Navigating the Regulatory Trilemma: ASIC Chair calls for strong crypto enforcement
Updated: Oct 22
Earlier this week at the AFR Crypto Summit, ASIC Chair Joe Longo delivered a speech making his case for strong crypto regulation and enforcement.
Mr Longo's spoke following a positive speech by the Assistant Treasurer, Stephen Jones, earlier that day announcing the release of Treasury's Consultation Paper setting out the government's plans for regulating digital asset platforms as a new form of financial product, with a view to both encouraging innovation and consumer protection.
The decline of Rome
Mr Longo drew a curious parallel between the economic conditions of the Third Century Roman Empire and the economic landscape of October 2023. Amidst economic instability and dwindling trust in traditional financial systems, saying that Roman citizens at the time resorted to forms of private money and bartering. In ancient Rome, the debasement of the silver denarius led to widespread distrust, which Mr Longo sought to analogise to today’s skepticism towards centralised currencies. The speech then delved into his view on the need for robust regulation in the cryptocurrency space.
Trust in Crypto
Mr Longo mentioned the fundamental role of trust in any financial system, but without distinction between decentralised systems and centralised systems which used decetralised products. He focused on the original libertarian intentions of cryptocurrencies to create trustless systems which would disintermediate banks, but that the ecosystem has evolved so that users are still placing significant trust in various parties within the crypto ecosystem, particularly in custody.
As Mr Longo put it:
This, I will argue, makes a clear case for strong regulation supported by effective enforcement.
Mr Longo noted the recent "crypto winter" following the collapse of key platforms as a stark reminder of how much trust is placed in intermediaries and the consequences when things go wrong. The crypto industry in Australia has been calling for custody rules quite publicly long before the collapses of last year and is welcoming a process by which custody of customer assets can provide strong consumer protection.
Balancing Regulation and Innovation
One of the most significant challenges in the crypto space is finding the right balance between regulation and innovation. Mr Longo said:
Ultimately, the challenge for regulation is to resolve the tension arising from not discouraging financial innovation while also seeking to provide clear rules and maintaining market integrity.
The careful balancing of these three concepts (i.e. fostering innovation, protecting consumers, and maintaining market integrity) has been referred to as the "regulatory trilemma", which Mr Longo has spoken about previously. It is without a doubt one of the most challenging areas that regulators face, and often these concepts can pull in opposite directions. Financial innovation requires clear rules, which come with a compliance cost, and risks creating 'regulatory moats' for those who can bring the capital required to comply. But if regulations are too light touch, then valuable protections for consumers may not be absent. Enforcement and guidance from regulators becomes extremely important when a new technology provides new ways of doing business which have not been considered in past regulation.
When it comes to the trilemma, Mr Longo made very clear that ASIC will prioritise protecting consumers whatever the form of the future crypto regulatory framework, using air quotes when referring to consumers "investing" in crypto and repeatedly stating his skepticism of crypto as an asset class. This is consistent with the US SEC's approach, with Mr Gary Gensler, Chair of the SEC, repeatedly referring to crypto as the "wild west".
As ASIC places consumer protection at the forefront of regulatory concerns, and despite crypto-assets not being an asset class that Mr Longo things is suitable for consumers, Mr Longo said that crypto-assets should be held to the same standards as traditional financial systems and services:
Offering services that involve new and innovative technologies doesn't afford service providers a regulatory exemption.
Bright line guidance from ASIC on when a crypto-asset would be a financial product, or how a crypto-asset financial product could be offered under the existing regulatory framework, is something the industry has sought for many years, and similar calls have been made in the US. ASIC has provided "sign-post" guidance in INFO225 and has only identified specific crypto-asset products as financial products through enforcement actions to date.
The global nature of cryptocurrencies necessitates international regulatory coordination. The Chair acknowledged that differences in approaches to regulating blockchain exist worldwide:
Although a consensus is developing through international financial regulatory bodies such as the Financial Stability Board, IOSCO, the Bank for International Settlements and anti-money laundering Financial Action Task Force, more work is needed to ensure we get our domestic settings right for this complex issue.
The FSB, IOSCO and BIS have all published risk-focused reports on crypto-assets and have set out principles in relation to DeFi which seek to 'look through' decentralised systems and locate persons who could be regulated. The Chair correctly identified that work is needed at the domestic level to get settings right in Australia.
Collaboration remains crucial to share lessons and establish harmonised regulatory efforts, which ensures that investor protection and market integrity remain consistent, regardless of the jurisdiction. It seems more education may be needed around how decentralised systems do not fit neatly within laws and regulations made for centralised systems, and how decentralised systems could bring greater efficiency to compliance (so-called programmatic compliance).
Regulatory Clarity and Enforcement
On the question of enforcement, Mr Longo observed:
The most comprehensive regulatory framework in the world would be incomplete without strong enforcement to support it.
This is of course true, but absent a comprehensive regulatory framework for crypto-assets, with ASIC bringing a number of enforcement actions against crypto service providers operating at the regulatory perimeter, the inverse might be proposed: that the strongest enforcement is incomplete without a comprehensive regulatory framework.
Mr Longo also reiterated his previous calls to consumers to "think twice before investing" in cryptocurrencies, sending a very clear message that Australia seems set to continue on a regulation-by-enforcement path while a regulatory framework is considered.
The ASIC Chair's views, that regulatory clarity, coupled with strong enforcement, provides the certainty needed to encourage innovation, will be welcomed by many if the regulatory clarity is fit for purpose and commercial so that start-ups can attract investment and grow.
Many in the crypto industry who have sought regulation (for years) in order to require basic standards be met, tackle rogue operators and scammers, and give Australians confidence to use and adopt digital assets.
ASIC's strong enforcement are hoped to be targeted against scammers and rogue operators and not those who have been actively seeking clearer guidance and more detailed "sign-posts", with meaningful dialogue to educate the regulator and government making proper allowance for those trying to protect consumers while facing an uncertain regulatory framework should held the regulatory trilemma be balanced.
By Michael Bacina, Steven Pettigrove and Luke Higgins