Andrew Bragg: Why more cryptocurrency experts need to get a job in Treasury to drive reform

On Mar 3, 2022

It has been nearly a year since the Senate Select Committee decided that we needed to pivot to focus exclusively on the opportunities and challenges of digital assets.

Cryptocurrency and digital assets were evolving at such a pace, it demanded our urgent attention.

As a lawmaker, I was focused on a familiar problem: how to ensure that the same time-honoured principles of legislating in the public interest are applied to new and emerging technology.

We are at a fork in the road. Down one path, we can see money, talent, and revenue leak offshore as we scramble to follow the world. This is also the path of no consumer protection.

Down the second path, we have the opportunity not just to join this group, but to lead it.

Australia has chosen to lead. The Treasurer, Josh Frydenberg, has set out our plan in his December 2021 crypto reform agenda.

These are key economic reforms which will drive more choice and lower prices for Australians – the biggest reforms to payments in 25 years.

The digital assets sector in Australia is thriving. Nearly 20% of Australians own cryptocurrencies. We are home to two companies – Independent Reserve and Coinjar – which are among the first globally to be awarded regulatory licences (in Singapore and the United Kingdom respectively).

While a select few jurisdictions have seized the initiative: Singapore, the Bahamas, Switzerland, and the US State of Wyoming, Australia runs a very serious risk of falling behind.

In a report I launched on behalf of Mawson Infrastructure, EY found the cryptocurrency sector contributed $2.1bn to the Australian economy and employs around 11,600 people.

With our policies enacted this could increase to a contribution of $68.4 bn and employ over 200,000 Australians by 2030.

Cryptocurrency is not fringe or fanciful. This is a sector that will employ hard working Australians, put food on the table, and create huge opportunities for our economy.

Sadly, we have already seen some failures in recent times: the collapse of MyCryptoWallet which resulted in significant consumer losses, and we’ve also seen companies like MHC Digital Code moving abroad as they chase more crypto-friendly settings.

Both are big blows. Both examples of why we need regulation. If we do not act, and act fast, it is only a matter of time until these events are repeated.

The reality is that crypto is unregulated in Australia.

As Chair of ASIC Joe Longo said in November “the policy and regulatory challenges are very significant… There are some difficult policy questions to be answered. They have to be answered, frankly, by the Government.”

“But for the most part, for now at least, investors are on their own.”

It is also true that Australian tech entrepreneurs are doing extraordinary things, generating wealth and providing jobs. They shouldn’t be choked by cumbersome, ill-designed, and inappropriate regulations. But there must be some form of regulation as set out in our policy.

But with the election upon us, where do we go from here?

In our attempt to answer this question, I hosted five roundtable consultations with fifty-eight industry leaders, experts, peak body representatives, and Treasury officials.

I’d like to share two aspects of the reforms which we examined, markets and custody. I want to talk about how we have tackled these issues: the problem we started with, the solutions we proposed, the ideas we have for how we would give effect to those solutions.

The role of markets

For crypto markets, a blueprint is provided in the Payment Services Act 2019 (Singapore) and the Digital Assets and Registered Exchanges Act 2021 (Bahamas).

This type of scheme allows governments to be responsive, and provides scope to adjust standards which would adjust the terms of the licences to align new technology with our core principles.

These principles will be based on core standards for capital adequacy, risk management, auditing and responsible person tests.

We don’t have to start from scratch.

Ever since 1792, when 24 merchants gathered under a Buttonwood tree in the City of New York agreed to only trade with one another and at a fixed commission, we have been developing ways of making financial markets stable, transparent, and competitive.

There will be no Buttonwood tree in the metaverse. The legal principles which apply to financial markets can, and will, apply to digital markets. It is clear that there is strong industry support for heavily beefed up requirements for an Australian crypto market licence.

It wouldn’t face the same level of obligation as the ASX, but a new market licensee would meet stringent tests for capital adequacy, responsible persons as well as auditing rules, control frameworks and product disclosure requirements.

Of course the incumbents agree to this because they are already the largest players and have the most to gain from raising the bar.

I am very conscious of the ongoing need for dynamism in this space and therefore I do not want to raise the bar so high that new entrants cannot breathe.

However, the idea of a $2 company running billions of dollars in ($AUD equivalent) trades each year is a real risk to consumers and the economy overall. I do not want to see the crypto markets become the next $2 company which hits consumers when they go to the wall.

For example, over A$11 million per day is traded with Coinjar, which also has over A$100 million under custody. CoinJar services over 400,000 users.

Over A$6.7 million is traded on the Independent Reserve platform every day. More than 200,000 customers are serviced in Australia and New Zealand.

At the moment, another group of $2 companies, the super funds, are busily hitting up their members, the workers, for money to pay their regulatory fines.

Hostplus is going to take $54 million from its members to pay its regulatory fines. Cbus is seeking another $63 million. Fines incurred by the directors will be paid by workers.

If all industry funds followed suit on an equal basis of 0.1 percent of assets, workers would be charged $920 million in new fees.

This is wrong.

I do not want to see a repeat of this disgraceful and avoidable behaviour. Certainly I do not want to see the proposed Compensation Scheme of Last Resort (CSLR) expanded to deal with crypto losses.

As I said in my additional comments in the Senate Inquiry into the CSLR bill, it should not be expanded in any foreseeable circumstance.

As Longo said, until we legislate these markets, it is unregulated and people should take care.

On timetables, we have committed to delivering the crypto markets system by the end of the year, I think we ought to be aiming for mid-year, such is the industry consensus and consumer protection needs.

If we get this right, we’ll find Aussie crypto exposure running through businesses domiciled in New South Wales, not New York.

The role of custody

For custody, systems in Switzerland, Germany and Singapore are all worthy of our consideration.

We recommended a custody regime for digital assets with minimum standards under the Treasury portfolio.

The industry’s feedback is that custody should be separated from market operation and have its own system of licensing.

We have a similar pattern in ensuring that custody is regulated in a manner which is technology neutral. Similar principles should apply as would apply to markets: minimum capital requirements, responsible person tests, audit, assurance, disclosure, and AML/CTF compliance.

While we should ensure minimum capital requirements are put in place, we should acknowledge that this means storing digital assets in a variety of settings, including cold storage.

There is a separate discussion about custodial banks which operate as full reserve banks which could be part of the solution of the endless debanking debacle. I believe there is a strong case for a wholly new structure for custody only banks which could be modelled on the Wyoming system.

In Wyoming, we’ve seen Digital Banks emerge such as Avanti. Avanti is a software platform with a bank charter, built to connect digital assets with the legacy financial system. Avanti provides custody for digital assets with a 100% reserve requirement. These institutions are going to be a critical bridge between the crypto world and the legacy financial system.

The new digital custody licence could be established as a standalone new chapter in the Corporations Act just as there is a new chapter for Corporate Collective Investment Vehicles.

Where to next?

The market licensing regime and custody regime must build-in the prospect of technology developing rapidly, and allow the same principles – stability, transparency, and competition, to be applied to these technologies.

These are the building blocks for consumer protection and investment promotion.

We can see the next big thing coming along the horizon: decentralised finance. Replacing financial intermediaries with self-executing contracts promises a revolution in finance unseen since the first joint-stock companies were established in the 1600s.

$100 billion in assets are held in DeFi applications.

Fred Ehrsam, the founder of Coinbase, says “I think we’re one-tenth of 1% into the development of DeFi”.

Slow movers

On the other hand, Governments move slowly. We are talking on a time horizon of months, which is the Canberra equivalent of the speed of sound!

I have always considered myself a liberal in the most orthodox sense of the term. I believe in individual liberty, free markets, and democratic government.

This is why I am instinctively quite reticent about what I am about to call for: giving the government the right resources, personnel, and authority to carry this agenda into effect.

But we have to. Technology has changed our lives and the public expects the government to continue acting in the interests of the people and the nation. If this means having a difference of opinion with Big Tech, so be it. If it means regulating the libetarian oasis of cryptocurrency to protect consumers, so be it.

But as it stands, there is simply not sufficient expertise inside the government, but we are catching up.

Moreover, the alphabet soup of executive branch agencies – ASIC, APRA, the ACCC, AFCA, the CFR, the RBA – are each given a statutory mandate which is directed at their own patch of turf – albeit one which frequently overlaps with the other.

There aren’t enough experts or enough awareness of this issue. The government does not have the right powers to deal with these wide, systemic, and broad issues in an effective way.

What is needed to carry these aspects into effect is three things: (1) enough funding (2) hiring experts to work on this permanently within a dedicated unit of Treasury and (3) a broad, principles based, regulation-making power delegated by law to a Minister.

Not a regulator, but a responsible Minister with authority over the system as you expect in a democracy. At least you can vote us in or out, but you’re stuck with ASIC and no one voted for them!

So, I encourage you to do your patriotic duty and apply for one of the jobs at the Treasury. There are dozens on offer as they build up their capacity to deliver our reforms.

As we approach the election, Australia has a clear choice on crypto between our path breaking changes and Labor’s tumbleweed of a policy. Labor’s spokesmen on these issues can only bring themselves to speak of “scams”.

If we are reelected in May, I know that our Liberal government will continue the work of implementing the reforms. But we will also issue a statement of expectations to the regulators that these reforms are a high priority for our government.

This statement would set out our expectations, as the elected government, on how our world-leading reforms should be executed and enforced.

That way, we remain accountable to you in the industry and the public at large. That’s how democracy is supposed to work.