Commonwealth Bank’s crypto project in the spotlight

Commonwealth Bank CEO Matt Comyn. Picture: Adam Yip

Commonwealth Bank’s big crypto play, unveiled last November by chief executive Matt Comyn, is quietly progressing to a second pilot, incorporating changes from CBA’s continuing dialogue with five (yes, five!) regulators.

In case you were wondering, the list features the Australian Securities & Investments Commission, the financial intelligence agency Austrac, the Australian Prudential Regulation Authority, the tax office and the Reserve Bank.

The reason for the full-court regulatory press can be summed up in a single word: risk.

ASIC’s interest is easily explained – the $2.8 trillion global crypto market has growing breadth and depth, the pace of innovation is blinding, and retail interest in a hugely volatile asset class is surging.

Chairman Joe Longo’s blunt warning a few weeks after Comyn’s grand unveiling – that “consumers should approach investing in crypto with great caution” – fell just short of a recommendation to find something less crazy to do with your money.

Longo said for good measure that investors, for now at least, were “on their own”, as many crypto assets were not regarded as financial products and were therefore outside ASIC’s regulatory net.

Austrac’s interest is also self-explanatory.

Crypto, with its well-documented association with money laundering and the black economy, is now poised to enter mainstream finance through the CBA venture.

All going well, about 6.5 million digital customers will be able to buy, sell and hold bitcoin and nine other digital currencies through the CommBank app.

As part of its efforts to mitigate money-laundering risk, CBA partnered with one of the world’s biggest regulated crypto exchanges, Gemini, and leading blockchain analysis firm, Chain­alysis.

Gemini has led discussions with Austrac, and Chainalysis is deploying its data analysis platform which features automated investigation, compliance and management tools.

The aim is to soothe AML concerns by operating a closed-loop system so that digital currencies can’t be imported into the CBA system from other exchanges.

Know your customer concerns will also be partly addressed by CBA only offering the service to existing customers.

As for the ATO, uncertainty might cloud crypto’s standing as a financial product, but the revenue agency is in no doubt whatsoever about the legal status of digital currencies as taxable assets.

APRA chairman Wayne Byres, for his part, will always take a vital interest in any new line of business for a regulated entity, especially when it’s the nation’s largest financial institution.

The RBA is similarly engaged with currency developments, as well as crypto’s undeveloped potential as a payments mechanism.

A week or so ago, rumours swept the market that CBA had tripped and fallen in its complicated dance with the regulators, with ASIC identified as the problem agency.

The strongest repudiation of the rumour comes with public acknowledgment by Comyn that a second trial is in the offing, even if it hasn’t formally started.

The bank has also progressed from a codenamed project to a nameplated business called CommBank Crypto, and is sticking to an expected launch date of sometime this year.

This assumes a favourable resolution of the debate over crypto’s status as a financial product.

CBA rightly thinks that oversight by ASIC gives its proposed crypto market the best chance of success.

No one – least of all unsophisticated retail investors – wants a reincarnation of the wild west.

That said, the balance has to be right. Crypto is hot, with CBA numbers suggesting 8 per cent of Australians have some kind of ­exposure.

People should have the right to invest where they want provided they are properly informed about the risk, which is why a lot of CBA’s discussions with ASIC have been about disclosure.

In the second pilot, a pop-up window will appear to remind customers that crypto is risky.

No leverage will be permitted, so only available funds can be used, and specific limits will be imposed – although it’s yet to be determined if they will vary between customers.

These and other changes were made on the fly after discussions with regulators and were implemented by CBA’s in-house digital solutions team x15 to ensure a speedy response.

The reality, though, is that Comyn and CBA are not going to get an armchair ride, with institutional resistance still strong to crypto carving out a significant niche.

The Financial Stability Board, which sets out recommendations for the global financial system, said in a paper last week that crypto assets could pose a threat to financial stability due to their scale, structural vulnerabilities and interconnection with the traditional financial system.

Direct connections were growing fast but currently limited, such that huge price swings had not spilt over to financial markets.

That’s not to underestimate the scale of the volatility.

Between January and early November 2021, the bitcoin price rose from $US29,000 ($40,264) to $US68,000 before falling to $US38,000 late last month.

The Financial Stability Board said crypto assets did not have the safeguards of bank deposits and other financial instruments, or even basic investor protections because they operated outside regulatory frameworks.

The sector, including its trading platforms, had seen a proliferation of fraud and abuse involving misuse of personal data or theft of assets, as well as other mis­conduct.

Crypto assets have simply disappeared, as well – of the 16,000 tokens listed on exchanges over time, only 9000 remained.

The FSB is the voice of mainstream finance and you might say: “They would say that, wouldn’t they?”

But the sector is clearly not for the faint-hearted.