The future of cryptocurrency regulation in Australia

The most expensive advertising in the world appears during the Super Bowl in the United States. In the 2022 game between the Cincinnati Bengals and Los Angeles Rams football teams, a 30-second ad cost up to $7 million, a price traditionally exclusive to major banks, insurers and multinationals. This year there was a new heavyweight alongside them. Cryptocurrency exchanges bought so many ads that the game was dubbed “the Crypto Bowl.”

LeBron James headlined Crypto. com. Larry David painted FTX. Cryptocurrency sponsorship deals were already well established in the sport: The Australian Football League announced a $25 million deal with in January, but with the Super Bowl takeover, the industry reached a peak.

There were objections. The ads seemed crudely commercial, even for an event famous for its crude commercialism. There was the implication that the crypto markets were not just going mainstream, but were on the hunt for “dumb money,” poorly informed investors whose capital is needed to prop up dubious assets.

One concerned observer was Gary Gensler, head of the US Securities and Exchange Commission (SEC), the world’s most powerful financial regulator. He later said that the show reminded him of the lead-up to the 2008 global financial crisis, when a subprime mortgage lender that announced itself during the Super Bowl went bankrupt. It was an unflattering comparison, made as a prelude to the proposed regulation. The SEC would step in to protect investors, capital markets, and the financial system in general, eventually.

Other countries had already acted. In 2021, China completely banned cryptocurrency trading and mining, ending the world’s largest crypto mining industry almost overnight. Authorities cited environmental concerns when announcing the closure. By then, dozens of countries already had outright or de facto bans on cryptocurrencies.

Its leaders feared not only illicit use, but also systemic risk: If enough money flowed into cryptocurrencies, it could destabilize traditional banking systems, especially in smaller nations. At scale, they could even dilute the ability of governments to set fiscal policies. On this, critics of crypto and its staunch libertarian supporters agreed, divided only on whether or not that was a good thing.

To the wary, stablecoins — crypto tokens that are supposed to be pegged to traditional currencies — seemed especially ominous. One finance academic, Rohan Grey, was so concerned about the risks of this “shadow money” that he left Australia and moved to the US, where he is now an assistant professor at the University of California Law School. of Willamette. In 2020, he co-authored the Stablecoin Tethering and Bank Licensing Enforcement Act (STABLE), a piece of regulatory architecture sponsored by three Democrats in Congress. He has languished, despite the fact that the President’s Task Force on Financial Markets highlighted the need for rules governing the use of stablecoins.

The stablecoin law aims to “protect consumers from the risks posed by emerging digital payment instruments.” According to Gray and her co-authors, “Digital currencies whose value is permanently pegged or stabilized against a conventional currency… pose new regulatory challenges while also representing a growing source of credit, liquidity, and market risk.”

The stablecoin crashes in May this year were predictable, he says.

“The reason cryptocurrencies were even able to do what they have done to enter this space is because we had a huge loophole in our system of banking regulation in the US. We didn’t have a clear definition of what money was in the shadow”.

Grey’s criticism has made him a name as a crypto adversary, and some of his disdain is blunt, especially for the more environmentally destructive tokens. “I have no problem saying we should ban that for environmental reasons,” she says. “It’s indefensible, it’s disgusting.”

However, he believes that cryptocurrencies have social value. He sees them as the latest in a long tradition of experimental coins that have privacy and innovation advantages.

“I don’t know of a very clear way to distinguish between those positives [tokens] and not without also leaving room open for things like bitcoin,” he says. He also believes that the post-GFC period was a huge missed opportunity to create public digital money.

For Grey, the priority is not to repeat the mistakes of 2008. “We saw that little acronym IBG, YBG – I’ll go, you’ll go.” Neither the buyer nor the seller will be held accountable, and the much-distrusted government will have to come in and clean up the mess. “They love all the protections and guarantees the state provides for their ability to earn money. Will they be millionaires or billionaires while everyone else is poor? There is a sense in which none of those actors will be responsible on the way down. So if we don’t stop it on the way up, it just won’t stop.”

Voices in favor of regulation have gained ground within the crypto movement itself. Caroline Bowler, CEO of Melbourne-based cryptocurrency exchange BTC Markets, is known for trying to bridge crypto markets and traditional finance. BTC Markets does due diligence, has been called a “sheriff in the wild west”, and refuses to list all but a few of the 19,000 crypto tokens now available. Like Grey, the GFC was formative for her. “I saw what happened when people operated in an opaque way. I saw the risk of contagion,” she says. “Being on the pointy end of the stick has really influenced my opinion when it comes to investor protection.”

Opacity is notoriously bad in crypto markets: it’s common for exchanges to trade illiquid or bet against their own customers. When liquidators examined failed Australian crypto exchange myCryptoWallet, they found that it had been operating while insolvent for three years.

“We do everything we can to prevent or stop cases of market manipulation,” says Bowler. “But I have no one to report that to. And there is no one asking me to do that. I am not regulated, because cryptocurrencies are not a financial product. So, market manipulation could be happening on other exchanges. And there is nothing. There is no support for the investor, no one is responsible for that. That is not right.”

It is an understatement to say that self-regulation has not been a success so far. Blockchain Australia has a voluntary code of conduct, which reflects best practice. Of the roughly 450 locally registered digital currency exchanges, only three are compliant.

“The industry in Australia has had the opportunity to self-regulate and hasn’t,” says Bowler. She believes that a legislated regulation is inevitable.

“You cannot deal with assets that have that value and not expect them to be regulated. Was there too much euphoria? – on the market for the last two years.”

Government regulation is at stake internationally. Twenty-seven EU member states have agreed to crypto rules that will take effect in 2024, with the UK likely to follow suit. In early July, the US Treasury hinted that it would begin work on an international regulatory framework. Bitcoin may be an exception, it is too mature and diffuse to be easily regulated, while other tokens, exchanges and platforms could come under.

“It will only go mainstream if it’s properly regulated,” says Greg Medcraft, a former director of finance and business affairs at the OECD. Once the legislation is in place, the next challenge will be the harmonization of those regulations around the world, to prevent any “crypto Cayman Islands” from emerging.

Such a move would mark the twilight of the shitcoin casino, and it is unlikely that there will still be 19,000 different tokens afterwards. Boosters have often said that cryptocurrencies never die, but regulation could be the end of the market as we know it.

Now, many countries are in the process of minting their own digital currencies. China launched a digital version of the yuan in 2020 in a program limited to a small number of cities. In that year, around 35 countries had tests of digital public money; by 2022, more than 100 countries had similar pilot programs. US President Joe Biden issued an executive order in March establishing “the utmost urgency in research and development efforts into potential design and implementation options” for a US central bank digital currency. (CBDC).

This week, the Reserve Bank of Australia announced a CBDC scheme that aims to create space for a digital version of the Australian dollar.

Crypto’s rebellion against fiat currency may end in a truce and ultimately an alliance.

This is the last in a four-part series on cryptocurrencies.

Read the first part: How the cryptocurrency market started.

Read the second part: The dark side of the cryptocurrency market.

Read part three: The huge environmental cost of crypto mining.

This article was first published in the print edition of The Saturday Paper on August 13, 2022 as “The Future of Money”.

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