Australia urgently needs wise cryptocurrency regulation despite bitcoin’s fall

In Australia, 25 per cent of the population has accessed digital assets. The need to regulate these issues should remain a high priority for governments. Picture: AFP

It would be a severe misreading of current events to put crypto regulation on the back burner because of the collapse of certain virtual assets or because the price of bitcoin has fallen. The fundamental strength and disruptive capacity of the technology remains sound, the utility remains and therefore popularity will be maintained.

In Australia, 25 per cent of the population has accessed digital assets. The need to regulate these issues should remain a high priority for governments. We must set governance standards to protect consumers and prevent damage, as seen in recent times with the collapse of stablecoins.

The result will be that markets and custody systems will be licensed like traditional financial services. This is highly desirable. This is a real opportunity for Australia to make a historical departure from having peculiar and parochial financial regulation which has damaged our export prospects for generations.

As the World Economic Forum meeting in San Francisco debates cryptocurrency and the policy and regulation required to protect consumers and promote investment, I offer two thoughts.

Firstly, if Australia locks in our first-mover advantage with a suite of crypto regulation, we’ll prove the dual purpose of crypto regulation is genuine: that it can provide consumer protection and promote investment. But we have to turn the recent Treasury consultation into draft legislation as a matter of urgency to show that we are committed to locking in Australia’s first-mover advantage.

Domestically, this means establishing a system of gatekeepers as proposed in the Australian Treasury consultation paper on “crypto asset secondary service providers”. The clunky name aside, the consultation paper has provoked a domestic debate on the detail of crypto regulation which few other nations have had at this juncture.

We should take a broad view and focus on a few controllable factors in the immediate term which emerge from this consultation paper but are not all directly addressed in it. During the next month, draft legislation should be put forward to set out how exactly the gatekeepers will be regulated in Australia.

Gatekeepers must have requirements on disclosure, capital, key personnel, insurance, auditing and AML/CTF. Placed under ASIC’s purview, we would have a regime where Australians could access retail cryptocurrency services knowing they enjoy the protection of Australian law.

This way, Australians wanting to access bitcoin or etherium directly can do so through an Australian licenced market and custodian. The alternative completely relies upon offshore providers where Australian regulators have no jurisdiction to assist consumers when something goes wrong.

It will be a beach-like “swimming between the flags” offering to Australian consumers. Doing this will require the new government to take a position on which virtual assets should be captured for retail regulatory purposes.

Australia should make a call on what the assets are within scope, or commission a mapping exercise as a matter of urgency.

Legislation should also set out rules for stablecoins to be established so that they are collateralised and classified as currency. This will allow us to avoid a repeat of the death spirals of uncollateralised stablecoins.

We should also address the access difficulties crypto organisations face in obtaining banking services. We don’t want crypto businesses working in the shadows. The Council of Financial Regulators is believed to have provided the new government with a report on how this should be addressed. Secondly, Australia should work with like-minded nations on the security implications of the advent of retail central bank digital currencies (CBDC).

The economic and security issues in this space lend themselves to a coalescing of like-minded ­nations.

Significant issues confront the concept of a retail CBDC and foreign state oversight of this type of currency. We must have a common approach to regulating foreign CBDCs. I will look very closely at the US’s Lummus Gellibrand bill and how it treats the Chinese CBDC product.

While we need to think carefully about how we defend our interests from foreign CBDCs, we also need to think carefully about our own CBDC prospects.

I am not sure the Senate inquiry, which I led, got it right on a retail CBDC. On reflection, I tend to think the privacy issues could outweigh the benefits and we should not have been as positive as we were about a retail CBDC.

Do we really want the government knowing how we spend every cent of our money?

I doubt Australians would ­support this type of state-run economic voyeurism.

The economic implications could be enormous. If for example, we had a retail CBDC issued by the Reserve Bank and each Australian had a digital wallet with the RBA, there may be no need for deposit-taking institutions or banks as we know them. Financial stability and the issuance of long-term financial products like mortgages could be undermined overnight.

What this means is that we cannot have a government with very few policies on training wheels sit on its hands and just watch events unfold. We need to move quickly to crypto legislation.

The Labor government has made virtually no utterance on these matters. The clock is ticking. The longer it takes to regulate crypto, the more consumers are exposed and new investment and jobs will be lost.

Andrew Bragg is a Liberal senator.