Do We Need Cryptocurrency Regulation in Australia?
Bitcoin and other cryptocurrencies are on the rise but would-be crypto founders and investors should beware, writes Adelaide corporate and securities lawyer (and cryptocurrency fanatic) Christos Tsonis of CXT Legal.
Bitcoin is now the world’s most established and well-known digital currency.
When it was released back in 2009, Bitcoin was reserved for the techies and early adopters. Now it has captured the imagination of everyone from the world’s big banks through to ‘Mum and Dad’ investors, who are buying it up fearing they’ll miss out on what feels like a gold rush. Other cryptocurrencies are emerging and new business opportunities are sprouting in connection with it.
So what’s all the fuss about? And what does it mean for Australian investors (and by that extension, founders of enterprises) dealing in cryptocurrencies?
What is Bitcoin?
Simply, Bitcoin was the world’s first decentralised cryptocurrency (a form of digital currency), a peer-to-peer payment system that sits outside of government and banking systems.
Cryptocurrency uses cryptography for security of transactions and to control the creation of additional units of currency.
The rise of Bitcoin and cryptocurrency
Cryptocurrencies are on the verge of going mainstream. People have become increasingly attracted to Bitcoin and other cryptocurrencies because of the decentralisation benefits, coverage from mainstream media and finance ‘influencers’, greater accessibility thanks to the growing list of apps, marketplaces and websites that make buying crypto easy, and of course, the investment opportunity.
As a result the price of Bitcoin has skyrocketed. At the time of writing (October 2017), one Bitcoin will set you back around $5,700 Australian dollars. Back in 2013, you could have bought your first Bitcoin for just $40!
Bitcoin’s market cap is now hovering around $70 billion.
And depending on what you read, the price is set to continue it’s meteoric rise.
There are more than a few concerns, particularly from a legal perspective which people should be aware of.
Decentralisation means that Bitcoin and other cryptocurrencies are currently not held to account by any form of regulatory framework in Australia.
The Australian Securities and Investments Commission (ASIC) does not class cryptocurrencies as legal tender. It also does not recognise Bitcoin as a financial product, which means it is unlikely to be covered by Australian Financial Services (AFS) legislation.
ASIC has been warning consumers about the risks, which include:
If something goes wrong, for example, if you’re hacked or the web platform fails, you could stand to lose your entire investment with no authority and little ability to get it back.
When you buy cryptocurrency, you’re in for a wild ride. Prices vary hour to hour. For some, this is part of the thrill. But it could cost you dearly.
Your crypto could be stolen
In the same way that you bank card or wallet can be stolen, so can your digital wallet. There are numerous recent cases of high profile hackings where investors have lost extraordinary sums of money.
While the independence of cryptocurrency can be a blessing, for the same reason it is also attractive to criminals who use it for money laundering and other illegal activities.
If the plan is to regulate cryptocurrencies, who will do it?
It seems that creating a specific regulatory framework for cryptocurrencies in Australia could form part of the answer.
But if we go down that path, who is responsible for being responsible?
The Federal Government wants to beef up the Anti-Money Laundering and Counter-Terrorism Financing Act and give more power to the Australian Transactions and Reporting Analysis Centre (AUSTRAC). There’s a draft Act here.
A voluntary, self-regulatory framework has been proposed by the Australian Digital Currency and Commerce Association (ADCCA), which would apply to Australian digital currency users, traders and merchants. Regulatory frameworks are, in practice, toothless tigers as businesses move to deliver outcomes faster than the safeguards are put in place.
Globally, the regulatory move isn’t new. The UK, China and Japan are also tightening up on digi-currencies.
Regulation is unlikely to be the silver bullet for the industry
As a seemingly endless number of cryptocurrency startups burst onto the scene, scenarios are being created that even the most solid regulatory framework will not be able to completely cover.
As things currently stand, certain parts of cryptocurrency businesses already fall under ACCC jurisdiction – misleading and deceptive representations remain a huge risk of cryptocurrency businesses as they embark on trading in the wild west – particularly when dealing with mum and dad investors. A clear articulation of what service are being provided and what disclaimers are conveyed are very important elements in any cryptocurrency start up checklist.
Crypto company founders, also take note. It’s likely that many crypto companies will need an AFS licence in certain circumstances.
It will depend on the services offered by the company, the use of the cryptocurrency and intention of its users, but if a person is making a financial investment, there’s financial risk or non-cash payments are being made, an AFS licence is likely to be required.
From our end, we’ve had founders come and speak to us about packaging cryptos with financial instruments based on the value of the underlying asset. Financial instruments based on the value of crypto, such as options, futures and contracts for difference are financial products. Businesses who issue them, advise on them or arrange for their clients to buy or sell them will need an AFS licence.
It’s a delicate balance
Few can argue that the idealistic purpose of financial decentralisation is beneficial for consumers. But it must be done with adequate protections in place for all involved.
The fact is that Bitcoin and other cryptocurrencies are here to stay and are growing exponentially in size and use. Inaction or a ‘wait and see’ approach runs the risk of consumer losses leading to demands for urgent regulatory intervention that may not result in a considered approach. There has never been a greater need for startup businesses dealing in crypto to have a considered approach.
Questions? Get in touch.
– Christos Tsonis, CXT Director