Australia sets out plans for regulated digital domination
By Paul Golden
05:48, 19 January 2022
Australian crypto entrepreneur Bitcoin Babe, describes herself on Twitter as a “sensual provocateur for all your traditional financial nonconformity pleasures”, but the final month of 2021 saw her country’s government set-out plans to make her business decidedly orthodox.
The country’s Treasurer Josh Frydenberg said in a speech that Australian authorities are looking to future-proof the country’s payment systems regulatory framework.
By the middle of this year, it will be committed to completing a consultation on the establishment of a licensing framework for digital currency exchanges, and finalising a consultation on a custody or depository regime for businesses that hold crypto assets on behalf of consumers.
The Select Committee on Australia as a Technology and Financial Centre has recommended that the capital gains tax (CGT) regime be amended so that digital asset transactions only create a CGT event when they result in a clearly definable capital gain or loss.
Australia’s Board of Taxation is expected to produce a report on taxation of digital transactions and assets by the end of the year.
Exchanges welcome regulation
According to Michaela Juric, the real name of Bitcoin Babe, most of the digital currency exchanges in Australia welcome the premise of formalised regulation to secure the stability of the country’s cryptocurrency ecosystem.
“A vocal minority are against the application of regulation, stemming in part from the positioning of crypto as a decentralised currency,” she says.
“A common theme across the two groups is scepticism and varying degrees of confidence in the ability of government and regulatory bodies to deliver on these outcomes in an equitable manner and with a healthy amount of community engagement.”
Zerocap CEO Ryan McCall falls into the former category, suggesting that the proposals are broadly positive and should achieve the desired outcome of protecting investors without stifling innovation.
The Bragg Report
The recommendations that came out of the Select Committee on Australia as a Technology and Financial Centre’s final report (also referred to as the “Bragg Report” after committee chair Andrew Bragg) have been extremely well received by investors, says Adrian Przelozny, CEO of Independent Reserve.
“If implemented there will be better consumer protection, clearer taxation rules, and operational clarity for businesses in the space,” he adds. “In our 2021 cryptocurrency index survey, 28.5% of respondents that didn’t own crypto cited ‘a lack of consumer protection and regulation’ as their main reason for not investing,”
“Implementing the recommendations from the Bragg Report will bring in many investors that have been sitting on the sidelines.”
Unsurprisingly, those who are currently trading or have assets invested and are comfortable with self-custody/decentralised finance are concerned that regulation might reduce their trading options by reducing leverage or access to derivatives products while increasing compliance costs.
Positive for customer protection
“There are positives from a customer protection standpoint, with additional requirements for digital currency exchanges and custody proposed as well as clarity to be provided around token mapping,” says Sagan Rajbhandary, director PwC Australia.
The proposed regulations will also introduce controlling mechanisms that will promote and encourage permissioned rather than permissionless innovation, adds Dimitrios Salampasis, lecturer in fintech innovation and entrepreneurship at Swinburne Business School.
The Melbourne-based academic expects both systemic and market corrections during 2022 across digital asset trading.
Jonathon Miller, managing director of digital asset exchange Kraken Australia is more circumspect, claiming that an onerous regime could drive business offshore.
“We don’t have to look far to see the effects of heavy market licensing in other jurisdictions such as Japan, where only a small handful of exchanges are able to manage the costs associated with maintaining market licences and those costs are ultimately passed onto consumers,” he says.
AML and CTF concerns
Miller says it is critical that the government consults with the cryptocurrency industry so that best practice can be developed by looking at existing secure and trustworthy exchanges.
“The novel character of digital assets means there is no existing licensing regime that is a perfect fit,” he says.
In addition to regulation, McCall suggests institutional investors are also concerned about AML/CTF (anti money laundering and counterterrorism financing) and security of assets in custody.
“These issues can be resolved by utilisation of technology already available, but there is a lengthy process of education required,” he says.
Regulation will entice institutions to crypto
“These institutions currently lack in-house expertise and capabilities and will need to partner to bring solutions to market, as was the case with Commonwealth Bank of Australia (CBA) and Gemini.”
Greater institutional participation will come via regulation and clear legal vehicles and provisions according to Salampasis.
“We still have a long way to go but I am confident that institutional investors are looking at this space very closely and are preparing new offerings,” he says. “We see substantial activity from big tech firms with organisations becoming active in NFTs (non-fungible tokens) and utilisation of enterprise-level blockchain/distributed ledger technology applications,”
“However, trust is the common denominator and this will come through clear regulatory mandates, provisions and guidelines.”
Supers look to crypto
In November, the chief investment officer at superannuation fund REST (Retail Employees Superannuation Trust) told its annual general meeting that digital assets will be an important part of its portfolio, although he also stated that any allocation would start small.
A spokesperson for the fund told Capital.com that while it is considering cryptocurrencies as a way to diversify its members’ retirement savings it will not be investing in the immediate future.
“Any investment is more likely in the medium term,” the spokesperson says. “We are currently conducting extensive research into the asset class and are also considering the security and regulatory aspects of investing in this asset class.”
Treasurer Frydenberg said the government’s plans were vital for Australia to retain sovereignty over its payment system. Recent research and market developments will have served as a reminder that he needs to move fast if he is to exert serious influence on the crypto market.
CBA enters the crypto sector
In November, the CBA announced that it would become the first bank in Australia to offer customers the ability to buy, sell and hold crypto assets (including bitcoin, ether, bitcoin cash and litecoin) directly as it looks to take business from the crypto exchanges.
It is not hard to see why CBA is keen to grab a slice of the digital currency action. Independent Reserve’s research found that ownership of crypto assets rose 56% last year with two-in-seven of those surveyed saying they own or have owned cryptocurrency.
But Juric warns that while CBA allowing consumers to buy and sell within the bank’s app sounds like a big step in the right direction, the general sentiment within the digital currency exchange industry is that it is a novelty rather than a utility since users can buy and sell within the app, but cannot functionally use the cryptocurrency for deposits or withdrawals, for example.
Strong retail crypto demand
It does, however, demonstrate the demand for crypto services in the Australian retail market. Andrew Leelarthaepin, managing director of crypto exchange Bitstamp Asia Pacific says entities which serve this sector – including pooled investment schemes and superannuation funds – would like to see clearer regulation in order to enter the digital asset market.
According to Swyftx’s 2021 cryptocurrency survey, two-thirds of current crypto owners would like their superannuation fund to include cryptocurrency compared to just 11% of respondents who have never owned any digital assets.
“Institutional investors in Australia are keen to enter the cryptocurrency market, but much depends on their risk tolerance,” explains Zennon Kapron, managing director Kapronasia. “At the moment, the unregulated nature of many cryptocurrency investment opportunities presents too much of a risk for traditional asset managers.”