The Australian Securities and Investments Commission has bolstered its cryptocurrency team as it seeks to regulate more digital assets by classifying them as financial products, a move that would make it harder to sell them to Australians.
Asic has yet to decide whether to classify Ethereum, the second most popular cryptocurrency after bitcoin, as a financial product after the way the currency works changed last week.
Most cryptocurrencies have not been regulated by Asic because they do not meet the definition of a financial product, depriving the authority of jurisdiction.
However, the regulator increased the size of its crypto team in March amid a wave of industry meltdowns that devastated investors who poured money into the sector as prices soared. end of 2020.
Other regulators have also begun to take a closer look at cryptocurrency, with the U.S. Securities and Exchange Commission becoming aggressive in its approach to determining whether individual coins, including Ethereum, qualify as securities, placing it under its regulatory umbrella.
“We’re not going to be the cheerleaders for crypto assets,” said Asic’s executive director for markets, Greg Yanco.
Since cryptocurrencies are mostly not financial products, the exchanges that trade them are largely unaffected by Australian regulations, with the exception of the requirement to report transactions to the agency. financial intelligence agency Austrac.
But if Asic decides that one or more of the most popular coins are financial products, exchanges would either have to remove them from the list or be subject to a list of regulatory requirements.
They will need financial services licenses, which may require proof that they hold large sums of capital in reserve, and would be required to segregate client funds – which collapses overseas revealed n was not common practice.
A bigger challenge would be to meet the new requirements for the design and distribution of financial products that came into force last October as part of the reforms after the Royal Banking Commission.
In particular, dealers should identify a target market.
Who that might be was “a good question,” Yanco said.
“Could it just be people who are willing to take extreme risk, extreme risk on very volatile products with no underlying assets, where custodial arrangements may not be, you know, maybe risky or unusual.”
Until recently, the crypto wasn’t on Asic’s hit list – it only had one person dedicated to the region.
In March, Asic added a second full-time employee and expanded its capabilities. Crypto assets are now part of its “core strategic plans”, the regulator said last month.
“Until what I would say, even last year when we were doing our business planning, crypto wasn’t the big priority,” Yanco said.
“We see products that mimic financial products because there seems to be a certain crypto twist, they seem designed to avoid regulation. And so we’ve seen that and you’ll have seen that with similar products overseas, people have lost a lot of money on them.
The regulator also raised concerns about the convergence of crypto-trading platforms with equity trading platforms, as well as research conducted for it by SEC Newgate in November. This research showed that 44% of Australian retail investors held crypto, and of those who did, only 20% believed they were taking a risk.
“If people are trading stocks, they’re suddenly offered a crypto, and they start thinking that maybe they’re no riskier than trading stocks,” Yanco said.
The regulator has obtained legal advice from senior counsel on whether certain coin offerings qualify as financial products.
“There are so many of these things, we’re probably not going to cover them all,” Yanco said.
“But we have a couple that we are looking at very closely. And if we have to take enforcement action, we will.
In the case of Ether, last week it went from awarding new coins to miners who performed power-intensive mathematical calculations, a process called “proof of work”, to awarding new coins to holders of coins that agree to lock Ether, a process called “proof of stake”.
The change, known as the “merger”, raises the possibility that Ether may now meet legal tests, in the United States and Australia, which means it should be regulated as a financial product.
When asked if Asic has decided whether or not Ether will be a financial product after the merger, Yanco replied, “No, no, we haven’t.”
“We’re tech agnostic, and we’re looking at these things right now because it’s not as simple as one thing – once you start aggregating assets, it depends on how it’s do. Is there a common goal? Or are you just in the pool and just getting a slice? It can be something different,” he said.
“And that’s where it becomes a lot of work for Asic to get to the bottom of how things are designed.”