On 16 October 2023, the Australian Financial Review held the second annual Crypto Summit. The event was widely attended by industry professionals, banks and regulators.
The overarching themes of the day were:
- Consumer protection: Consumer protection is at the forefront of regulatory oversight and must be the highest priority in the offering of digital asset services, following events in recent years including market collapses, and crypto-related scams.
- Crypto is more than Bitcoin: Many regulators and panellists emphasised the versatility of digital assets across a range of applications, primarily financial services including the tokenisation of real world assets, the cost savings and efficiency gains presented by distributed ledgers, the benefits and promises of asset-backed stablecoins and a wholesale central bank digital currency (CBDC).
- Regulatory clarity is critical: Industry welcomed the announcement of the new regulations and reiterated calls for regulatory clarity in digital asset activities.
The Crypto Summit opened with Stephen Jones announcing the Treasury’s new Proposal Paper titled, ‘Regulating Digital Asset Markets’, following the consultation process in March 2022 for the ‘Crypto Asset Secondary Service Providers: Licensing and custody requirements’ paper. The new regime proposes that digital asset platforms will be required to obtain an Australian Financial Services License and will be subjected to the same obligations, standards and processes in relation to, for example:
- Acting ‘efficiently, honestly and fairly’
- Dispute resolution,
- Conflicts of interest
- Solvency and cash reserves
- Financial record keeping
The regime emphasises that asset holding is the regulatory anchor point. The focus is on platforms not tokens.
Critically, Stephen Jones noted four key activities which are proposed to be subjected to enhanced regulatory oversight. These include:
- Trading digital assets
- Staking (which involves intermediating an account holder’s participation in validating transactions on a public network)
When asked during the Q&A, Stephen Jones affirmed that treatment of stablecoins will be considered under a separate regulatory exercise addressing the payments system more broadly, expected within the next few months.
Aligned with the themes of the day, the new regime places consumer protection front and centre, but affirms that the regulations seek to promote innovation and be technologically neutral and scalable. The deadline for submissions is 1 December 2023, with new legislation expected in 2024.
Loretta Joseph (Consultant, Commonwealth Secretariat), Chloe White (Managing Director, Genesis Block), Ryan McCall (CEO, Zerocap) and Mark Carnegie (Founder, MHC Digital Group)
The panel considered the newly announced regulatory regime, with panellists continuing calls for regulatory clarity. Loretta Joseph provided insights into Australia’s place in the global regulatory framework, stating that regulation needs to go ‘beyond consumer protection’ and emphasised the importance of the international standards authorities in particularly the Financial Assets Task Force recommendations on AML/CTF. Chloe White drew on her involvement in the virtual assets regime in Dubai providing useful comparisons to proposed regulations. Ryan McCall observed that new licensing requirements will impact smaller businesses given the cost of compliance. Mark Carnegie welcomed the new regulations particularly after the events of market collapses like FTX and stated that regulators must start with the actual problems in crypto.
Kate Cooper (Head of Innovation – Digital Assets, NAB), Julian Sawyer (CEO, Zodia Custody) and Rene Michau (Global Head – Digital Assets, Standard Chartered Bank)
The panel focused on banks’ adoption of crypto assets, regulation and the increasing interest in tokenisation of real world assets. Kate Cooper discussed NAB’s stablecoin and its focus on ‘high friction, high value use cases’. Kate also welcomed the legal clarity in the new regulations, reiterating several phrases from the Assistant Treasurer’s speech including ‘pragmatic’, ‘consumer centre’ and calling the regime a ‘regulation and innovation framework’. Julian Sawyer welcomed the regulations and discussed the entry of Zodia Custody into the Australian market as the preeminent ‘bank grade’ custody provider. In response to a question from the audience about the issue of debanking, Rene Michau explained that the concept of debanking implies that everyone debanked is entitled to banking, which isn’t necessarily true, and posited that clear standards and regulatory framework for entities seeking banking services will be important to ensure against category based decisions.
After opening with a history lesson on free-banking in the United States and Australia, Brad Jones reinforced the importance of the current two-tier banking system, with a reputable central bank operating as an ‘anchor’ and ‘enabler’ of competition which provides a ‘foundational level of trust’. He stated that tokenisation and blockchain technology will be an ‘evolution, not a revolution’ and that efforts should be focused on uplifting rather than replacing the two-tier system. Brad Jones discussed the huge potential for tokenisation to drive efficiency into the financial system, through enhanced auditability replacing the banking ‘still done over the phones’ and reduced risks and costs. Drawing from hypothetical data, these cost reductions could potentially amount to approximately $17 billion ($1-4 billion on bid-ask spreads and $13 billion on capital markets efficiencies). Four main forms of tokenised money were outlined:
- Unbacked cryptocurrencies
- Asset backed stablecoins
- Tokenised bank deposits
- Wholesale CBDC
Brad Jones also confirmed that there is no immediate intention for the Bank to consider a retail CBDC.
Sophie Gilder (Managing Director – Blockchain & Digital Assets, Commonwealth Bank), Nigel Dobson (Banking Services Lead, ANZ), Andreas Furche (CEO, Digital Finance CRC) and David Lavecky (CEO and Co-founder, Canvas)
The panel focused on the commentary and work of the RBA in relation to potential cost savings, stablecoins and the wholesale CBDC, as well as industry use of blockchains in financial markets. Sophie Gilder, in discussing the work of CBA in determining the business cases for tokenisation of real world assets agreed with the findings in relation to operational efficiency and efficient allocation of capital. Andreas Furche argued that blockchain and crypto is the next step in ‘evolution of the financial system’ and that tokenisation of real world assets is not just a ‘tail end’ to crypto. David Lavecky discussed Canvas’s role in the RBA CBDC Pilot and the resulting efficiency gains in foreign exchange trading, with blockchain offering cost savings, atomic settlement and easier cross-border payments.
Joe Longo began by reinforcing that ASIC’s regulatory focus is not about ‘DLT [distributed ledger technology], tokenisation or CBDCs’, which may have ‘merit’. Regulations must resolve the tension between fostering innovation but designing clear rules for market integrity. Joe Longo discussed the role of trust, and the transfer of trust to centralised businesses which offer digital asset services illustrated by the crashes of Terra Luna and FTX. He discussed requirements for good regulations focusing on the need for minimum standards, stating that governance, risk management and market abuse requirements still apply and that all businesses have an ‘obligation to determine if they are offering financial products or services’. Joe Longo asserted the need for strong enforcement against service providers operating at the regulatory perimeter, and noted that compliance isn’t a ‘box ticking exercise’ and some businesses will need to fundamentally change. Some key risks will remain unresolved for example selling of inappropriate products and services, and the use of crypto in scams.
Lisa Wade (CEO, DigitalX), Vimal Gor (CIO & Co-head of Asset Management, Trovio), Richard Galvin (Co-founder & CEO, DACM) and Nick Bishop (Director, NotCentralised)
The panel questions sought to gather industry perspectives in relation to the future of Bitcoin. Lisa Wade argued in favour of Bitcoin as both a store of value and a medium of exchange. Richard Galvin provided an important reminder that despite its price volatility, in some countries Bitcoin is a more stable store of value in contrast to devaluing currencies, rather than a speculative asset to profit from. Vimal Gor reinforced that bad actors and counter-party risk have been the key issues in the crypto industry so far. Nick Bishop spoke passionately about the benefits of crypto assets in finance, arguing that the distinctions between ‘decentralised finance’ and ‘centralised finance’ will diminish over time as these systems morph to a new generation of finance.
Susannah Wilkinson (Regional Head – Emerging Technology (APAC), Herbert Smith Freehills), Kain Warwick (Founder, Synthetix), Henrik Andersson (Co-founder & CIO, Apollo Crypto) and Sidney Powell (CEO & Co-founder, Maple Finance)
This panel focused on the current and future state of DeFi and quickly turned to the role of DAOs within both DeFi and the current regulatory environment. Susannah Wilkinson, our Emerging Technology APAC Head, identified the key legal issues when considering the formation and operation of DAOs, raising the important questions of liability particularly to token holders. Kain Warwick and Sidney Powell provided valuable insights into the operation of DeFi protocols and expressed their views on DAOs, as both Synthetix and Maple Finance operate using DAOs. Kain Warwick emphasised the role of democratic governance and discussed the representative committee functions in some DAOs like Synthetix. Henrik Andersson also provided important insights from a private equity and funding perspective for DeFi protocols.
Several founders and CEOs offered their insights on the latest regime, the state of the crypto market and the future outlooks of their respective businesses. Jeff Yew (Founder & CEO, Monochrome) discussed his transition from CEO of Binance Australia to establishing Monochrome, following differences in business focuses. Brian Armstrong (CEO of Coinbase) provided insights to Coinbase’s history and the recent SEC hostility, and commented on the new regulations in Australia stating that it is promising signs. Daniel Roberts (Co-founder & Co-CEO, Iris Energy) opened with a history of money, in particular the devaluing of money over time, and discussed Iris Energy’s projects in using excess energy to mine Bitcoin. Lastly, Robbie Ferguson (Co-founder & President, Immutable) gave insight into the lessons learned at Immutable over the past few years particularly in building in bear markets, and not wanting to be ‘the main character in crypto’.
An additional conversation invited Paul Fletcher (Shadow Minister for Government Services and the Digital Economy) who spoke about the necessity of regulation but contended that a light-touch, practical framework is important to not impede the freedoms of people investing.