On 9 November 2022 FTX, the second largest cryptocurrency platform, collapsed. Its demise echoes a string of recent crashes in the cryptocurrency sector:
- In May 2022, the Luna cryptocurrency network collapsed, wiping US$60bn in market value
- In July 2022, crypto lender Celsius filed for bankruptcy, leaving its customers out of pocket by US$4.7bn
- In November 2021, Australian exchange ACX and its parent firm Blockchain Global became insolvent. It was subsequently uncovered that ACX had misused customer funds, including by pooling customer deposits with business funds
In Australia, where digital assets do not fall neatly within existing financial services regulations, there is a growing need for more targeted regulation in the current crypto climate. The Australian Government has indicated that it intends to introduce legislation to improve regulatory frameworks around cryptocurrency in 2023.
The existing regulatory landscape
While Australia does not yet have specific cryptocurrency laws, some existing laws have been confirmed to apply to the crypto sector. For example, businesses in the crypto industry may be required to comply with:
- the anti-money laundering and counter-terrorism financing (AML/CTF) regime, given the rising use of cryptocurrency by criminal and terrorist groups1
- the financial services regime under the Corporations Act 2001 (Cth). Under current regulations, crypto assets that are or form part of an investment product or exchange traded product require an Australian financial services licence (AFSL) or an exemption (see the Australian Securities and Investments Commission (ASIC) Information Sheet 225)
- the credit activities and services regime, where cryptocurrency lending activities may require a credit licence under the National Credit Consumer Protection Act 2009 (Cth) (NCCPA)
- the electronic transactions regulation for self-executing transactions using blockchain or distributed ledger technology, pursuant to the Electronic Transactions Act 1999 (Cth)
- the consumer law and unfair contract terms regime under the Australian Consumer Law (ACL), set out in Schedule 2 of the Competition and Consumer Act 2010 (Cth)
The next phase of crypto regulation
Specific cryptocurrency draft legislation is already before Parliament. On 19 September 2022, Liberal Senator Andrew Bragg released a private member's bill, the Digital Assets (Market Regulation) Bill 2022.
It is unlikely this Bill will be enacted in its current form by the current Labor Government. However, the work undertaken by Senator Bragg may inform the regulations that are ultimately adopted.
The Bill recommends new rules for digital asset exchanges (like FTX and ACX), stablecoins (like TerraUSD) and digital asset custody services, which we explore in more detail in this article.
The Bill also proposes some of the world's first regulations of central bank digital currencies (CBDCs). The Bill specifically targets the "digital yuan", a cryptocurrency tied to the Chinese Yuan and administered by the Central Bank of China.
New licence regime for crypto services
The Bill proposes a licensing regime for digital asset exchanges, stablecoin operators, and digital asset custody services to hold a licence. This would allow scope for licence conditions to be met and monitored, and provide greater regulatory oversight of these organisations.
In the wake of the FTX crash, customers of crypto companies are looking for assurance that their funds are safe. Some companies have published "proof of reserves", in order to verify that they are holding customers' funds in full. At present, there is generally no legal requirement to do this. Under the Bill, licensees would be required to disclose certain information to customers and regulators, which should improve regulatory oversight and transparency for customers.
The Bill specifically prohibits mixing of customer funds. Exchanges would be required to maintain minimum amounts of capital, which should help to reduce the risk of a "bank run" in customer redemptions for a particular exchange or token.
The Bill would also introduce new rules in relation to cybersecurity. Cryptocurrency exchanges are frequently the subject of cyber attacks, which pose a risk to customer funds held on the exchange. In 2022, several large Australian companies were targeted by cyber criminals, exposing the data of millions of Australian consumers.
Stablecoins
A stablecoin is a type of cryptocurrency that has its value pegged to a traditional asset class, usually a fiat currency like the Australian or US dollar. For example, A$DC is a stablecoin issued by ANZ Bank. Its price is tied to the Australian dollar.
This cryptocurrency carries certain risks. In May 2022, the "Terra Luna" stablecoin network unwound, wiping AUD $85 billion from cryptocurrency markets. TerraUSD was a stablecoin with its price pegged to the US dollar. However, on 7 May 2022, a series of large sales of TerraUSD caused the price of TerraUSD to split from its USD peg, setting off a wave of panic selling and ultimately falling to $0.02 cents.
The Bill seeks to introduce clear measures to avoid similar meltdowns in the Australian market. In addition to licensing requirements, stablecoin issuers would need to hold reserves equal to the face value of their stablecoins on issue. For example, if ANZ issued $10 million A$DC, they would also need to hold $10 million Australian dollars in reserve.
The Bill would require stablecoin issuers to publish monthly updates on the amount of assets held in reserve and stablecoins in circulation.
Digital yuan
Digital yuan is a type of stablecoin with its value tied to the Chinese yuan. It is issued by China's central bank and is considered legal tender.
Some commentators see the digital yuan as a tool for domestic control.2 In theory, China's central bank could track the movement of digital yuan and monitor for illegal transactions.
The Australian Government may be taking the first step towards oversight of CBDCs like the digital yuan. The Bill recommends requiring certain banks to report information about, for example, the number of Australian businesses who use digital yuan, and the amount of digital yuan held by Australian customers.
Conclusion
Despite the volatility in cryptocurrency markets, blockchain continues to be seen as a transformative technology. Australia is seeking to protect consumers of blockchain assets and services, while gaining a competitive edge in this sector.
Australian businesses and consumers can expect some form of crypto regulation to be introduced in the Australian market soon. While it is unlikely that Senator Bragg's Bill will be passed in its current form, it nevertheless reflects significant consultation with Australia's crypto stakeholders and presents a possible direction for Australia's crypto regulatory framework.
1 For example, the Cryptocurrency Enforcement Framework report by the US Department of Justice states:
- "cryptocurrency is increasingly used to buy and sell lethal drugs on the dark web (and by drug cartels seeking to launder their profits)"
- "while terrorist use of cryptocurrency is still evolving, certain terrorist groups have solicited cryptocurrency donations running into the millions of dollars via online social media campaigns."
2 Brenda Goh and Samuel Shen, "China's proposed digital currency more about policing than progress" (1 November 2019) Reuters.
Photo by Austin Distel on Unsplash
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