TOM TILLEY:
So the government have announced they’re cracking the whip on cryptocurrency cowboys. They’re going to bring crypto exchanges, not the currencies themselves but the exchanges that people trade them on, under the control of the financial regulator ASIC. So exchanges holding more than $5 million worth of assets will soon have to apply for a license from ASIC and then adhere to all the laws related to that license.
Stephen Jones is the Minister for Financial Services. He’s spearheading this new regulation. Stephen Jones, thanks for joining us on The Briefing.
STEPHEN JONES:
Hey, good to be with you.
TILLEY:
So, you’ve announced the government will step in and regulate cryptocurrencies, and we’ll explain how you’re going to do that in a moment, but, first, what worries you about cryptocurrencies?
JONES:
Well, look, a few things stand out, quite apart from all the consumer issues where people have heavily invested in crypto and seen wild fluctuations. Some may say, well, that’s just the inherent nature of cryptocurrencies as an asset. There is that issue. There’s what we’ve seen in the US and elsewhere with the misuse of currencies held in custody and the mis-investment and what looks at the face of it to be fraud. So there’s concerns about that. And then, thirdly, there’s concerns around cryptocurrencies being used to facilitate scams and other sorts of fraud and crime. So there’s three things – consumer concerns, systemic issues and those sorts of things that we’ve seen in the US. They’re on the negative side.
Can I say on the positive side, the government sees a lot of benefits in the underlying block chain technology. We want to see it emerge, particularly in the area of tokenisation, and we think with the right sort of guardrails, with the right sort of regulation, we can encourage quality investment in this space.
TILLEY:
So do you have any idea of how many Australians have been burnt by a cryptocurrencies or crypto exchanges and how much money Australians have lost?
JONES:
Look, really hard to get a handle on some of this stuff. The Tax Office tells me that somewhere around 600,000 Australians have at some point in time invested in cryptocurrencies. Swyftx, a well known platform, tells us around one in four adult Australians are invested. That’s a lot. Even if they’re half right, that’s a significant number of Australians who’ve invested. The short answer to your question is it depends when they bought and it depends when they sold as to whether they’ve lost a lot of money or made a lot of money.
TILLEY:
Yeah, well, a lot of people got in on that ride or were drawn into that ride sort of heading up to that peak of the Bitcoin price in late 2021, and then it came off hard – about 75 per cent. As you say, it’s come back a little bit. Does that I mean maybe say that it’s too late – a lot of people have dipped in, been burnt and got out, or do you think it is here to stay and the sort of value of this currency will continue to grow and, therefore, be an attractive although potentially sometimes dangerous option for people as an investment class?
JONES:
Look, I think the currency is here to stay. But I think where this is going to emerge and where there’s really exciting prospects is the tokenisation of other real world assets which provides great opportunities for Australians to be investing in different ways – in the same things in different ways and in new things in different ways – which haven’t existed prior to the emergence of block chain. So I think there’s lots of exciting possibilities in those areas.
TILLEY:
Okay.
JONES:
And we’re also seeing banks and other financial institutions looking at the underlying block chain technology to do some of their traditional transactions in a way that are either more efficient or safer.
TILLEY:
Okay.
JONES:
I don’t think you have to be a crypto bro to see some exciting opportunities in these areas.
TILLEY:
Well, this next question might give away the fact I’m not a crypto bro, but you used an interesting phrase there that I haven’t really heard before – it was both interesting and something I didn’t really understand. Tokenisation of real world assets – tell me what you meant by that.
JONES:
So whether it’s commodities, the traditional things that Australians have invested in for years or whether it’s shares and equities, whether it’s real estate, there is the capacity for tokens to be used in a way to represent an ownership or partial ownership of real world assets and for those to be traded in a way that other assets and shares and the like are. So I think there’s plenty of opportunities in that area.
I think we’ll see the emergence of that come on quite rapidly. I mentioned earlier that banks are looking at – the Reserve Bank at the moment is involved in a proof of concept trial around a few use cases for crypto and block chain technology to see whether it can be used for atomic level transaction, speed transactions, I should say, with sort of normal things that are occurring in the banking world at the moment, whether it’s bank-to-bank exchanges or whether it’s the payment of superannuation by employers into superannuation funds. They’re looking at other use cases for the underlying technology with a fair bit of optimism.
TILLEY:
Yeah, you sounded quite optimistic there you’re talking about the sort of digital representation of real world assets like commodities or real estate. But isn’t that concerning, because that would basically lift the trading of those assets outside of our regulatory systems, and that’s the challenge with these technologies – that they’re decentralised digital representations of real world value, which means they don’t come under the normal regulation of markets, say, like our Australian stock market?
JONES:
That’s exactly why we need to bring crypto platforms into the financial system regulation, and that’s exactly what the government is proposing to do. We’re not going to be focusing on the tokens per se, but the points of exchange in the platforms, and we think that’s where the highest risk is, but I think it’s also where from a regulatory point of view the greatest value can be added so that people who are engaging in the trade or the tokenisation or placing their currencies or their tokens in custody in one of these platforms can have confidence that they have an Australian Financial Services license, that they’re being operated in a way that’s honest, efficient, fair and is complying with Australian law.
TILLEY:
Okay. So that’s the big news here – that you are planning to regulate the platforms that operate in the crypto markets. So tell us more about that. What sort of platforms will you be able to regulate? How will you regulate them, and is this an acceptance of the reality that there’s so much of this space that you can’t control?
JONES:
What we’ve looked at – we’ve spent a lot of time looking at this, we’ve spent a lot of time looking at the underlying tokens, what they do, what the contract is underneath the token and how they performed. Some of them perform in exactly the same way as a traditional financial product. So as a result of all of that analysis we’ve said, well, where’s the greatest need and the greatest risk? And the greatest need and the greatest risk is the points of exchange. It’s with those platforms that are holding people’s assets and at the moment not holding them with a set of standards which hold them accountable. That’s what went on with FTX in the US. They had custody of currencies and they were using them in related-party transactions without permission. So there’s a whole bunch of those sort of things that need to be looked at, need to be appropriately regulated – transparency, anti-money laundering, obligations to stamp out illegal and unfair market behaviour. All of these sorts of standard things that you’d expect in any financial market are the sorts of things that will apply to these platforms.
TILLEY:
Okay. So just to break it down into really simple, everyday terms, you know, we talk about platforms and exchanges. But can you explain, you know, the kinds of services these are and what you can actually do to control them? So you’re talking about the biggest Australian-based exchanges, so, what? CoinSpot, Kraken? Who are you talking about?
JONES:
They’re examples of the sorts of platforms, and more will emerge. There are literally hundreds and hundreds of them in Australia at the moment. Some of them are large and sophisticated financial organisations. Some of them are a few people with a laptop in a spare room. What we do expect is that there’ll be consolidation within the industry. The regulation will force that. And there’ll be consolidation around quality and standards.
So you’ve asked me, like, to make more concrete what are some of the things that we’ll require these platforms to do. So we’re going to ensure that they have proper dispute resolution processes. We’re going to ensure that they have appropriate liquidity – that is, enough money on hand to meet current and expected requirements. Ensuring that they have appropriate records and recordkeeping and they’re reporting to the financial regulators and ensuring that they’re monitoring and disrupting any poor market misconduct. They’re the sorts of things that currently apply to any market platform in Australia. They don’t yet apply to cryptocurrency platforms on the whole, and we’re going to make sure that they do.
But we’ll also ensure that there’s some new specific arrangements that apply to, you know, crypto platforms and they ensure that they have standard form contracts for the platform. So for people who are purchasing services off that platform that there’s a standard, plain‑English contract which sets out rights and obligations of consumers, that there's minimum standards for holding tokens, standards for the custody software and that there are standards when they’re transacting in tokens.
These are all consistent with regulatory moves that are being made in Singapore, in Canada, in the EU and the UK. So what we’re doing is consistent with what has gone on in other regimes, and it should give both investors and consumers a lot of confidence.
TILLEY:
And so when are you going to do this?
JONES:
So we’ve got a short consultation period out between now and the 1st of December. We’ve put out a very detailed framework for what we’re proposing to do. Just want to consult with stakeholders to ensure we’ve got the details right. We’ll then convert that into draft legislation which we should have back out to industry early next year with a view to legislating next year and giving industry a decent 12-month lead-in so they can get their house in order.
TILLEY:
Stephen Jones there Minister for Financial Services. And this all sounds fairly sensible, I’ve got to say. It’s a plan that appears to have bipartisan support. It was something the Morrison government was actually working towards and now the Labor government are bringing it to fruition. And clearly, as we were discussing there there’s a lot they can’t control in this space, but regulating the exchanges is a good start. And to hear that other countries are also regulating their exchanges means that Australians that don’t necessarily use Australian-based exchanges can still have, I guess, some faith that some of those big exchanges overseas will also be regulated in a similar way to the Australian ones. So it seems like slowly the governments here and around the world are catching up with this emerging technology and investment class.