Digital disruption and blockchain

The evolution of disruptive technologies is testing the boundaries of global markets and regulation, so understanding how they work is critical, writes Greg Medcraft.

Digital disruption is capturing the attention of everyone with an interest in the finance industry. Regulators globally are facing new challenges, which essentially come down to: how do we allow the opportunities to flourish while mitigating the risks?

Global investment in fintech ventures tripled to US$12.2 billion in 2014, from US$4 billion in 2013. New developments are going beyond the banking system directly to the customer.

Businesses have seen the potential for new ways of directly creating and sharing value with technologically savvy investors and consumers. Examples include:

• Peer-to-peer lending and marketplace lending.
• Robo-financial or digital advice.
• Crowdfunding.
• Payments infrastructures (for example, digital currencies, such as Apple Pay).

The blockchain phenomenon

Blockchain technology is a good example of digital disruption. Blockchain is the algorithm behind Bitcoin that allows it to be traded without a centralised ledger. In basic terms, it is an electronic ledger of digital events – one that’s distributed or shared between many different parties and maintains a growing list of data records.

Blockchain has three key features:

• It is a vehicle for transferring value and holding records – each transaction or record is evidenced by a unique data set or “block” that attaches to the continuously growing blockchain.
• It does not involve a central authority or third-party intermediary overseeing it or deciding what goes into it. The computers that store the blockchain are decentralised and are not controlled or owned by any single entity.
• Every block in the ledger is connected to the prior one in a digital chain algorithm. So the record of every transaction lives on the computers of anyone who has interacted with it, and is updated with each entry. The continual replication and decentralised nature is what makes it secure.

Transforming capital markets

We see that there are four key ways that blockchain has the potential to transform capital markets:

1. Efficiency and speed. When investors buy and sell debt and equity securities or transact derivatives, they generally rely on settlement and registration systems that take days to settle. Blockchain has the potential to automate this process.
2. Disintermediation. Blockchain automates trust; it eliminates the need for “trusted” third-party intermediaries.
3. Reduced transaction costs. By eliminating the need to use settlement and registration systems and other intermediaries, there is potential to reduce costs.
4. Improved market access. Because of the global nature of blockchain, global markets have the potential to become even more easily accessible to investors and issuers.

Naturally, harnessing this potential will depend on the integrity, capacity and stability of blockchain technology and processes. It will also depend on industry’s willingness to invest in, and make use of, new ways of settling and registering transactions.

ASIC’s response

For ASIC there are five key areas:

• Education: We are supporting people to understand opportunities and risks of the digital economy via our MoneySmart website.
• Guidance: We are engaging with industry and have set up an Innovation Hub to help start-ups.
• Surveillance: We monitor the market and understand how investors use technology and financial products and the risks that arise.
• Enforcement: Where we detect misconduct by our gatekeepers, we will take action.
• Policy advice: Ensuring the right regulation is in place to protect investors and keep them confident and informed, while not interfering with innovation.

Right now, we don’t know exactly how blockchain or other disruptive technologies will evolve. But it is fair to say that they will.

Blockchain potentially has profound implications for our markets and how we regulate.