How do we regulate payments in the 21st Century?
When AusPayNet was established in 1992, the first internet browsers were being trialled, pennies were still in circulation, and we had just emerged from the recession we apparently ‘had to have’.
Every day in Australia, 55 million payments are made. $650 billion changes hands. AustPayNet’s presence can be seen in the BSB number, the magnetic ink coding for cheques, and bank codes.
The payments system is evolving as rapidly as the technology underpinning it. The significance of these challenges need to be addressed. They are inextricably linked to the broader policy challenges Australia faces.
I want to offer my thoughts on why reform is needed, both in payments and in the wider economy, and what that reform should look like.
Australia cannot afford to stay on policy autopilot. But Josh Frydenberg and the Morrison Government are ensuring we are ahead of the game.
The Treasurer said yesterday: The comprehensive payments and crypto asset reform plan I am announcing today will firmly place Australia among a handful of leading countries in the world. It represents the most significant reforms to our payments system in 25 years.
Back in June 2021, the Treasurer released the 2021 Intergenerational Report. It is a sobering read.
On one side of the public ledger, we face an ageing population and the burgeoning health and social services costs. On the other side, we will see a shrinking workforce and a narrower tax base. Translation: without action, Australia will be weaker and poorer and our children and grandchildren will pay the price.
A more productive and efficient economy is one answer to the macro challenge. The Treasurer Josh Frydenberg has flagged payments policy as a key element of Australia’s response.
Payments regulation needs to be a national policy priority, made in the national interest, as was recommended by the Farrell Review.
But how do we do this?
Prime Ministers and Treasurers have not regularly identified payments policy as a key national economic priority. Excluding appointments to the Payments Systems Board, on only four occasions in the last twenty years has either the Prime Minister or Treasurer, specifically talked about the payments system.
Two occasions referred to the commencement and conclusion of the Farrell Review. On another occasion, the Assistant Treasurer, Kelly O’Dwyer responded to a 2016 inquiry into digital currency.
She stated “FinTech innovations like digital currencies and the technologies that underpin them have the potential to aid the transformation of our economy in a positive way and increase Australia’s international competitiveness.”
In 2018, the then-Treasurer in the Turnbull Government, Scott Morrison, gave an address to the Australian-British Chamber of Commerce, entitled “Consumer powered competition in our banking sector”.
Mr Morrison said that “the disruptive forces of technology, the arrival of nimble new players, the evolution of data use, and the empowerment of the customer are combining to upend traditional banking products, services and transactions the world over.”
On commissioning the report in October 2020, the Treasurer, Josh Frydenberg, had the following to say:
“The regulatory architecture of the payments system has served Australia well, but has remained largely unchanged for over two decades. This comes at a time when consumer appetite for different payment methods… has accelerated”
The Treasurer further reiterated that the system has to be fit for purpose in light of rapidly evolving technology: “ it is critical that the regulatory architecture supporting our payments system promotes innovation and competition to ensure that costs to business are minimised, consumer experience is enhanced, and there is confidence in the security of the system”.
The payments system is undergoing a transformation. The past decade has seen the advent of digital wallets, Buy Now Pay Later, and of course, cryptocurrency and stablecoins.
The payments system, on the other hand, has not evolved. As the Treasurer noted, the last review prior to the Farrell Review was the Wallis Inquiry, conducted in 1997.
The RBA has a mandate to maintain currency stability, full employment, and the general welfare.
It is highly unusual that the Reserve Bank would have primary authority over the payments system. The RBA’s clear mandate is in controlling the money supply in order to ensure economic stability.
Their policy objectives, and the expertise within the organisation, are geared towards that objective.
As we have seen, payments’ policy is indelibly linked to our national interests. It matters not only for the health of the entire economy, but also in protecting our national sovereignty.
It makes no sense that an organisation which is focused on narrow policy objectives would have oversight over something so far-reaching and fundamental.
The RBA is not an elected Parliament or Government. Decision making on vital national policy should be made by elected officials. It is only members of the executive government which can provide this. No one elected members of the Reserve Bank board.
The integration of payments into other spheres of policy is accelerating. Payments now means data. And data is the engine of the modern economy.
It is imperative that customers have control over their own data - something which the Morrison Governments world-leading adoption of the Consumer Data Right has recognised.
Likewise, it is imperative that countries ensure that data is capable of being made subject to our own laws.
Take digital wallets. 36% of Australians say they use a digital wallet - such as Apple Pay - to pay online when they have the option. In part a function of the pandemic - though don’t expect old habits to come back - between March 2020 and March 2021 the number of digital wallet transactions increased 90%, and the total value of digital wallet transactions rose 110% to $2.1 billion.
When you transact with a digital wallet, a separate payments system sits on top of the transfers between banks and recipients. Left untouched, that separate payment system is governed from Silicon Valley or Shenzhen.
As the Treasurer said in August this year. “if we do nothing to reform the current framework, it will be Silicon Valley alone that determines the future of our payments system, a critical piece of our economic infrastructure”
A critical plank of the most essential part of our economic infrastructure cannot be under the control of foreign governments.
The rise of digital wallets is just one aspect of how payments are integrating into not only our economic interests, but also our national interests. But it is not just the national interest, it is the interests of consumers too.
Payments policy needs to become a national priority. The recommendations of the Farrell Review make this possible, by giving control over payments policy to the Treasurer. Only the Treasurer has a mandate which can match the significance of the policy challenge.
It is not tenable that payments are overseen by regulatory bodies with a cautious institutional culture and narrow objectives. Payments touch every aspect of national life. It can only be effective if a Treasurer can provide the strategic direction that he is empowered to give.
The good news is the Government is moving to work with industry and regulators to develop a strategic plan for the payments system by mid-2022. The plan will be reviewed annually.
- The Government will also legislate additional powers for the Treasurer to direct payment system policy and address emerging and future gaps in the payments regulatory framework.
- The payment system regulatory framework will also be updated in order to accommodate new and emerging payment methods.
- The current one-size-fits-all licensing framework for payment service providers will be replaced with a functionally based licensing framework adopting graduated, risk-based regulatory requirements.
Senate Inquiry into cryptocurrency
The gulf between Canberra and the commercial world often feels like it has never been wider. In the crypto space, we are a very long way from the market.
I tried to adopt a market approach to the Senate review and its recommendations.
In the competitive marketplace you are constantly under pressure to be more effective than your rivals. In government, problems and solutions can sometimes get tangled.
As a legislator, I have a mandate to serve the public, not to engage in the self-indulgent politics of good intentions.
This year I led an inquiry into the regulation of cryptocurrency and digital assets.
Over the course of this period, a few critical facts become obvious: first, that cryptocurrency is here to stay; second, that it is likely - if not already - to become a common method of payment; third, that a clear and comprehensive regulatory framework was needed to protect consumers, promote competition, and drive Australian investment and jobs.
The Committee received nearly 100 submissions and conducted public hearings over several days.
The Final Report is a body of work which I believe everyone who contributed to the process ought to be proud of. It sets out a framework for managing these new assets within an agile, modern, market economy.
Two key design principles can guide this new system: consumer protection and investor promotion.
Recommendations one through to five are the core of the reform package: a licensing regime for crypto markets. a depositary regime for digital assets with minimum standards, a cross-government working group, a new company structure - Decentralised Autonomous Organisations, and a review of AML-CTF regulations.
Second, the report made recommendations to ensure that tax settings were fit for purpose and that policymakers could respond to debanking in the appropriate manner.
At the moment, the application of Capital Gains Tax to cryptocurrency transactions has been described as unworkable. This has to be fixed.
Third, when it comes to de-banking, a clear regulatory framework is essential to ensure that banks can no longer arbitrarily withdraw services on account of their perceived ‘risk appetite.’ You can’t be a crypto hub without a bank account!
As the inquiry I chaired noted, we have not been prepared for this change. Large financial institutions have often withdrawn services to customers who are involved with cryptocurrency.
As the inquiry found, a clear, comprehensive, and workable framework for cryptocurrency - one which is directed at consumer protection, investor promotion, and financial stability - is a matter of national urgency.
The bulk of these recommendations have now been adopted by the Treasurer with four key steps:
- The Government will begin consultation in early 2022 on the
establishment of a licensing framework for Digital Currency Exchanges that will allow the purchase and sale of crypto assets by consumers within a regulated environment, and on a custody regulatory regime for businesses that hold crypto assets on behalf of consumers.
- The Board of Taxation will be tasked to advise on an appropriate policy framework for the taxation of digital transactions and assets, to report by the end of 2022.
- In the second half of 2022, Treasury will consult on how to accommodate Decentralised Autonomous Organisations within Australia’s legal and financial regulatory framework.
- In early 2022, the Government will task the Council of Financial
- Regulators, together with other relevant Government agencies, to consider policy options to address fintech de-banking and provide advice to the Government by mid-2022.
Joint Committee on Corporations & Financial Services
In saying that payments policy should become a national priority, I am not just talking about endless regulation.
I am also talking about the need to foster and encourage innovators in the payments space onshore, and further, the need to create an investment environment which can keep them there.
Australia is in a prime position. After all, one national tech champion - Afterpay - is a payments innovator. We should not be stifling these new sectors simply because they are new. And - mark my words - we should not be imposing new regulatory requirements on the payments sector until the framework is properly clarified.
Twice in the last two months, I have been the lone dissenter in parliamentary reports which have recommended increased regulations on the payments sector. I did not take these decisions lightly.
When the Joint Committee on Corporations and Financial Services recommended a ban on the use of digital wallets for online gambling, I dissented.
The Committee’s own majority report did not convey a problem which warranted public attention to a sufficient evidentiary standard. It failed at the first hurdle. Nor did it establish that a ban would be effective, especially when compared to the existing prohibitions, such as that in the BNPL code of practice, which were agile and sector-specific.
Similarly, the Committee recommended that regulatory agencies mandate the ePayments Code, actively monitor the Buy Now, Pay Later Code of Practice, and open an inquiry into the BNPL industry. I objected to these recommendations. The existing framework surrounding mobile payments and digital wallets was described as ‘inconsistent and complex’ and ‘overly burdensome’, issues which were compounded for new market participants.
We should not be imposing any new regulatory burdens or subjecting the payments sector, and especially innovators, to piecemeal bans to satisfy extraneous needs. What we should be doing is streamlining the system and fostering innovation.
Thus far, Australia has led the world in payments innovation. We punch well above our weight in fintech. But this is not guaranteed.
The next phase of innovation will involve technologies which we have only just begun to anticipate. The use of stablecoins and cryptocurrency will revolutionise payments online, allowing individuals to access peer-to-peer payments without relying on centralised financial institutions.
Per the Treasurer’s statement, the Government will begin consultation in early 2022 on how to modernise the payment system framework, including the appropriate treatment of these services in a way that best promotes competition and innovation.
Payment policy is a big deal. It is on the verge of disrupting large parts of the economy. Our policy plans must put payments near the top of the economic reform pile.
The Treasurer has identified this as a national priority. He has done the work and Australia is well positioned to respond and get ahead of the game.
We are on track to get ahead of our friendly rivals like Singapore, the UK and the USA.
Australia will be a world-leading crypto hub under Frydenberg’s plan.
The world is watching Australia which is now setting the global standard for crypto, payments and digital wallet reform.
These are key microeconomic reforms which will drive more choice and lower prices for Australians.
This will be a key driver of investment and jobs over the next decade.
It is high time that the Treasury reclaimed the payments policy mantle.
The Australian Government, not Silicon Valley, or Shenzhen or the RBA should run Australia’s payments policy. Now we are back in control of payments policy.
No other Treasurer/Finance Minister has been as involved in this dynamic but critical space as Mr Frydenberg has been. I thank him for his leadership.