Should crypto be regulated? Insights from an ethical broker

How should cryptocurrencies be regulated, if at all? This question has been the topic of recent contentious debate, with governments, financial institutions, and investors all weighing in.

In 2022, Australia is set to create a licencing framework for crypto exchanges to promote greater transparency and accountability. These regulations could include the possibility of launching our own retail central bank digital currency as part of the biggest overhaul of the AUD $650 billion-a-day non-cash payments industry in a quarter of a century.

Australia was one of the first countries to embrace cryptocurrencies, legalising crypto transactions as early as 2017. Around the world, there are more than 220 million people who are trading cryptocurrencies- generating a total combined value worth more than US$2 trillion. Enforcing regulations could see cryptocurrency exchange operators comply with the same obligations attached to those who give financial advice- including transparency measures such as annual reporting.

These regulations are being introduced at a critical time. In the first half of 2021, cryptocurrency was the most reported type of investment scam, with 2,240 reports Australia-wide. The Australian Competition and Consumer Commission said losses to investment scams involving Bitcoin reached $25.7 million in mid-2021, compared to $17.8 million across of all 2020- the equivalent of a 44%increase. Undoubtedly, the data demonstrates that cryptocurrencies exchange operators must be regulated, but how?

Investor protection should focus on the safety of funds and crypto assets

Crypto-assets are virtual or digital assets that do not exist physically as coins or notes, but instead as digital tokens stored in a digital “wallet”. Crypto relies on blockchain for security and other features, and may or may not have an actual asset underlying it. Anyone can create a crypto-asset, so at any given time there can be thousands in circulation. For this reason, price fluctuations in crypto can be extremely volatile, as cryptocurrencies are only worth what people are willing to pay for them.

Therefore, it is important that crypto regulations focus on the safety and protection of investors. Regulations that crack down on crypto crimes, scams, and tax evasion would be extremely beneficial to investors and ensure the long-term growth of the crypto market.

Regulators can hopefully view crypto as tech innovation that has real-world applications

Despite the popularity of crypto, in Australia it’s still not considered legal tender for goods and services to be used for everyday transactions. However, recent research reveals that 1 in 3 Australians believe that Bitcoin will eventually overtake fiat (regular) currency. 1 in 6 Australians own cryptocurrency, including almost a third of Gen Z. To continue the growth in the crypto space, regulators need to view cryptocurrencies as a tech innovation with real-world applications and provide a strong framework to allow those innovations to continue, whilst still affording comprehensive investor protection.

Brokers have standards and rules they must follow with client money, and the same standards should follow with crypto

ASIC is the body responsible for regulating brokers in Australia and there are a strict set of rules brokerage firms must comply with. In the CFD industry, for example, each brokerage firm must have an ASIC authorisation to promote their services in Australia, otherwise their website will be blocked by the local ISPs.

In addition, brokers must follow strict client money rules to ensure client/ investor money is kept segregated from company money and that the broker has sufficient capital to meet its obligations to clients and other creditors without putting money at risk. Client money rules are the primary mechanism ASIC uses to protect investors as this is where many CFD broker failings have come from. This is also how crypto investors can be harmed by crypto exchanges and it’s a significant risk. Brokers must accept that they will be audited on a regular basis to promote transparent business conduct.

Forex and CFD brokerage firms are also required to meet minimum capital requirements of at least $1 million (AUD) to ensure that they can meet their obligations to creditors and investors without endangering client money. To ensure transparency and fairness across the board, crypto exchange operators should be held to similar standards and rules as other brokers.

Australia has a great opportunity to be a crypto innovation hub

Finally, it’s important that any regulations placed on the sector take into account that crypto technology is in the early stages, and there’s still plenty more innovation and opportunities for technological advancement down the track. Australia has a great opportunity to become a crypto innovation hub, by making positive moves to address the space.

Some examples of how regulations could be used to create positive innovation and growth include:

• Preventing ‘debanking’: Debanking is when banks and other financial institutions ban cryptocurrency operators from using their services, causing a lot of problems for crypto companies and investors alike. Whilst the government may not be able to force banks to provide their services to any business or person, more can be done in this space to address these issues.
• Reducing CGT for crypto traders: there have been calls to scrap the capital gains tax (CGT) completely for digital currency trades, however it’s looking more likely that the CGT should only be applied when there is a clearly definable capital gain or loss when a trade occurs.
• 10% tax discount for companies using renewable energy: The idea has also been floated that a 10% tax discount should be applied to companies using their own renewable energy sources to ‘mine’ Bitcoin. This would be a step in the right direction, supporting not only increased growth in the crypto market but a positive impact on the environment as well.

As a professional trader, the biggest misconception I hear around cryptocurrencies is that some people mistakenly assume it’s just a fad. However, as the savvy investor knows, just because crypto is still a relatively new asset doesn’t mean we should dismiss it or overlook it as a passing trend.

In the dot com boom of the late 90s and early 2000s, many projects had insane valuations and most disappeared over time. Either way, the internet as an underlying concept turned into what it is today, and standout companies have stood the test of time. Regulators need to prioritise innovation, transparency, and investor protection as the market continues to grow. Cryptocurrency as a concept is like what the internet was 25 years ago, and a lot of the work being put in will only be fully realised in the future. We are still early in its development.

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