Crypto firms opt for regulatory grey zone: ASIC

The watchdog is bulking up its expertise in the asset class amid a boom in new products. But it warns that, given the choice, many companies say they aren’t covered by regulations.

The explosion of crypto-related products, and of decentralised finance, pushed the government to task a Treasury-led group to look at regulatory reform. Picture: Justin Tallis/AFP

The nation’s corporate regulator says most companies who operate in the “grey zone” of cryptocurrency regulation are taking the view they do not fall within the rules – and the watchdog is not able to assess every new product.

But the Australian Securities and Investments Commission has developed extensive expertise in enforcement and policy development in the fast-growing crypto-asset space, market infrastructure senior executive leader Nathan Bourne says.

“It is a complex area, and there’s a large grey zone of products that may or may not fit within the current regulatory parameter,” Mr Bourne told The Australian.

“By and large, the firms we are dealing with take the view that they are outside the regulatory parameter, and they have relied on their own legal advice for that.

“We do advise firms to obtain their own legal advice and we can’t go and assess every product ourselves. That’s a large part of the way the industry operates.”

While the range of cryptocurrency assets is expanding rapidly, ASIC only regulates the sector to the extent they involve financial products or financial services.

The Morrison government had tasked the Council of Financial Regulators – which includes ASIC, the Reserve Bank, Treasury and the Australian Prudential Regulation Authority – to consider further regulation of crypto-assets including what a licensing regime for a range of services from digital currency exchanges to custody services would look like.

In particular, ASIC is considering how regulation of decentralised finance – where there is no controlling provider of the product – could proceed.

The collapse of the US dollar-pegged currency TerraUSD has also pushed funds held in DeFi applications built on the Terra platform to levels last seen in early 2021 – down more than $US25bn ($35.3bn) in the last month alone.

Separately, there has been a boom in crypto-related products including the debut of three Cboe Australia-listed cryptocurrency ETFs – one from Cosmos Asset Management and two run by ETF Securities. While those are regulated by ASIC, there are other products that may not fall within its remit.

The regulator has repeatedly warned consumers to be wary of investing in crypto-asset related financial products including options and futures through unlicensed entities.

In April, ASIC alleged Melbourne-based cryptocurrency lender Helio had falsely claimed it held a credit licence but didn’t.

But it has publicised little other enforcement action, although Mr Bourne said the regulator had engaged with several providers “and their behaviour, or who they are providing their services to, has changed as a result of that”.

“For example, there were a couple of firms that were more obviously offering derivative products for Australian retail clients. They’ve gone through a process to make sure that is not occurring, or that they get the relevant licences to meet the relevant regulatory obligations,” he said.

In April, ASIC commissioner Cathie Armour said the regulator had received reports from consumers who had used unlicensed platforms to trade crypto-related options and futures and “experienced significant losses due to excessive leverage, platform outages, or unfair liquidations”.

Mr Bourne, who declined to comment on the Treasury-led reforms of the crypto-asset regulations, said ASIC had “built up a lot of expertise including enforcement and policy development work, so as to understand the products (that were being offered in Australia)”.

“We still need to engage with the service providers to determine whether they’re offering a financial product or if, for some reason, it falls outside that area.

“We do look at things to assess whether they are economically the same as financial products.

“It’s always difficult in this kind of evolving space to find the right expertise across the industry,” he added.

“That ability is highly sought-after. But we have built up those skill-sets across the organisation. Part of the approach is when you have distinct individuals that are very good in this space, to make sure that they’re training others within the organisation. And that’s what we are doing.”