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Select Committee on Financial Technology and Regulatory Technology

ALLEN, Dr Darcy, Private capacity [by audio link]

BERG, Dr Chris, Private capacity [by audio link]

KONASHEVYCH, Dr Oleksii, Private capacity

LANE, Dr Aaron, Private capacity [by audio link]

VALLAS, Mr Steve, Chief Executive Officer, Blockchain Australia


CHAIR: I now welcome Mr Steve Vallas from Blockchain Australia and Dr Oleksii Konashevych, who are here in person, and, via teleconference, Dr Darcy Allen, Dr Chris Berg and Dr Aaron Lane. Thank you all for your time. Information on parliamentary privilege and the protection of witnesses and evidence has been provided to you. We have three groups, so we'll just ask all of you to make pretty brief opening statements. We'll start with you, Dr Konashevych.

Dr Konashevych : Thank you for this opportunity. It's an honour. I have been researching the use of blockchain in electronic governance for five years. As an outcome of my work, I presented a concept for a new generation of public property registry. I'm not only advocating the use of blockchain for a land registry; I have presented a viable technical protocol and a vision for how it could be introduced.

Australia has always been a great example of how innovations find their application across industries. It's evident that the technical processing and digitisation of title rights and other property is a call of the 21st century. The first country that will use the full power of blockchain technology instead of traditional registries, applying smart laws and smart contracts, will undoubtedly gain lots of advantages, including attracting investments from all over the world into a new digital economy.

Blockchain is an emerging technology, and it's obvious that there are some unknown edges. Nevertheless, in my research I could address all widely discussed issues, such as scalability, legal governance, law enforcement and some others, with the use of blockchain. I think Australia has all the means to run a pilot with the land registry, which could work as an alternative to the existing registration procedures. By the way, this would not be new for Australia, as the old-fashioned system worked for 150 years in parallel with the new Torrens system.

As to my conclusions, there is no need to change legislation for the pilot phase, as the existing laws define that the registry can be kept in any form or combination of forms. However, the full power of the technology—for example, automating bureaucratic procedures—can be achieved through changes in regulations.

In the second paper I address the problem of a digital identity. The blockchain, as well as the digital economy in general, requires mature protocols. In the proposed concept I outlined a selective disclosure protocol that enhances privacy and data protection and, at the same time, addresses KYC requirements. With all of this been said, I hope my humble contribution will work for the benefit of society.

Mr Vallas : Thank you for the opportunity to speak. I'll keep it brief. I am the CEO of Blockchain Australia. We're the peak industry body with respect to blockchain technology. We engage with government, with enterprise, with the education sector and with startups. I have been in this role for approximately seven months, and I've probably spoken to no less than 1,500 people at close quarters. In the years preceding, I've probably been to hundreds of events and sat in rooms. I think I'm well placed to speak for a lot of people's views; I'm not saying any of the views are the right or the wrong ones, but just give a landscape view of where we're at.

This ecosystem in Australia, in my view, suffers from an assessment of its capability in 2017 and 2018. Nations across the globe—as reflected in my submission—indicate that people are revisiting the views that they formed in 2017 and 2018, with good reason, in my view. Australia is well placed to take advantage of what were our successes in 2017 and 2018—the regulatory frameworks we live within, the education system and the access to talent. So, from my perspective, federal government is the cornerstone of confidence creation in this sector. The conversations that are happening globally are being led at the top of government from a national perspective, so confidence is driven by federal government commitment to this space. I'm hopeful now, that by representing an industry that is very keen to talk to government and to enterprise, to move forward.

Dr Allen : Good morning. We welcome the opportunity to appear before this important committee today. I'm delivering this opening statement on behalf of my associates Dr Chris Berg, Dr Aaron Lane and myself. We appear here today in our personal capacity. We are a team of academic economists and lawyers affiliated with the RMIT Blockchain Innovation Hub in Melbourne. Chris is also a member of the steering committee of the Australian government National Blockchain Roadmap. Our research explores complex economic and public policy implications of frontier digital technology, including blockchain.

We have provided a written submission to the committee that outlines our research in this field. Our submission has two themes. The first theme is the potential of blockchain as new digital infrastructure. Applications of this technology represent a fundamental shift in the governance structure of the economy, with applications ranging from supply chains to decentralised finance, or DeFi. For Australia, blockchain represents a unique opportunity to transition our major sectors, such as trade and education, towards the digital economy.

The second theme of our research turns to the challenges that blockchain presents for regulation, or, more broadly, what governments do to foster blockchain innovation. Understanding the regulatory challenges of blockchains must recognise that blockchains are unique technologies of governance. They enable us to organise and to coordinate in new ways by facilitating trusted information and trade.

Ongoing regulatory possibilities of blockchain innovations are critical. While we do not cover specific regulatory issues in our submission, our interactions with industry partners suggest some current challenges, including [inaudible] taxation system, the potential treatment of blockchain and decentralised finance, products as managed investment schemes—some of these issues relating to ICOs [inaudible] issue. And finally whether blockchain base records will be accessible by Australian regulators—any specific regulation must be housed within a broader regulatory approach. Our standards should demonstrate to entrepreneurs that governments are adaptable and open to innovation and willing to reduce regulatory concerns. Our recommendation is that governments aid the transition to a digital economy by using and improving regulatory reform tools, such as sandboxes, to facilitate the process of regulatory evolution.

We thank you for the opportunity to appear before this committee and we welcome any questions that you have regarding our submission.

CHAIR: Alright—very, very good. I will kick off. I might just start with you, Dr Konashevych. So this is the basis of your PhD?

Dr Konashevych : Yes, that's right.

CHAIR: And did you do that here in Australia or elsewhere?

Dr Konashevych : There was an international program with some European universities, at RMIT. It was the University of Bologna in Italy, the University of Barcelona in Spain, Tilburg in the Netherlands, and RMIT as an associated partner of this program.

CHAIR: This is a very thoughtful proposal that you have here for the committee to consider. If this were to be progressed, it would have to be progressed through the state legal regime. Have you given any thought to how this could be implemented?

Dr Konashevych : In terms of legal aspects—regulations?


Dr Konashevych : It is my conclusion that, at the moment, this kind of pilot can be introduced without any changes to the level of statute laws—legislation. It's because the law says that the land registry can work in any form or combination of forms. Blockchain is a kind of electronic form of database. But, if we're talking about some automation of bureaucratic procedures, it's obvious that some legislative changes will be needed in the future.

CHAIR: Can you just explain what sorts of inefficiencies this sort of model would sweep away? Wouldn't it sweep away unnecessary, inefficient intermediaries and the like?

Dr Konashevych : Right. I thank you for this question. The current technology, by default, is closed. It's a closed database. So, if you want to interact with the records of your property rights, for example, you always interact through the intermediary—through the registrar. You don't have access to directly manage your property records on the database. It's a fundamental specific of this technology. On the other side, blockchain is fundamentally different because it's open by default, and so the proprietors, the owners of any property—title rights are just an example; it can be any property rights—can directly interact with their property rights and manage these records that represent their property. Why the registrar is inefficient is that, when there is a centralised database closed by default and it's mediated through other people, it's a bottleneck. It's always a bottleneck. You've seen maybe a lot of startups advocating ideas: 'Let's shrink this bureaucratic procedure for mortgages; let's make it more efficient.' It's because they always bump up against the closed database system, which doesn't allow smart contracts and doesn't allow automation and interaction by many interested parties, like banks, insurance companies, landowners and developers for building something new—all those things. If it's an open infrastructure, like blockchain is, it makes it possible to introduce these sorts of things, with digital rights operating with smart contracts.

CHAIR: What are the intermediaries that can be swept away? There must be parts of the value chain in the property market that can be effectively made redundant.

Dr Konashevych : There are two sides. The registrars themselves are kind of intermediary. You don't interact with your property rights directly the registry. If we could introduce this system in one night—just imagine—tomorrow morning we would reduce the work of registrars by, I guess, 90 percent.

CHAIR: You mean in terms of the registry run by state governments?

Dr Konashevych : Yes. The land registry and the registrars that do this kind of registration. It's manual work.

CHAIR: How would the state governments maintain integrity and privacy in this new world?

Dr Konashevych : In the research I introduced, I developed some technical protocols to manage the system to introduce legal governance and law enforcement. That's a set of technical protocols. The blockchain doesn't mean that we detach government and the public body from this; it just means we can make it more efficient with more automated procedures.

CHAIR: Can you supply that on notice, in a form which is not too lengthy, for the secretariat.

Dr Konashevych : Yes.

CHAIR: I think that could be quite interesting. Mr Vallas, I have a question for you. We're doing this review in the context of significant geopolitical change in our region, as we heard before, with the changes in Hong Kong. We have performed strongly during this pandemic. The opportunities are only growing for Australia to become a tech-savvy economy, an economy which can attract investment and create new jobs. My question to you is fairly simple. Are we on track? Do we have a good, clean agenda for being as competitive as we can be in blockchain, and are we in a position where we can achieve the level of interoperability that you would deem necessary?

Mr Vallas : We're well placed—that is the way I would characterise it. We have a base from which to accelerate. In some respects, not having done a lot in the space in recent years has not hurt us. We've been able to assess what jurisdictions, globally, are doing. The National Blockchain Roadmap—I'm the deputy chair of the steering committee—was announced last year, in February, through the Department of Industry, Science, Energy and Resources. That was the first of many steps, and I think that single act has grown enormous confidence in the ecosystem. So we are signalling, across the country and to the states, that this is something that people should be investing in. I can tell you, from my conversations across the globe—not just locally, in the region, but throughout the EU and in the UK and the United States—that people have observed what that road map is. It is a set of signposts, not a prescriptive view of what the ecosystem should do. That's driven by the department of industry. That sort of approach needs to be coordinated across other government departments, because, at the moment, we have outliers. We have people who believe in the technology, or are willing to have the conversation, but they are not the majority, nor do I expect them to be. But I think we need more signals from regulators in particular that they're willing to discuss this subject matter with people who are well versed in it.

So, foundationally, we're well set, but my concern, which was raised in the submission, is that the actions of a variety of governments—I use the US as an example simply because, for the longest time, they didn't act particularly aggressively in this space; they didn't seek to move and assert some dominance. But, even in the last six months, including in the last month, the Office of the Comptroller of the Currency, out of the Treasury, have been signalling very strongly to businesses, banks and the banking sector that they can custody assets. That's an important message. They've said to the banks that they should be banking cryptobusinesses. They recognise it's a problem and that there's reticence with respect to the banking industry. They've said, 'You should do this.' As recently as January, they said that the banks are able to use the technology of these open-source platforms, that they can host nodes. Those things, collectively, say: 'Business, you should be paying attention to this; you should be investigating it.' Those signals are largely absent from the Australian market.

CHAIR: So what you're saying is that the banks or the regulators are not pushing hard enough?

Mr Vallas : I think there's trepidation with respect to it. There's a low level of knowledge across all sectors of the economy, including the government.

CHAIR: Are you concerned that the banks are not willing to bank cryptobusinesses and the like?

Mr Vallas : I think it's a global problem, and it is a problem here in Australia as well. I think the US having to say deliberately, 'You should bank them' is a good example.

CHAIR: You should—

Mr Vallas : That they should be banked, as in they should be considered on their merits and there should be a determination as to whether to something should be banked, or accounts shouldn't be closed, because they generally sit within this realm of business. In Singapore, I believe in 2018, they started to give consideration to it, and the Singapore government, I think through MAS, were deliberately saying to banks, 'Let's have an active conversation around this subject matter.' When I speak to people in the crypto space and the digital assets space and I mention banks, they don't want to talk about banks. They don't want to talk about banks publicly.

CHAIR: But how do you think that should be regulated?

Mr Vallas : It's not the regulation as much as it is the confidence that we should be looking at these asset classes and this investment opportunity. That's—

CHAIR: Is this a market thing? Or is this a policy thing?

Mr Vallas : It's a policy thing. I think the reality here is that we haven't prioritised this technology. And with the conversations that I have, when I reference what's happening globally, the truth is that most people in the ecosystem are unaware of the attempts to move into this environment. I mentioned in the submission that in the EU—

CHAIR: We're talking about crypto and digital assets, right?

Mr Vallas : Yes, crypto and digital assets, and everything that stems from it—conversations around central bank digital currencies, conversations about stablecoins. They're all a by-product of this conversation.

CHAIR: I don't want to mischaracterise your evidence, because it's quite important. What you're saying, if I understand you correctly, is that in terms of blockchain we're well placed, but in terms of digital assets and crypto there are policy and market issues that we need to think about.

Mr Vallas : There's been a reluctance. That's a fair assessment. There's a reluctance when we move into that. People are happy to talk about blockchain if they decouple from financial services and the impact on the financial services industry and regtec. That decoupling isn't necessary. You can speak about these things discreetly if you have an understanding of the underlying technology and what the opportunities are.

CHAIR: The question for us, then, is: what sort of policy recommendation will this committee consider making in the crypto and digital assets space? And I think we have quite a few witnesses today who we'll ask. But what is the policy recommendation?

Mr Vallas : I think there should be active consultation there. This committee, serving fintec and regtec issues—there is no committee, there's no active conversation I've seen that meets regularly to discuss the issues that are being discussed in all the rooms that I'm in. In the UK I think as recently as January they have been asking for evidence with respect to how crypto assets, digital assets and stablecoin should be regulated. So, they're going into industry and saying, 'Tell us your views; tell us the risks and the challenges associated with it.' Most jurisdictions are actively seeking out feedback from participants in the ecosystem. We're not an attractive destination in that regard at the moment. When we look to—

CHAIR: We're underdeveloped.

Mr Vallas : Yes, underdeveloped. No-one wants to land here. I think everyone knows that we have a very good regulatory framework, but the sign doesn't say 'Open for business' with respect to this technology. So, when we look at some of the custodian businesses and the like that are taking shape in the United States, they're not naturally coming to Australia, because no-one is saying that this is a welcoming environment and you can trust our regulatory framework and we're open to a conversation about what these businesses could do in Australia.

CHAIR: Okay. That's very useful. I'm going to ask you to take something on notice, if you don't mind—

Mr Vallas : Sure.

CHAIR: just to give a bit more thought to what sort of recommendation or set of recommendations we should consider in this precise space of crypto and digital assets.

Mr Vallas : I'm very happy to do that.

CHAIR: Great. Before I hand over the call to other interested senators, I might just pursue with the Melbourne doctors—and there's nothing wrong with being from Melbourne, by the way; I grew up in Victoria!—did you have a couple of ideas that you think we should consider about this crypto and digital asset space?

Dr Allen : We do have some recommendations, and I might hand over to Dr Berg, and then we can talk about practical things that we can go forward with. Chris?

Dr Berg : Absolutely. We have two very specific recommendations that we think would have a material impact on the investment climate in Australia. These are recommendations that we're hearing from our relationships with industry, and I'm certain that Steve is hearing from his as well. The first one relates to the capital gains tax as it applies to cryptocurrencies or digital tokens et cetera. The current regime treats a cryptocurrency transaction or an exchange between two cryptocurrencies as a capital gains event. That was a decision made the better part of seven years ago. It may have made sense in 2014, but it really makes no sense in an environment where people are rapidly changing between multiple tokens, multiple cryptocurrencies, in order to conduct their daily business—whether it be investing or interacting on a chain that requires multiple tokens, which many of them do.

The first major thing we're hearing from industry is the capital gains problem. It leads to a huge amount of regulatory uncertainty because people aren't exactly sure what sorts of exchanges count as capital gains events. It is an extraordinary regulatory burden. With the two of those combined, I suspect that there is a great deal of tax violation going on because it's so confusing [inaudible]. So that's the first one.

CHAIR: So CGT and cryptocurrency crystallisation, yep?

Mr Vallas : Yes. Sorry, I've got a terrible echo, so forgive me if I'm a little slow. The second major one is the way [inaudible], blockchain and cryptocurrency organisations or applications are treated by Australian law and whether they are treated as managed investment schemes. Our reading of the environment in which people are developing what we call distributed autonomous organisations, which are decentralised organisations that have voting rights, or many of the decentralised finance applications, could very plausibly be described as managed investments, so come under that rather severe regulatory framework that would require these pop-up organisations, these pop-up financial products, which are completely decentralised and completely run without registered individuals, to be registered with ASIC and to put out product disclosure statements and so forth. It is an extraordinary burden that these rules might apply to Australian products—so much so that many legal advisers are telling people to leave Australia, that you can't launch it in Australia because there is too much regulatory uncertainty. But there are a couple of ways—

CHAIR: Because it might be captured as an MIS?

Mr Vallas : Yes, exactly. A lot of new products might be captured as MISs, but the MIS regime doesn't make a lot of sense. I will pass over to Aaron because he has some ideas about how to resolve these problems.

CHAIR: Go ahead.

Dr Lane : Thanks, Chris. Thanks, Senators. Broadly there are two ways the carve-out could be achieved. The definition of managed investment schemes in the Corporations Act lists a number of things that are not managed investment schemes; it explicitly carves them out. So that's one easy mechanism. Obviously that's a legislative change, but that's relatively straightforward in terms of the change. The second and perhaps more complicated way to achieve that is to expand the fintech sandbox—or, as it is now being known, the enhanced sandbox—to, effectively, achieve the same outcome. So I think there are realistic alternatives that the committee might have to help achieve that outcome.

The next recommendation that we have is to clarify the extent of blockchain based records under Australian regulation and, for example, the admissibility of evidence in courts. We are not quite there yet, but we will be at a stage relatively soon where an enterprise wants to rely on providing proof or evidence of compliance with Australian law by reference to a blockchain record. There is an open question about whether regulators will accept that or not. There is also an open question about whether those records will be admissible and accepted in the courts as well if those regulatory actions are challenged, so there is some legal uncertainty there. I think what we have seen in other jurisdictions—the United States, for example—is a number of state jurisdictions have passed specific legislation to explicitly recognise blockchain records in smart legal contracts, as an example. Again, that is a tangible step that the parliament would take. That may not just be from the federal parliament; that may also be state jurisdictions as well. But that is a tangible step that law-makers can take in this space to provide some certainty.

CHAIR: I will ask you to provide answers to questions on notice on the CGT issue and also in relation to the MIS issue.

Senator KITCHING: I have two questions. One is to Dr Konashevych. I am interested in how a regime like this would work. Would all countries have to sign up to the same rules, for example? I know in your submission you do talk about an international approach. Does everyone have to sign up? Would everyone have to agree to a rule and then operate under the same regulatory framework?

Dr Konashevych : I am not sure if I heard the question. Could you please ask the question again?

Senator KITCHING: Would all countries have to agree to the same rules and regulations in order to have it work?

Dr Konashevych : Do you mean different countries agree?

Senator KITCHING: Yes.

Dr Konashevych : It is usually a policy on land registration, a national policy. I am not sure if I got your question about countries.

Senator KITCHING: I'll come back to my first question. We have here a Torrens title system. How would you see that? I agree it could do with some modernising, but how would you see that working? Would a land title system just transfer onto another database, effectively?

Dr Konashevych : From this perspective, it is still a Torrens title system. These titles are digitised and they can live in the blockchain type database. From this perspective, it is just another database, no matter how it has been designed. It is designed in an open format. It is a kind of open ecosystem where all participants or interested parties can collaborate on this platform and introduce new things like smart contracts and other innovations to make this industry more efficient. Right now, at the moment, it is still a title system but the database is closed and each time you have to do these things through the manual of work of the registrar and with many other people involved in the process if we are talking about mortgage and other things.

Senator KITCHING: I just want to ask how you would ensure people's privacy in relation to, in this case, their property holdings.

Dr Konashevych : It's a very good question. My second submission was about digital identity. It's inevitable that we have to address these problems because the blockchain database is, by default, transparent—it's open. So, with cryptographic algorithms, it's possible to ensure data protection and privacy and, at the same time, to address the problem of KYC requirements. These protocols were introduced—well, the general framework of decentralised identifiers was introduced by the W3C organisation last year. The first version is already adopted. So these protocols are already in this space and can be introduced for the real work.

Senator KITCHING: I understand that, in a land title process, there is a chronological order to dealings with property. I'm just trying to think of something that may not necessarily be chronological and where blockchain may not be the optimal system, but I can't think of an example. Obviously, if you're collecting the data and it is chronologically dealing with something, I think that is good for titles and dealings with real property, but do you think it can apply to every transaction?

Dr Konashevych : This is why we discussed the problem of retroactivity on blockchain where you can't change anything in the past; you can create only new transactions. It's a kind of a band-only database. Actually, it's not a problem. It's just a matter of proper design of this system. Why? Well, just think about this idea: you don't change anything—you don't want to change anything in the past. We just attach new records, even though, if you want to go back, to return to the previous record, you just attach a new record says: 'Okay, that's the current state of affairs.' So it's just a matter that you always create new records, and, because of the chronological order of these records, you will see and you will understand that the current state of affairs is the latest record on the system. That's it.

Senator KITCHING: What if there's a court case where, let's say, there was a decision that may actually reverse a transaction?

Dr Konashevych : Yes, that's right—

Senator KITCHING: It would just be the next lot of data, would it?

Dr Konashevych : Yes, yes; I know. That's a matter of law enforcement and legal governance, and so, for that reason, with the team that I've been collaborating with, we've developed the technical protocol that allows you to manage two records—two types of transactions. Basically, it starts when you create a token—you create the representation of your property record—but, at the same time, there is a record: there is another blockchain transaction of a register that certifies this record. So, when it is certified, it means that you can now manage your token in a free form—you can perform any smart contracts with it. But, at the same time, if you need to update the legal status of your property right, the land registrar will attach a new record, on their side, to change the legal status; if there is a court decision or anything like that, the land registrar will be able to change this.

Senator KITCHING: There wouldn't be two systems, would there? You wouldn't still have a land registration system, as maintained by the Victorian government, and also a blockchain system that was also recording? Would they both be updated in real time?

Dr Konashevych : Yes, you can see the system as the same system with the same land registration, but with the blockchain you just shrink unnecessary bureaucratic procedures which we don't need. It's still the same land registration but based on the blockchain.

Senator KITCHING: So a state government would have to maintain the blockchain register? As a solicitor, I would always go to the state government's land title system rather than a blockchain system, because I would consider that to be a reliable source.

Dr Konashevych : Right. There is no need to maintain the blockchain if we are talking about public blockchain. As the public open repository, it is a self-governed and self-maintained system for records. They are immutable. Nobody exactly maintains these records. That's the fundamental difference of the closed central—

Senator KITCHING: Well, the land registry system maintains them.

Dr Konashevych : Yes, but the layer of governance is a technical protocol. It is maintained. It should be maintained by the land registry or by any public body—whatever. From this perspective, yes, the land registry is responsible for these technical protocols that allow legal governance upon the blockchain, let's say.

As to your question about your choice, I think the better system will be when people have the right to choose. If they want to stay with the traditional land registration, it's their decision. Those who want to can get benefits from the new system, with smart contracts for business. They can just transfer their title record from the old-fashioned system to the blockchain and then manage their property rights online on blockchain. It's a matter of choice, I think.

Senator KITCHING: Can you just take me through how the system—did you say 'smart transfer system'?—would work?

Dr Konashevych : Do you mean the example of a smart contract?

Senator KITCHING: Yes.

Dr Konashevych : The simple smart contract would be that you transfer the title in exchange for a payment. There is no one who keeps money and waits until the registration will finish. It is just automatically performed with the system.

Senator KITCHING: Is it recording, for example, stamp duty being paid et cetera?

Dr Konashevych : I'm sorry. Could you please repeat that.

Senator KITCHING: Obviously, any contract for the sale of real property would involve stamp duty to be paid? Is that noted in the data kept on the blockchain system?

Dr Konashevych : Yes, absolutely. The blockchain is a kind of registry itself, so, when the transaction is performed, you don't need to go elsewhere in the register anywhere. It's the contract and the transaction at the same time, and it can be performed with the payment, with the mortgage and with all other things as well. So many parties can be involved in the smart contract.

Senator KITCHING: Are various state governments signing up to this?

Dr Konashevych : If it's necessary, of course, it can be designed in such a way that there will be approval by a town clerk or a registrar. When it is necessary, it can be done.

Senator KITCHING: But it would always be necessary, because in a Torrens title system you must have every property listed on there, because otherwise you would get uncertainty in property transactions. So everything would have to be registered, not just when you choose this.

Dr Konashevych : Yes, it is a fundamental limit of the centralised system. When it is closed, when nobody sees, it is mediated through someone who is in charge of this system. That's why we need a registrar to ensure that there is no double spending for the same title twice. With the blockchain, there is no need. Technically, it's a redundant action for this particular case. But it doesn't mean we don't need registers. There are some specific cases where we do need a register. I will give you a very simple example. Let's say someone has a smart wheel and the proprietor dies. The smart contract doesn't know that the proprietor died, so the system cannot trigger the transfer of inheritance. For that reason, we need third parties—someone who we trust.

Senator KITCHING: I will leave it there because I know other committee members have questions. Thank you very much. The Blockchain Australia submission—I apologise, Dr Konashevych, for confusing you at the beginning—talks about the role of government and about standards and interoperability in relation to the international blockchain standard. Mr Vallas, does blockchain become more efficient if all countries were to sign up to the same regulatory framework?

Mr Vallas : Before I answer that, I'll just provide some clarity in relation to the questions you asked before. These are architected systems. It's not an off-the-shelf environment here. We're talking about application features that you architect into the system. You can permission access in. You can say some data goes in and some data doesn't go in. You can give access to a variety of state bodies. That's the application layout. When we talk about blockchain in a narrow sense, effectively you think of it as the operating system of a computer. It comes out of a box, but the thing you see and get value from are the applications that are built on top. When you are talking about something like the land registry systems—the state government of Victoria and, I think New South Wales, in early stages were creating things like digital twins. They're a precursor to an accurate record of land registry titles that we can potentially put into a federated system where access rights are still determined to be limited to government parties or relevant parties. So the system can be configured accordingly. That's a broader definition of what blockchain is; it's much better considered as distributed ledger technology. These systems are all—

Senator KITCHING: I'm thinking back to my days as an articled clerk and going down to the land registry office. Obviously it's now digitised. In fact, I recently worked at a law firm that dealt with a lot of the Catholic orders and their property holdings. Those titles are still on beautiful old bits of parchment with beautiful copperplate handwriting. I can see that you would want that to be a very secure system. I don't mean just in terms of people being able to access it and change it; you'd also want to have that as the complete system, because I can see that there would be uncertainty in property holdings. We all know that, even though the system is much better than it was, there are still cases today where people are arguing about who has what strip of land between properties, which can obviously make a considerable difference to the holding. So thank you for clarifying that. Do we need all countries, or the majority of countries? How does that work in an interoperable way?

Mr Vallas : We don't. I think we all know it's impractical to get all the countries of the world to agree. One of the reasons why the technology is pervasive in how it has been taken up is that it is built on open source frameworks. The bulk of the technology has rolled out on open source frameworks. You would be familiar with some of them. Bitcoin is open source, Ethereum; there are private versions, but Ethereum is often mentioned here. When you look at the list of the 50 most innovative companies in the world, they are primarily building on open source or variants of open source. So we don't all have to agree what the standard is. There are lots of interoperability working groups; I'm aware of a variety of organisations. Standards Australia are doing a great job in relation to that as well. They are paving the road. But, in some respects, the technology is being built, so they are chasing what the technology is doing. So there is no need for everyone to agree. Again, it's ultimately a determination of what's fit for purpose. China, for example, has rolled out what they termed the blockchain services network. It started as open source. It is an open source project. It's modified from, I think, Ethereum. Effectively, they've said: 'Come one, come all. Build on our services network. We'll provide an infrastructure layer at a reduced cost. Build services on top of our infrastructure layer.' That's the determination that China has taken with respect to building this out. So they're facilitating the building of these applications on top of these layers.

Senator KITCHING: Can I ask: what do we know? Who and what is building on their service?

Mr Vallas : They've called out to a variety of larger protocols and said—

Senator KITCHING: What are they?

Mr Vallas : The Chinese government has said that this infrastructure is available, and they've asked a variety of protocols whether they'd like to build on top of that layer. So it's basically a call-out to technology companies to say, 'Build on this platform.'

Senator KITCHING: Is there is an equivalent democracy doing that?

Mr Vallas : Absolutely. All democracies are building on different protocols.

Senator KITCHING: Are they building something themselves and then calling on others to build on it?

Mr Vallas : That's one of the options available. In the United States, for example, many of these financial service things are built on what is an open-source product, and they modify them if they need to make it more private in one way or another. So everyone's building on open source, primarily.

Senator KITCHING: But the Chinese one is modified. Is it still open source?

Mr Vallas : It is open source. They've said, 'Here's the protocol you build on.' So ultimately the information there aims to create a superhighway of data, information and services. They have provided an open-source protocol to build on.

Senator KITCHING: You've talked about the role of government and you've said that the support of government is critical for confidence in the blockchain sector. What else can the government do to [inaudible]?

Mr Vallas : It's always going to be the case that people will say that investment in the ecosystem is useful. We as an association are member driven, so we know a lot of the people who are in the space volunteer their time. With respect to the national blockchain road map and the steering committee working groups, they're all volunteers. So anywhere there is support provided through organisations like Austrade—I work closely with Austrade—they aid the development of businesses and the telling of business stories. They're critical. Any department that wants to put their hand up and say that there is a role or some interest in this sector would be welcome. One of the challenges I just briefly mentioned in the startup sector is that, because this is misunderstood or not understood at all, there isn't a great appetite within the startup ecosystem for this technology. It's complicated by the fact that state based priorities also make it difficult. That's why I think some guidance from the federal government will encourage the startup ecosystem to invest in this technology as well.

Senator McDONALD: I want to start with you, Dr Konashevych. In your paper, you talk about the public sector using blockchain. I'm an accountant, and I was reading a professional [inaudible] a little while ago about the US using blockchain to identify monetary issues. An example they used were SIMs and mobile handsets to save money. Is it part of our problem that we as a nation are not actually entitled to blockchain at a public-sector level?

Dr Konashevych : I'm sorry. I didn't hear the question.

Senator McDONALD: Can anybody understand my question? Should I move to another witness?

Mr Vallas : I understood the question. The public service is absolutely behind in the uptake of this. As part of the roadmap one of the signposts was the creation of a group to upskill the public service, that's critically important. My understanding is that the first meeting of this public service group happened and there was a very good turnout, so it's promising that there is interest there. Across the public service there are no signals that say this is something that can make process better. We appreciate your support on the Parliamentary Friends of Blockchain as well.

Senator McDONALD: Yes, terrific, because I think this is a massive missing link, that, as a fintech industry, or a portion of it, unless we as a nation are adopting blockchain—it's not just smart, innovative start-ups; it's actually that we [inaudible] understand the benefits of blockchain and also the digitisation of data. How can we ever deeply and truly understand [inaudible] and innovating. Could you talk further to that?

Mr Vallas : Yes, I concur with that view. If we don't do that we'll never get it. This is part of the submission, that other nations are getting it and they're very quickly seeking consultation at a deep level to understand the implications of the technology. I can say that with respect to the regulatory frameworks every country I speak to, every organisation, talks about regulation first. No-one has an answer, say, for the fact that they're all looking at it. In talking about it they're giving confidence. This is an issue in every room. I'm not so much often worried about certainty as I am about confidence, which is why I keep saying confidence instead of certainty. I think certainty legally is not necessarily a driver of great innovation. I think great businesses are built in a little bit of uncertainty. If we wait for government to tell us what's perfect then we'll probably complain about what government told us, so from that perspective confidence is the key.

Senator McDONALD: Wise words. I note—

Dr Lane : I might just jump in if you don't mind?

Senator McDONALD: Please, go ahead.

Dr Lane : On the public sector innovation front I think there are a couple of points here for fertile development. One is on areas that have been in the record keeping business. That regulatory function is a record based digital registry. One project we've been working on with the RMIT Blockchain Innovation Hub, and we cover this in our written submissions, is on building the digital infrastructure for water rights. This is a joint project with Civic Ledger, Far North Queensland Growers and SunWater in the Queensland government. What this is looking at doing is building that digital platform to allow water holders to trade those water rights in a way that is open and transparent and it can be seen. In the past that has been done on paper. In the past in order to get information about water rights trading people have simply called up the office and asked someone to look in the book and see if any information is there, whereas now we're going to get much better information and a more efficient water trading scheme. That's something tangible that is being done on the ground at the moment, albeit in a pilot phase. I think that's one area that the public sector can move ahead with this, to be able to see where it can integrate sensibly in their functions.

On the other side, as I was mentioning before, it's about scaling up the capacity of regulatory agencies to accept blockchain based records where it makes sense—agricultural supply chains being one example when product is coming in and it's being traced and used as a blockchain enabled supply chain platform. What's going to be really important is that Australian customs, the Australian Taxation Office and the Department of Agriculture and so on are able to view that record and accept that record, rather than have duplicate records and have to have a duplicate paper record. That's the sort of thing I see as the real scope here for public sector innovation.

Senator McDONALD: And that leads to this concept of confidence doesn't it?

Dr Lane : It certainly does. Some colleagues of ours and at RMIT have developed what we call a 'crypto-friendly index' and one of the measures on that index is public sector use bases. Has this been taken up by government? I think that is a very, very strong indicator of [inaudible] that is friendly, that is open to this sort of innovation. So, yes, I think perhaps you're right, Senator.

Senator McDONALD: Would anybody else like [inaudible] contributions of public sector use of fintech and in particular blockchain? I would appreciate it.

Dr Berg : I'll endorse, obviously, everything that Aaron has said. As part of the working group on credentials through the National Blockchain Roadmap, one of the things that we're quite interested in is encouraging the public sector to accept digital blockchain based credentials for HR purposes, for example, or to provide the credentials that the government produces—for example, licences—as themselves blockchain based credentials or interoperable with blockchain based credentials. I think if you see the prominence of the government in so many of the industries that we look at for blockchain [inaudible] there's a vast amount of work that can and should be done to allow for that interoperability and standardisation.

CHAIR: Are there any other contributions? Are you concluded, Senator McDonald?

Senator McDONALD: Yes, thank you, Chair. I think it's a really important point. I just wanted to thank the department.

CHAIR: Very good. Thank you. This is probably a little bit unorthodox, but just because we covered a lot of ground in that session I'll remind all the three groups that we have asked you all different questions on notice. Those will be made available to you, from the secretariat, in the next few days. We'd be grateful for your timely, and probably not too lengthy, responses. You go with our best wishes and thanks.

P roceedings suspended from 10:42 to 10:56