The year 2020 introduced many investors in the world of traditional finance to the potential impact that cryptocurrencies will have in the coming decades. The bull market currently occurring in the digital asset space following the March 2020 crash prompted many to dive deeper into understanding Bitcoin (BTC) and the Ethereum network. With partial regulatory acceptance in key financial centres such as the US, UK and Singapore, global acceptance and integration of cryptocurrencies has already begun. As the world of finance moves forward, where is the Australian financial sector placed and what needs to be done to ensure we are not left behind?
Where is the industry currently?
On a global scale, a widespread push is being made to establish bridges between traditional finance and the lucrative world of crypto, both by crypto natives and a plethora of traditional heavyweights such as JP Morgan and Deutsche Bank. While investment vehicles like the Grayscale Bitcoin Trust have shown to be of great interest to institutional investors (outpacing inflows for all US gold ETF’s combined in 2020), the SEC’s hard-handed approach has been followed by many national regulatory bodies, particularly in response to the push for digital asset ETFs. Although multiple applications have been denied in preceding years, VanEck, a New York-based investment firm, is the most recent company to put forth a proposal for another tokenised ETF with the hopes that a change in SEC leadership will offer a more progressive outlook.
Key growth sectors such as Africa, Hong Kong and Mainland China hold vastly different opinions on crypto’s place in the future of their economy. Africa remains one of the most progressive centres for crypto development largely due to the region’s unstable financial framework and high use case for fast and cheap international money transfers. As adoption rates continue to grow among the young and tech-savvy, nations are beginning to acknowledge the significance of the space. In 2020, the two largest African cryptocurrency markets, namely South Africa and Nigeria, published legal frameworks to spur innovation and regulate the industry that is positioned to compete with the world’s largest markets in the coming years.
Mainland China and Hong Kong remain a fundamental component of global industry growth, particularly due to the public’s sentiment towards the use of cryptocurrencies and its underlying blockchain technology. The use of cryptocurrency has decreased in China and its regions largely due to its recognition as a virtual commodity, limiting its ability to be used as a medium of exchange. While restrictions on trading cryptocurrencies were already in place in Mainland China, a recent change in Hong Kong legislation prevents retail trading of digital currencies, further limiting the extent of their use case by the general public. Despite this, volume still remains high across Mainland China and Hong Kong through anonymous OTC trading and stable coins. While the SFC has taken a firm stance on the wide use of these assets, it notes that as the market matures so too will its position.
Such uncertain regulatory standards have not been experienced across all avenues of digital asset integration, as 2020 saw an array of regulatory approvals for crypto banks, publicly listed crypto companies and crypto security listings. Most notably, the OCC’s approval for the use of stablecoins by US banks displays the attitude shift that is slowly occurring. Alongside macroeconomic drivers such as high inflation and ongoing global economic turmoil, the push for innovation by an increasing number of interested (and reputable) parties has led many to understand the significance of the movement’s impact, creating a snowball effect that has validated crypto’s value added to the existing framework, despite mixed regulatory attitudes.
How does Australia compare?
The Australian Government has remained focused on stimulating the FinTech sector as it tries to maintain the nation’s position as a global leader in the industry. Despite this, its regulatory stance is largely conservative. As such, the existing legal guidelines used for traditional financial products and services have been applied to the use of cryptocurrency in Australia displaying their one size fits all approach.
The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (2017-2019) has further driven regulation to be consumer protecting, laying out clear cut guidelines for companies in the space. Cryptocurrencies are protected under the Corporations Act (2001) which requires that disclosure, registration, licensing and conduct obligations be met by all companies involved in the space. The inclusion of cryptocurrencies under this existing model is not only beneficial to consumers but also eases the transition for existing companies to delve into crypto. The biggest legislative impact on the Australian crypto space to date has been the introduction of AML/CTF requirements in 2018 to combat the use of digital assets in illegal activity. Establishing clear-cut requirements such as mandatory AML/CTF policies will inevitably display Australia’s standards in this burgeoning industry. Should regulation continue in this manner, it will likely lead to an influx of business from those that value higher legal and regulatory standards. Australia’s internationally-valued financial and legal frameworks are promoting cryptocurrency-focused business and innovation in the country from interested parties based globally.
As cryptocurrencies are not recognised as legal tender, they are treated as tradable assets which makes them subject to capital gains tax. Due to the anonymity of cryptocurrencies, tax evasion has become an increasing issue since the ICO boom. As such, the ATO established a specialist task force in 2018 to limit their exposure. Working in tandem with exchanges, the task force conducts routine checks on account inflows and outflows through a process similar to that of a random audit check.
As no cryptocurrency products are currently regulated under an Australian Financial Services License (AFSL), a large portion of the public is barred (by lack of knowledge and/or ease of access) from committing substantial capital to investments in the space due to regulatory restrictions surrounding financial advice and superannuation funds. While limited information is preventing full-fledged government support, their back-seat approach is still allowing private sector innovation to occur, keeping Australia-based development moving forward. Both ASIC and AUSTRAC have created innovation hubs to offer guidance for FinTech startups or established businesses searching for guidance as they integrate digital assets into their existing models. Through these hubs companies can gain access to an extensive network of international relationships, with the likes of France, Hong Kong, Singapore and Germany all committing to information-sharing and regulatory sandboxes.
Additionally, Australia has joined a host of groups aimed at promoting growth from providing consistent international securities law (IOSCO Multilateral Memorandum of Understanding) to fueling innovation in the financial sector, both globally (Global Financial Innovation Network) and regionally (Asia-Pacific Fintech Network).
What is the outlook?
Australia is uniquely positioned should the crypto market boom in the expected manner. As mentioned above, the Australian Government’s focus on FinTech support and development is attractive to internationals that do not have the same level of institutional support. Should regulation continue to develop alongside the growing industry in a favourable manner, significant interest is likely to gather. To reach this point, steps must be taken to develop smoother investment onramps to allow access to the existing investment markets such as the ASX. This, alongside an attitude shift among those in the financial sector and government to proactively integrate crypto-based products and services, can place Australia among Asia-Pacific’s leaders with potential to compete on a global scale. This would not only secure the future of cryptocurrency in Australia but also the future of the Australian financial industry should crypto continue to provide valuable solutions.
As the world of digital assets continues to mesh with the existing framework, sceptics remain cautious of betting big on crypto. The push for mainstream acceptance is forcing wider adoption globally, particularly as more reputable and powerful proponents lend support. Although regulation is a key requirement to facilitate widespread use, current trends suggest that cryptocurrency use will increase despite slow regulatory implementation. Restrictions in places like Hong Kong suggest a likely future where certain parts of the world limit usage to accredited investors and institutions. While this may dampen the initial volume of inflow, one must simply look at the success of alternate markets such as gold to understand that any asset’s popularity and longstanding place in the financial ecosystem is not only based on widespread use but also inherent value and utility. With special interest groups such as the banking sector seriously analysing crypto solutions, much of the required systemic conversion is underway. As innovation continues, cryptocurrencies threaten to drastically increase efficiency across a large portion of the existing financial pipelines. Combine this with the development of advanced Dapps and blockchain-based technological solutions and a world without crypto in it seems increasingly unlikely.