During a recent webinar hosted by Piper Alderman’s Blockchain Group, speakers from Chainalysis and Swyftx joined in for a discussion on the latest regulatory and financial crime developments in relation to digital assets.
The digital asset ecosystem is currently at a pivotal point following the bull run of 2020-21 and the collapse of several high profile businesses, including FTX, last year. Markets appear to have stabilized, with new innovation rising in a number of different areas, including BRC-20s, Ordinals and increasing real-world asset tokenization, and a focus on real world use cases.
However, while jurisdictions such as the EU and Hong Kong are leading the way in introducing and implementing a regulatory framework around digital assets, Australia risks lagging behind, despite ongoing efforts through a Federal Treasury led Token Mapping consultation, an AML/CTF consultation and a private members bill proposing licensing for centralised exchanges, custodians and stablecoin issuers.
Investor protection is often delivered through regulation and different approaches taken across jurisdictions were discussed. For example, the requirement to issue stablecoins in Japan, where issuers must be a qualified bank fund transfer service provider or a Trust company, whereas in Singapore, a standalone stablecoin category for digital assets under the existing Payment Services Acthas been proposed. Despite the different approaches taken internationally, a common trend is that tokens that resemble securities are increasingly being identified and treated in ways analogous to existing securities laws but with tailoring to meet the unique characteristics of crypto technology.
Hong Kong authorities are pushing ahead with permitting retail access to digital asset trading subject to certain safeguards and specific limits, with stringent requirements including a suitability due diligence process to ensure clients have a sufficient understanding of risks of crypto-assets and limitations on retail investors’ access to only eligible ‘large cap virtual assets". In examining the approach taken by Hong Kong, an important question was raised as to how much friction to retail users will be suitable in the Australian market to deliver user protection without users moving to offshore providers.
Adam Percy, the General Counsel & Company Secretary at Australian cryptocurrency trading platform, Swyftx, said:
Customers are going to trade what they want to trade, whether that’s done by an onshore Australian entity or whether they have to…get a VPN to access an offshore facility, that is going to happen.
He further suggested that offering consumer protection in Australia through regulation is recommended so that users financial well-being is not jeopardized by them
pursuing alternative trade opportunities offshore. However, striking the correct balance between regulating for consumer protection and facilitating market demands remains a difficult task.
Chengyi Ong, the Head of Policy APAC at Chainalysis noted that the Chainalysis Crypto Crime Report showed overall illicit transaction volume still remaining a ‘fairly small share of total activity on chain, far less than 1%’.
Chengyi identified the key drivers behind the 2022 USD$20.1B illicit transaction volume as sanctions, scams and hacks. However, she reflected optimistically on the potential to significantly reduce illicit activity in stating that there are many commonalities behind these seemingly separate crimes. She suggested that networks of perpetrators using the same type of services for money laundering provide a good target for law enforcement to conduct high impact enforcement actions. In doing so, she also highlighted the potential of chain analytics in assisting scam identification and risk management, which was echoed by the other panelists.
On the topic of surveillance, Michael Bacina, Partner and Head of the Blockchain Group at Piper Alderman and Chair of Blockchain Australia observed:
If we want a digital cash for use online, we probably don’t want it to be traced for all of our everyday transactions…being able to catch people who are doing the wrong thing without living in a surveillance society…is a very difficult balance to strike.
However, he echoed the panelists’ optimistic view on Australia’s potential to introduce effective regulations to attract people onshore in stating:
Australia has a really valuable opportunity here because we’re viewed favourably for our rule of law and for…quality regulators who are...honest
While the Australian Government has been continuing its efforts to introduce regulations on digital assets, given that other jurisdictions like the EU and Hong Kong have already surpassed the discussion and consultation phase and are transitioning into the implementation stage, Australia will have to play catch up to prevent further innovation heading offshore and Australian users being protected only by foreign regulatory regimes.