FTX collapse shows our regulations not fit for purpose

An FTX bankruptcy filing showed that the fallen cryptocurrency exchange and a number of affiliates had a combined cash balance of just over $1bn. Picture: Eric Lee/Bloomberg

The collapse of the FTX cryptocurrency exchange has shown that Australia’s regulatory framework is not fit for purpose.

In his six months as Financial Services Minister, Stephen Jones has shown no interest in implementing meaningful digital asset regulation. He seems genuinely unsure of what to do with his own portfolio. As recently as late October, Jones referred to cryptocurrency as a “new and novel asset”.

But the real issue is that Jones has shown no urgency. On August 22, Jones said he wanted to “start consultation with stakeholders on a framework”. He said on the same day that “a public consultation paper on ‘token mapping’ will be released soon.”

More than three months later, crickets. Nothing.

Meanwhile, Jones has been singularly focused on his favourite vested interests. So far, Jones has stripped transparency in super fund payments to unions, proposed gutting the best financial interests test for super funds and blown up his own penalties for bankers reforms.

There are two consequences of Jones’ failure to act on crypto.

Firstly, Jones has exposed consumers. As the minister responsible for these matters, he has maintained an unregulated market and clearly shown that he is in no hurry to progress regulation.

The FTX collapse has impacted over 30,000 Australians, who have no recourse as there are no laws to regulate crypto organisations.

This may have been avoided if crypto organisations were subject to licensing and custody requirements. This would have protected consumer funds and provided regulatory recourse.

These steps formed the first recommendation of the Senate inquiry into digital assets which reported in October 2021. Jones said this was wrong in August.

He said: “The previous government dabbled in crypto asset regulation but prematurely jumped straight to options without first understanding what was being regulated.”

Following the report of the committee, Treasury commenced consultation on the implementation of licensing and custody requirements in March 2022.

The Treasury consultation laid the groundwork for these regulations to be implemented, irrespective of the election result.

Yet, Jones has failed to act on the consultation process which was completed by Treasury. Jones is also refusing to disclose any part of the consultation to the public. He won’t even put the submissions on the Treasury website.

Australians should know why the government killed this initiative. That is why I moved an order for the production of documents last week which was approved by the Senate.

Jones will now be required to disclose the briefings, recommendations, submissions and policy options he has received from the consultation process to the Senate and the public.

Meanwhile, immediately following the FTX collapse, the government announced that it would begin another consultation process on digital assets reform.

In an embarrassing repudiation for Jones, this was announced by his boss, Jim Chalmers, who said via a spokesman in November that: “These developments highlight the lack of transparency and consumer protection in the crypto market, which is why our government is taking action to improve the regulatory frameworks.”

Jones’ hostility to the process he inherited has damaged consumers and dragged his boss into the mess he has made of his portfolio.

Secondly, the delay of new rules cannot be justified.

In stepping into Jones’ shoes, Chalmers says Treasury will open consultation on crypto regulations early next year, with a view to introduce legislation in 2023.

In other words, the government will issue another consultation paper then introduce legislation late in 2023. This is too late.

With a staff of 1200 Treasury has ample resourcing to draft these regulations. Yet to date, I have proposed more digital asset laws than either Jones or Chalmers.

Given my frustration at Jones’ inaction, in September, I released a draft private senator’s bill to regulate crypto exchanges. Without departmental resources, I was able to apply the recommendations of the committee into a draft bill. The bill isn’t perfect, but it’s a start.

The Treasury should be directed to commence work on a draft bill immediately. These reforms should be introduced to parliament next February with a view to passing them in March 2023. Anything short of this is an unacceptable risk to Australians.

25 per cent of Australians appear to have exposure to crypto assets. As Financial Services Minister, Jones has a responsibility to protect these consumers, and provide them with the same protections as consumers of conventional financial products.

Australia has developed detailed plans to regulate crypto which are gathering dust as Jones enriches his favourite vested interests.

It is perhaps the worst example of the government for vested interests’ warped priorities.

Andrew Bragg is a Liberal senator for NSW.