The collapse of FTX is certainly a shock to the market, but it is not the end of cryptocurrency. It is important to be clear about this event.
In short, a Bahamas-registered crypto exchange has collapsed, and allegations about unethical internal trading and transfers of customer funds have been made.
FTX did not have an Australian cryptocurrency licence, because no such licensing regime exists. Its Australian licences did not relate to cryptocurrency. And the allegations of fraud are comparable to those in any other industry.
I continue to take the long view on digital assets. I believe the fundamental strength of the concepts of blockchain and cryptography is assured. The ability of the technology to disrupt incumbents and introduce new competition and choice also remains. However, we must not continue hurtling along in an unregulated libertarian nirvana.
The FTX collapse shows the Australian Senate was right back in October 2021 to recommend legislative reform to regulate crypto for two reasons.
First, the best way to protect consumers is to establish regulated markets. Our first recommendation was “that the Australian government establish a market licensing regime for digital currency exchanges, including capital adequacy, auditing and responsible person tests”.
This was adopted by the Liberal Party as our policy and, before the May elections, Josh Frydenberg released a Treasury consultation paper on how this recommendation could be turned into a law. Our ambitions for Australia to become a leading jurisdiction, as measured by rules promoting consumer protection and investment, were thwarted when we lost the elections.
Since Labor came to power six months ago, it has shown little or no interest in digital assets, let alone lifted a finger on the policy provided to it on a platter. Financial Services Minister Stephen Jones said in August: “Our government is ready to start consultation with stakeholders on a framework for industry and regulators”, suggesting the government wants to start from scratch.
The Senate select committee I chaired last year was largely bipartisan and the Treasury consultation is a non-partisan departmental process. But Jones isn’t just ignoring the work of the Senate. He’s also ignoring the Reserve Bank and US Treasury Secretary Janet Yellen, who warned after the recent collapse of algorithmic US stablecoin Terra than an estimated $US60 billion went up in smoke in a “digital run”.
Talking about stablecoins, RBA governor Philip Lowe, said it is “important that these tokens are backed by high-quality assets and that they meet high standards for safety and security”. In a similar vein, Yellen has urged US legislators to move on consumer protection in the digital race.
Minimum reserve standards must be introduced to ensure that stablecoin issuers provide consumers with a reasonable standard of consumer protection. This is a no-brainer, alongside a comprehensive system of market and custody licensing requirements. Any such system would require the segregation of customer funds to ensure customer money isn’t tied up with corporate funds in a bankruptcy; as has been alleged in the case of FTX.
Regulation is also the best way to attract investment to, and to keep in Australia the best ideas we have. Australia should be a hub for digital assets. Already we have seen Australian crypto exchanges obtain licences in Singapore and Britain, two of the only jurisdictions to have established clear legal arrangements.
We should be using corporate law as a weapon to win investment and achieve policy goals. For example, it could be deployed to cut emissions. The idea that only the wealthiest fund managers with wholesale access to an obscure system of Australian Carbon Credit Units should be able to win exposure to emissions reduction is un-Australian.
The truth is there is no easy way for Australian workers to gain exposure. Decarbonisation is the preserve of the wealthy. If ACCUs could be easily tokenised and traded, it could grant economic exposure to our net zero future to all Australians.
The government should get on with the job of legislating, rather than commissioning another review. After six months in the job, Jones should be prepared to make a decision unrelated to his favourite domestic vested interests – the super funds and unions. He should release a draft bill now and pass Australian crypto laws by next March.
It seems unlikely. Jones had the Treasury tell Senate estimates last week that the government had no immediate plans to regulate crypto markets or custody systems.
The draft bill I released in September shows how Australian consumers could be protected with capital requirements, key personnel tests, auditing and disclosure laws. These are not new concepts in Australian law.
By not moving to regulate crypto, Jones and Labor are failing Australian consumers. Australia remains a libertarian nirvana. The next FTX could be one of the many unregulated Australian crypto exchanges. It could happen here, and it would be on Labor’s head.
Andrew Bragg is a Liberal Senator for NSW.