- L Misthos and M Bacina
AFR: Australian regulators yet to understand digital assets
The Australian Financial Review (AFR) has reported shortcomings in the understanding of digital assets in Australia by regulators, specifically the Australians Securities and Investment Commission (ASIC).
A range of inconsistencies in the digital asset space was highlighted in a recent Chanticeer column, including ASIC taking near no steps to stop scammers using social media platforms to lure Australia into scams using famous individuals images and claims of returns from financial product trading platforms, and the Australian Stock Exchange not permitting Bitcoin exchange-traded products while Afterpay's new possible owner Square Inc, which made the majority of its profit in the first six months of this year from Bitcoin, prepares to list.
Despite many international jurisdictions, like Canada and Europe, allowing exchange traded products which treat digital currencies like property or commodities, the AFR accuses Australian regulators of awaiting guidance from the United States, who have had their own tumultuous year with digital regulation.
One unnamed ASIC official was called out for not understanding how Bitcoin works in a recent online meeting, suggesting that because of the way Bitcoin's code *could* change, it should be considered a "standalone asset". This repeats ASIC's suggestions in CP343, a consultation which sets out ASIC's view that crypto-assets can't fit within existing asset classes because there is no certainty of pricing, like indexes (except that S&P offers indexes), because there is challenging to custody of such assets (except there are regulated custody providers already in the space), and the last argument which seems to be remaining, that the code could possibly change.
By virtue of the publicly available source code and long published documentation, it is well known the only way to change the code of the Bitcoin protocol is to have control of over 50 per cent of miners running the network, a feat that would require control of more electricity than is needed to power Australia and would be immediately and easily apparent to all given the code of Bitcoin's protocol is open source and can be inspected at any time.
This notion, that a possible change in an assets use or "class" falls apart if the logic is applied to other common exchange traded products. Real-estate investment trusts and gold exchange traded products hold assets which can change in use or "class", for example if a property changes use or a gold bar is converted into a gold watch.
Regulators need a clear understanding of the things which they seek to regulate, lest a well intentioned desire to protect consumers simply stifle innovation and drive potential purchasers offshore where they will have even less protection from unscrupulous operators.
While the digital asset space continues to grow, it is paramount Australian regulators properly understanding its nature in order to benefit and support the digital economy. We hope the ongoing Bragg Inquiry recommends all Australian regulators receive specific funding to help boost their knowledge understanding of this growing technology so they can better apply their regulatory tookit to the real opportunities and risks in the space.