Samuel G Brooks
Samuel G Brooks

Block8's Chief Technology Officer

04.03.2021. in Technology, Thought Leadership, Solutions

Block8 Blog Series: Submission to Senate Select Committee on Fintech and Regtech

Part Two: Challenges

Block8 recently provided a submission to the Australian Senate’s Select Committee on Financial Technology and Regulatory Technology. We focused our discussion on the use of distributed ledger technology (DLT) and its relevance to the Committee’s two public consultation papers that were released during 2020, as well as the Committee’s terms of reference in general.

The perspective we provided was one not just as technologists, or as blockchain specialists, but as a holistic product development company. Block8 not only provides professional services, but also co-ventures with subject matter experts to design, build and commercialise full-stack and production-grade software solutions. We understand the importance of discussing these topics with a practical lens. In isolation, DLT presents several novel characteristics when designing a new software application, but we must look to integrate a number of related technologies and considerations in order to realise its full potential. This includes things like scalability techniques, rules as code, privacy-preserving technologies such as zero-knowledge proofs and secure hardware, and digital identity.

This blog series mirrors our submission to the Committee, covering the following points of discussion:

  • [1] Introduction, providing the context and motivation for our submission from our CTO;
  • [2] Challenges, discussing blockchain awareness and innovation culture;
  • [3] Opportunities, discussing the scope of FinTech and RegTech opportunity for Australia;
  • [4] Regulation, with a focus on the Consumer Data Right;
  • [5] Technology, covering the characteristics of blockchain and misconceptions; and,
  • [6] Conclusions, which summarises our present challenges and imperatives.

If you’re in any way curious about the future of digital technology, particularly as it applies to Fintech, Regtech, or the future of the Australian digital economy, we hope you will find some value from this series.

As before, new blogs will be published each week, but if you want to read the full submission early, you can do so below.

DOWNLOAD THE FULL SERIES HERE

Challenges

Improving Blockchain Awareness

Blockchain is often seen as experimental, unproven, immature, or lacking in performance or privacy characteristics - a view particularly held among large enterprises. Although Australia has been home to several break-away initiatives that have enjoyed a degree of press coverage over the past few years, there is little evidence to encourage us that these innovations have continued. Beyond the press release, it appears that others have not followed the broken ground with meaningful take-up of the technology. This is reflective of the broader blockchain sentiment. Discussions with large enterprises are frequently plagued by dismissal and doubt of blockchain-based innovation in FinTech and RegTech due to a number of residual misconceptions on the characteristics and utility of distributed software.

In terms of Government the story is similar. While pockets of public Government discourse have been accommodating of blockchain in Fintech and Regtech - including brief comments by the Prime Minister and the sponsoring of the National Blockchain Roadmap by the Department of Industry, Science, Energy and Resources (DISER) - when asked about the application of DLT to given regulatory domain, our experience of the responses from individuals within Government is one of uncertainty, vagueness or mischaracterisation of the question; the answers we get only ever fit an existing regulatory paradigm.

While generally open and accommodating of a brief discussion, it shouldn’t be surprising that the latest in Government thinking is consistently two years ex post facto. As public blockchain technology accelerates into the next few years, this lag in regulatory clarity is set to increase without a strategic focus. Australian policy-making is often said to be fast-following, but this is only possible if it is in fact looking ahead and anticipating change. Otherwise, it’s not fast-following, it’s just “following.”

When it comes to blockchain, the capabilities of the technology are not well understood across the board. But while Block8 has hands-on access and experience with start-ups, when it comes to the enterprise and Government landscape - comprising the future customers of novel fintech and regtech solutions - it is hard to penetrate to find an informed and willing sponsor. There is a striking gap between blockchain software specialists and the apparent centre mass of blockchain knowledge in both Government and businesses. 

The problem also appears to be partly one of incentive. At a macro level, the incentive is clear; Government organisations are champions for policy setting that supports innovation. If you’re a business, failure to innovate puts you at risk of disruption. And yet at a micro level, the reality is quite different; there is scant appetite for individuals to embrace a topic that widely remains perceived as risky, experimental or potentially illegal.

The combination of misapprehension, lack of awareness, and risk aversion means that our regulatory apparatus never ventures beyond the strict black letter boundary, and our business leaders electing for a strategy of ‘wait-and-see’. 

Whatever the reason, be it political or cultural, innovation risk in blockchain is not a broadly celebrated virtue. If we were to follow the lead of our Minister for Industry, Science and Technology, then ‘together, we can drive the long-term development and adoption of blockchain technology, and capitalise on the tremendous economic and social opportunities it offers.’ But as before, policy will be a key determinant of success. 

In the October 2020 Budget, the Digital Transformation Agency was given a clear Federal mandate to roll out digital identity nationally, with over $250m in funding, and yet,  under the very same Budget, two blockchain software pilots were approved with a budget of $6.7m. If we truly want to accelerate our economic recovery with digital transformation, any desire to drive change must be met with a commensurate level of attention and investment. 

Our Innovation Culture

Despite our apparent strategic imperative to embrace digital innovation, blockchain adoption is hindered in very practical ways by the negative repute from questionable public blockchain projects. Distributed ledgers are also very different to traditional technologies; its unfamiliar nature tends to require close support for newcomers in order for the scope of its application to be fully appreciated.  

Australia currently faces a situation where technologists with deep expertise have difficulty getting connected with deep business domain experience. These two sets of people speak different languages and exist in different universes. Distributed ledgers can innovate deep within organisational boundaries, but the interface points for capable technologists to connect with the problem space is often limited to personal relationships or knocking on the front door with a fatigued smile and a thinly funded proof-of-concept.

However, every so often, a business domain expert with a curious disposition becomes intrigued, begins reading about blockchain technology and considers how it applies to their experience of business problems. In fact, this is how many DLT projects initiate in large enterprises - by chance - instead of being the product of a conversation intentionally designed to maximise these intersections of technology experts and businesspeople.

At Block8, software design is always pragmatic. As a solution-first professional services company, we integrate solid product management and business process re-engineering into every blockchain conversation we have with our customers and partners. But our key limiter continues to be our ability to connect with enough subject matter experts to develop new blockchain initiatives to save money, time, and risk. In the absence of a practical strategy, there is no prevailing opportunity for domain experience to make or maximise connections with technology expertise. Combined with residual misconception and risk aversion by decision-makers, valuable solutions routinely go ignored or unnoticed entirely.

Research conducted by Data61/CSIRO shows us that the overwhelming majority of blockchain initiatives in Australia are undertaken by small businesses - technology startups. 87% are businesses with less than 50 employees, and just 7% by those with over 200.  

If it’s one thing that all disruptive technologies have in common, it is inevitability. At some point in the future, our collective perception of blockchain will eventually start to change. And it will change quickly once it does. But in order to meaningfully accelerate institutional transformation we will need the help of our technology experts and support them to connect with individuals and educate.

It’s not a question of if blockchain will transform our digital economy, but rather: how soon will we act to capitalise on its benefits?

Case Study on Interoperability 

We present a recent example of a substantial interoperability initiative in e-Conveyancing. This example is interesting for several reasons that are relevant to the use of blockchain in FinTech and RegTech:

  1. The interoperability use case was ideally suited to the use of a consortium blockchain.
  2. The use of DLT as a potential solution was not fully explored.
  3. Factors besides the most appropriate technology influenced the final outcome.

Background of e-Conveyancing in Australia

In 2008, the Coalition of Australian Governments (COAG) agreed to pursue a national digital approach to e-Conveyancing. Property EXchange Australia (PEXA), was formed by a collection of States and banks in 2014, kicking off development of a digital property title exchange and settlement platform to integrate with State-based Land Title Offices, commercial banks and the Reserve Bank.

By 2018, Australian States begin to impose deadlines to move their jurisdictions to a fully electronic conveyancing ecosystem. In the same year, PEXA was sold to a private consortium for $1.6b shortly after claiming over 50% of the market (currently worth around $250m in addressable revenues). Around the same time, ASX-backed Sympli launched the first Electronic Lodgement Network Operator (ELNO) competitor into the PEXA-dominated market.

Soon after, the New South Wales and South Australian Governments convened workshops to assess competition in the electronic conveyancing market and options for interoperability. Then in October 2019, the South Australian Government Department of Planning, Transport and Infrastructure (SA DPTI) took their investigations into interoperability one step further, seeking input from industry and academia with a Request for Information (RFI) on the use of DLT for ELNO Interoperability (DLT for ELNO iOp).

In the documentation provided to respondents, there were four models of API-based interoperability that had been developed by the joint NSW-SA team for consideration. Each relied upon data synchronisation between distinct systems using API messaging.

Block8’s Solution

Block8, in concert with one of our partners, supplied a submission which included a high level solution design based on blockchain.

This is a particular class of solution that Block8 has identified before: Process and data interoperability between (competitive) businesses of the same type. In this example, interoperability was initially sought between PEXA and Sympli with easy extensibility to other market participants.

Our submission contrasted the benefits of a blockchain-based architecture with the prevailing designs for an API-based (message-based) architecture, in which we reasoned that a blockchain architecture in this context could simultaneously reduce process duplication, create interoperability and provide a new platform for innovation.

Core to the architecture was a separation of the proprietary and common domain models for electronic lodgement, where the common process is operated as a smart contract that is shared among the market participants on an industry-operated consortium blockchain. The shared "ELNO" industry domain model was intended to exist as a distinct business component within any entity interfacing with that market.  Followup discussions and supplementary information covered:

  • Why centralised systems are troublesome when sharing information of value
  • Cost and risk benefits of blockchain-based systems
  • How public blockchains can be used by enterprise more broadly

We briefly cover these later in this Response.

During our correspondence with SA DPTI, we proposed that the API-based architectures initially proposed all appeared to suffer from similar limitations, namely:

  • Quadratic or linear increase in industry implementation cost
  • The risk of divergent API implementations (even in the presence of a data standard)
  • Linear cost increase for the industry for any data standard changes
  • Risk of data sharing errors, requiring data control processes such as remediation

These drawbacks are only made apparent when contrasted with a smart-contract-based approach; our proposed DLT-based architecture avoided all of the aforementioned issues while exhibiting additional features unobtainable with a set of interconnected centralised systems. Three key differences are summarised below:

Open Innovation Marketplace

New entrants can optionally seek to enter the market with micro-applications on top of the shared market smart contracts. Given the degree of coordination, control and data quality guarantees, this kind of innovation is far less practical using a centralised system message coordination.

A blockchain also allows for the flexible addition of new market players; the barrier to entry is substantially reduced given that the common industry process is operated as a shared service. In other words, new competitors can be supplied with something akin to a pre-built API implementation (which is guaranteed to be consistent with your counterparties), rather than requiring them to independently implement it from a specification. 

Better Data, in Real-Time

The costs and time associated with managing the correctness of data as it relates to the shared process are greatly reduced when using a smart contract given that (i) correctness is managed by the consensus algorithm, and (ii) processing time is reduced from by-request or batch, down to near-real-time (i.e. the blockchain block time, typically around 3 seconds for a typical consensus algorithm, far less with a high-performance option). This is as close to real-time as any two businesses can hope to interoperate. It’s on-par with system interoperability within an organisation, but with superior guarantees of data and process veracity while eliminating any requirement for reconciliation processes. 

Improved Industry Coordination

Given that all connected market participants would operate the same logical code base, it becomes far simpler to deploy upgrades. This is in contrast to an API specification, where each ELNO would be required to upgrade both a client and a server separately. Not only does the API approach come with a risk of divergence in implementation (requiring significantly more testing in aggregate), it also requires the industry to all coordinate the upgrade timing, lest any given participant fails to upgrade in time and becomes incompatible with the rest of the consortium. Smart contracts avoid this challenge altogether.

The Fork in the Road

Over the course of 12 months, SA DPTI held discussions with responders on the application of the technology. But in September of 2020, when agreement among the States to nationalise interoperability was finally reached, attention quickly turned to the strong regulatory imperative from the ACCC to fast-track its implementation. This was designed to give potential competitors time to gain meaningful market share in the presence of the fast-moving incumbent.

A decision was quickly taken to proceed with an API-based approach, similar to that of the current Open Banking implementation, and South Australia’s investigation into DLT was promptly abandoned. An AFR exclusive, the news of the agreement amongst the States along with the implementation timeline was the first time that respondents who had been working with South Australia on the initiative had heard about it.

Review of the correspondence among the various interoperability stakeholders including the ACCC reveals a near total absence of consideration toward  employing smart contracts to enable interoperability.  Although the reasoning behind pressing ahead with one of the more developed API architectures is understandable, it’s also unfortunate that it comes at the expense of fully investigating DLT as a supplementary or future enhancement. 

Arrangements with ‘Big Tech’

It’s well known that incumbent banks in Australia struggle with the complexity of their IT infrastructure - particularly those that have existed for more than a generation and have grown due to mergers and acquisitions. This is not a situation that can be changed in any practical sense - it can only ever be managed - particularly as this complexity, along with the cost and risk associated with digital transformation, requires significant periods of time to safely execute. Each of Australia’s ‘Big 4’ have tens of thousands of interdependent technology systems, and as technology changes, regulation shifts and financial products are perpetually created and grandfathered (for up to 30 years for a mortgage), the process of managing this complexity is continuous.

However, modern consumers are indifferent to the energy our banks must spend maintaining their system and process infrastructure. In the hands of competent software engineers, modern cloud tooling allows new entrants to quickly develop competitive and superior offerings. The entry of ‘Big Tech’ then offers an exciting horizon for Australians to enjoy alternative financial experiences replete with the experience design, speed and features developed by Big Tech over the past 20 years.

Block8 would highlight however areas of concern around data monetisation, competition and tax. Big Tech in domestic financial services has the potential for an unfair competitive advantage due to tax arrangements. Firms with international reach have an incentive to use their sprawling international corporate structures to unfairly minimise their domestic tax obligations. Besides weighing on Government revenues, this also has the potential to provide a cost base for Big Tech entrants to offer financial products to Australians that is significantly below those with a domestic base.

Another area of concern is the strategic nature of ‘Big Tech’ entering such markets; it is likely to be in support of ‘Big Data’ - not financial services. Data monetisation is one of the biggest drivers of revenue for these businesses, and as these databases grow and enrich, they become exponentially valuable and powerful. One does not have to look far to notice the risks of this. In a recent public address, RBA governor Philip Lowe pointed out that "data analysis is part of their DNA and they have become increasingly effective at commercialising the value of data they collect and analyse". The most recent example of this has been Facebook’s heavy-handed treatment of Australian news on its platform; this power comes from the centralisation data and network effects.

Our banks are highly regulated and in many ways we are familiar with how banks manage, use and disclose our data. But if financial services data becomes diverted to Big Tech, we might anticipate that it will be used in ways that have not been previously contemplated.

get-your-copy-of-the-block8-submission-to-senate-whitepaper

Block8 would be happy to further discuss our thinking on any of the topics covered above, including specific detail on solution architectures and demonstrations of currently working distributed ledger systems developed to address the challenges and opportunities outlined in the Issues Paper and our Response.

Our experts are also available to assist with research mapping the value chains for centralised and decentralised approaches, the identification of the highest-value areas for a consumer-centric data infrastructure, or working with the Government and other members of industry in the development of pilot or production programs.

GET IN TOUCH


Footnotes:

[1] DISER, The National Blockchain Roadmap

[2] Productivity Commission, PC Productivity Insights 2020: Australia’s long term productivity experience.

[3] Bratanova et al. (2019) Blockchain 2030: A Look at the Future of Blockchain in Australia. CSIRO Data61

[4] Our submission is a concise and informative document describing consortium blockchain solutions in the context of a real use case. It is not in the public domain, however if the Committee wishes to review how such a system would operate, it can be supplied upon request to Block8.

[5] https://www.afr.com/property/residential/rod-sims-says-pexa-monopoly-must-end-20200615-p552vy

[6] The States were also given an aggressive time frame of the end of 2021 to finalise the requisite legislation and have the system in production.

[7] ACCC letter to NSW Ministerial Forum on interoperability in eConveyancing, Feb 2019

[8] The relevant deliberations of the interoperability industry panel members, including a key specialist technical report relating to the decision are not available in the public domain. It would be illustrative to understand the full scope of their concerns.

About the Author: 

Samuel_Brooks_Block8_CTO

Samuel G Brooks is Block8's Chief Technology Officer.

He is an expert in developing decentralised software products and has designed numerous solutions for startups, enterprise, government and OpenTech since 2014.

Samuel regularly speaks at technology conferences, meetups and podcasts, and holds several advisory positions on technical industry boards and committees. He is a also a heavy contributor to blockchain and fintech-related public inquiry and writes about the nature and benefits of distributed ledger technology on our blog.

Samuel holds a degree in Electrical Engineering from UNSW, and has stayed close to both the code and the latest research ever since encountering Bitcoin in 2011.

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