Cryptocurrency is here for good. It is increasingly a mainstream product, owned by one in five Australians, according to Finder. It has taken off as a mainstream asset class for investors in Singapore, the US and Britain.
The only question for policymakers around the globe is how to respond to this global phenomenon.
Australia has decided that we will have a proper policy to both protect consumers and to drive more investment. The Senate is developing policy options as we speak.
Where did cryptocurrency come from? On October 31, 2008, six weeks after the collapse of Lehman Brothers, someone called ‘‘Satoshi Nakamoto’’ logged into an online message board and posted a white paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System”.
On January 3, 2009, ‘‘Satoshi’’ issued the first bitcoin on a blockchain. The London Times’ splash that day was ‘‘Chancellor on brink of second bailout for banks’’.
We all know the story of the 2008-09 global financial crisis. Novel products with fancy-sounding names – collateralised debt obligations, credit default swaps, subprime mortgages – almost sank the international financial system.
The financial crisis was an economic shock created by the financial sector.
Crypto emerged from the crisis and represents a turning away from intermediation and endless layers of middlemen.
Rather than relying on trust in financial institutions, government and the legal system to protect ownership rights, cryptocurrency embeds the rights of ownership within the code.
By circumventing the gatekeepers of modern finance, cryptocurrency became a brand new system and asset. Its development has given rise to more consumer choice and new jobs.
Cryptoassets have been allowed to flourish in an unregulated market. Now they are an indelible element of the financial system. The combined market capitalisation of all 11,145 cryptocurrencies is roughly equivalent to the nominal GDP of Canada.
Institutional investors account for 63 per cent of trading, up from 10 per cent in 2019. About 17 per cent of Australians own cryptocurrency and 13 per cent plan to buy it in the next 12 months.
Decentralised finance, which provides for self-executing ownership of securities on a blockchain, is still in its gestation period.
Nonetheless, it accounts for roughly $US128bn ($180bn) in assets. Fred Ehrsam, the co-founder of US-based crypto exchange Coinbase, estimates that this represents ‘‘one tenth of one per cent’’ of the potential value of the sector.
The problem is this: we cannot have an unregulated financial sector competing with a regulated one. Consumers are exposed to scams and fraud. Market participants run their operations flying blind. Australia misses out on investment due to the uncertainty. Unnecessary risk threatens the stability of the financial system.
On the flip side, if Australia addresses this gap in the right way, we could attract an enormous amount of new investment and jobs.
This situation has been brought to my attention as chair of the Senate select committee on Australia as a technology and financial centre.
It might surprise you that the loudest voices calling for appropriate regulation are market participants. I have never heard so many people cry out for regulation!
As a liberal, I am not an instinctive interventionist because regulation often impedes growth and innovation.
But in the case of digital assets, it is time for a clear, coherent and transparent framework.
All dimensions of this system have to be worked out: market arrangements, custodial rules, anti-money laundering laws, tax settings and what to do with tokens, if anything.
I cannot pre-empt what an appropriate framework will look like – that will be outlined in our final report, due to be released in October.
We are still listening to the market, with more public hearings scheduled later this week.
But what I can say is that a number of laudable proposals have been submitted to our committee, including those that have been implemented in other jurisdictions. We will be looking at, and learning from, those experiences.
Singapore, the European Union, Canada, Britain and the US are at varying stages of implementing a comprehensive framework for the regulation of digital asset markets.
Regulators in Australia have attempted to do this to some degree. Austrac maintains standards for digital currency exchanges.
ASIC regulates digital assets to the extent that they are financial products – although this definition confuses investors. The ATO is attempting to apply existing tax standards to cryptocurrency.
The haphazard and fragmented nature of the existing framework is unsuitable for consumers and investors.
That’s why we are running the review. The digital asset market in Australia is maturing quickly and we can capitalise on our early mover advantage.
Australia developed into a world-leading fintech hub through an active private sector collaboration with Canberra.
Cryptocurrency can be the next fintech if we follow this model.
Doing nothing is not an option because regulatory arbitrage cannot be a feature of a major financial market like Australia. The dividend will be more jobs and more choices for Australians.
Andrew Bragg is a senator for NSW and chair of the Senate committee on Australia as a technology and finance centre.