at the same time.

Through the creation of Blockchain, the fintech industry has seen an increase in the use of the technology and as such the development of businesses utilising the Blockchain structure. Blockchain has been utilised by the financial services industry in relation to payment systems, digital currencies, digital identity and capital markets businesses.

The Blockchain model generally consists of four main elements with these elements having the ability to be altered to best suit different business models.

The four elements are:

  1. Distributed Ledger – stores a list of records which is shared amongst participants. Depending on each participant, access to records in the distributed ledger can be restricted.
  2. Participants – have access to the distributed ledger and are sometimes known as ‘nodes’. Participant access can be restricted based on their business structure and role.
  3. Consensus mechanism – an algorithm or set of algorithms that participants execute to agree and verify records that have been posted on the distributed ledger.
  4. Cryptography – mathematical algorithms that are applied to records on the distributed ledger to ensure secure storage.

How does Blockchain work?

How is Blockchain Regulated?

Deciding whether an entity needs an AFS Licence to operate a business utilising the Blockchain technology can be difficult, especially since the uses for Blockchain are growing rapidly. ASIC has developed an assessment tool for businesses seeking to utilise Blockchain to assist them in evaluating whether they fall under the AFS Licensing regime. The assessment tool can be found on the ASIC website.

To assist businesses in entering the financial services industry and understanding their regulatory obligations, ASIC has developed the Innovation Hub and a Fintech Licensing Exemption. Further information can be found on our blog.

Does the AML/CTF regime apply?

The AML/CTF requirements for businesses who utilise the Blockchain technology vary depending on the nature of the business.

Where a business holds an AFS Licence, the business is required to register and enrol with AUSTRAC as an AFS Licensee. The business is then caught by the AML/CTF Act and Rules and corresponding obligations.

Where a business provides services relating to digital currencies, the business is not caught by the AML/CTF Act and Rules. Currently, the definition of “e-currency” under the AML/CTF Act does not include digital currencies. In practical terms, this means that business who offer a digital currency to clients i.e. Bitcoin are not required to register or enrol with AUSTRAC and therefore not bound by the corresponding obligations.

In December 2016, the Attorney-General’s Department released a Consultation Paper entitled Regulating digital currencies under Australia’s AML/CTF Regime which provided commentary around the inclusion of digital currencies under the AML/CTF Act. Sophie Grace will be watching this space carefully over the coming months to ensure we can advise fintech businesses adequately.

What types of Blockchain businesses are there now and what’s in the pipeline?

The Blockchain technology has been adapted across the financial services industry to assist a variety of business in enhancing the delivery of services.

Some examples include:

  • Exchanges: Blockchain has been adopted to streamline business as well as make the clearing and settlement of trade methodology more effective. The Australian Stock Exchange (ASX) is one such example of an Exchange evaluating whether to adopt Blockchain technology. The ASX is looking at Blockchain as a method for clearing and settling trades. The ASX would abandon the traditional means of a clearinghouse and adopt the distributed ledger technology to increase transaction times.
  • KYC: Participants across the financial services sector which are caught by the Know Your Customer (KYC) obligations are aware of the time-consuming processes involved in identifying and verifying clients. KYC business has emerged utilising Blockchain offering a more efficient KYC service. By including client KYC information as a new ledger in the Blockchain, other financial institutions are then able to access information previously held on an individual.
  • Advisors: With the increasing popularity of Blockchain and digital currencies there has been an emergence of advisory businesses assisting clients in acquiring and selling digital currencies.

Blockchain will not only increase the capabilities of businesses which are already established but will also bring new businesses to market. The use of Blockchain in the real estate industry is changing the way individuals can buy and sell property. Individuals are now able to partially purchase property through Blockchain. Platforms are being developed which will allow clients to easily buy and sell partial ownership in property with all records of transactions stored on the distributed ledger.

Bitcoin – A Blockchain Example

Bitcoin is one of a number of types of digital currency and is created by complicated computer-based algorithms.

Bitcoin is stored on a public ledger called the Blockchain in what is known as a ‘Bitcoin Wallet’, a software program where Bitcoins are stored. A Bitcoin Wallet acts in much the same way as a bank account – you can deposit, store and transfer Bitcoin from the Bitcoin Wallet.

Bitcoin can be used to pay for online purchases; every transaction is recorded on the Blockchain which is a public ledger, this means that each time Bitcoin changes hands from one user to another this is recorded where it can be viewed by anyone and this prevents users from selling bitcoin they don’t have.

The Blockchain records the transaction history and ownership of every single bitcoin. For further information, visit our Bitcoin page.

Sophie Grace provides effective and practical guidance to new entrants to the market seeking to utilise Blockchain, as well as assisting existing players, to operate within the regulatory framework.

Please contact us for further information on how we can assist you with all compliance and licensing aspects of operating your business using Blockchain technology.