The growing realisation that blockchain technology has the potential to revolutionise the structure of financial services has created significant global interest. In its simplest form, blockchain is a shared public ledger for transactions, which enables the quick and secure transfer of money.
This technology is beneficial for financial institutions as it is very difficult to corrupt, and its distributed ledger and cryptographic data renders it almost impossible to replicate. Blockchain technology is used in Bitcoin transactions, where each transaction is recorded by users on a blockchain network. However, it is increasingly apparent that the benefits of blockchain could make it a likely infrastructure choice that can be used for any asset transfer in the digital age.
This month, the International Organisation for Standardisation (ISO) appointed Standards Australia to lead the development of international blockchain standards. This announcement follows Standards Australia's submission of a proposal to the ISO in April 2016 recommending the development of international standards on blockchain and electronic distributed ledger technologies that support interoperability among systems, privacy, security and terminology.
Standards Australia CEO, Dr Bronwyn Evans, explains that "leading the ISO blockchain committee will place Australia in a perfect position to help inform, shape and influence the future direction of international standards to support the rollout and deployment of blockchain technology." The appointment will see Standards Australia manage an international technical committee for the development of blockchain standards. The committee will be comprised of 35 ISO members from countries including the USA, Canada, the UK, Germany, France, Korea and Japan.
A blockchain acts as a record ledger for transactions, which is shared and accessible by various participants. Instead of requiring each participant to submit information to a central intermediary for consolidation and processing, each participant has the ability to submit new information directly onto the blockchain. The blockchain then picks out inconsistencies in information submitted by the participants and resolves the inconsistencies based on pre-agreed algorithms to present a set of internally consistent information. Further, all participants can see and analyse the details of transactions because the ledger is distributed and replicated to all of those who are part of the blockchain network. This "distributed ledger" structure means there is no central repository or administrator.
The ability of blockchain's distributed ledger technology to settle transactions faster and more securely has captured the interest of the Australian Securities Exchange, which is contemplating the technology as a replacement for its current equities clearing and settlement system. Similarly, international consortium, R3, which includes some of Australia's largest banks, is currently investigating the use of blockchain technology in financial services.
These developments tie in neatly with the pro-innovation agenda of the Australian Government. In April 2016, the Government released a policy statement on Australia's FinTech future which identified blockchain as one of its FinTech priorities. More recently, the Government has charged the Productivity Commission with reporting on ways to increase data availability to boost innovation in Australia. Data and privacy issues remain hot topics in the FinTech context, where data often includes sensitive financial information. On 30 August 2016, the Australian Securities and Investment Commission released RG 255 - Providing digital financial product advice to retail clients, which provides guidance on "robo-advice", being the provision of automatic financial product advice using algorithms and technology without the direct involvement of a human advisor. The guidance requires licensed financial institutions to have at least one person with the skills and experience needed to understand the technology and algorithms underpinning digital financial product advice and to conduct regular reviews of the digital advice generated by algorithms to ensure that it is legally compliant.
Blockchain technology is here to stay. The ISO standards will play a key role in creating greater market certainty and confidence, while supporting regulation of financial transactions, commodity exchanges and asset transfers.