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After a series of wars and revolutions, the economic climate is unstable. Inflation means the currency has been losing value for decades, with salaries barely keeping pace.
In response, distrust of the standardised currency has led many people to look at alternative forms of payment, deliberately outside reliance on state standards. But without a standardised value, these alternatives are themselves volatile.
Alongside these developments, traditional assets seem to be less appealing, with large numbers of investors putting their money into new, less tested areas in an attempt to increase profits.
I’m speaking, of course, of the Third Century Roman Empire. But you would be forgiven for thinking I was describing the global economic conditions of October 2023.
By the time the Emperor Severus Alexander took the Roman throne in 222AD, the purity of the silver denarius had been significantly devalued, and distrust in this centralised coin was widespread.
Those who could, had taken to building up more reliable stores of value by removing the silver from the impure coins, much like the Americans who saved their silver dollars in the 1960s. Others reverted to simple bartering.
The similarities between the economic conditions of Alexander’s reign and today are striking. In the last two decades, in the wake of economic shocks like the global financial crisis and the COVID-19 pandemic, we’ve seen a resurgence in the popularity of precious metals.
And, of course, there’s the emergence and growth of crypto, originally intended, like those Romans minting their own coins, as an alternative medium of exchange to the official government-sanctioned system.
Looking back to the third century’s economic crisis reminds us of the need for, and the central role played by, trust. And nowhere is this more applicable than crypto. Despite the intent of the creators of crypto to set up a trust-less system, consumers are still required to place significant trust in many parties within the crypto ecosystem. This, I will argue, makes a clear case for strong regulation supported by effective enforcement.
I will begin by demonstrating just how much crypto relies on unregulated trust, before discussing the need for regulation to mitigate the risk of consumer harm.
However, first a caveat. I am not talking about distributed ledger technology, tokenisation, or central bank digital currencies, which have been discussed in other sessions today. These may very well have merit, and neither I nor ASIC are against them – nor are we against innovation as long as the two other horns of the ‘regulatory trilemma’ are acknowledged. I’ve spoken about this trilemma before.
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. Whatever the resulting crypto regulatory framework is, it should not come at the expense of adopting high standards of consumer protection.
Let’s begin by looking at the role of trust in crypto.
The role of trust
As the denarius crisis shows, trust is essential in any financial system. This question of trust has been at the heart of crypto since its inception, with cryptocurrencies first developed to remove the need to work with (or trust) intermediaries or governments.
Notably, this reflected a deeper trust by the core development community in computer code than in anything else. There was a clear distrust of financial institutions that issue, hold and manage money, of central governments, and of the existing economic, political, and regulatory structures.
And so, like their Third Century predecessors, the promoters of crypto sought a peer-to-peer system that could deliver outcomes more efficiently than through government or institutional intermediation.
But crypto today is far short of that goal. The prices of most crypto-assets are highly volatile. The price you pay in crypto for a coffee, for example, will change every hour. Instead of a decentralised peer-to-peer currency system, today lots of centralised businesses facilitate consumers ‘investing’ in crypto-assets, in the hope their crypto will be worth more in the future.
Customers trust these entities with their money. They trust them to perform their services effectively, to buy, sell and hold crypto on their behalf.
Indeed, many of the purported benefits of crypto, such as ‘trust-lessness’, from a user’s perspective, are lost. It is not always clear to customers that intermediaries aren’t generally regulated for their crypto activities.
Nor do they always provide the consumer protections normally expected when dealing with what appears to be a financial services business.
The ‘crypto winter’ that followed the collapse of Terra / Luna and FTX is good evidence of just how much trust is placed in intermediaries – and just how dangerous that can be when things go wrong.
The need for regulation
All this means we need regulation to ensure trust isn’t misplaced. Good regulation requires a base level of standards and provides mechanisms to promote compliance with these standards.
I’ll take each in turn, but ultimately, this is about providing protections for consumers to enable them to better understand what the entities do for them, and the risks involved.
First, regulation is about setting the minimum standard. In this respect, crypto’s standards and underlying behaviours and risks aren’t so different from traditional finance. Trust, as our excursion to the Roman Empire shows, is fundamental to any financial system. Lies, theft and investor losses are enemies to be defended against in crypto as in anything else. Questions of governance, risk management, and market abuse still apply.
In ASIC’s view, important consumer protections such as design and distribution obligations should also apply – given the nature and risks of the activities performed in the crypto industry.
We shouldn’t think crypto is somehow outside traditional standards. Offering services that involve new and innovative technologies, or that are built around new and innovative technologies, doesn’t afford service providers a regulatory exemption.
All businesses have a responsibility to determine whether they are offering financial products or financial services. If you are offering such products, it’s your responsibility to get a licence or seek relief from the financial services regime.
ASIC’s guidance (Information Sheet 225) helps make it clearer when crypto-assets may be, or involve, financial products, and I encourage you to work through that material.
We won’t hesitate to act on any cases we think involve financial products that seek to avoid current regulatory standards.
Crypto must be held accountable to the same high standards we expect of everyone else. While many of the services provided using crypto have traditional finance equivalents, there are differences that apply when it comes to the second aspect of regulation: putting in place mechanisms for meeting those standards.
The current regulatory system is designed around the basic concepts of ‘financial products and services’ – and some aspects of crypto don’t fit neatly in that framework.
This means it can be unclear whether a particular service performed in relation to crypto requires a licence. This is a key theme of the feedback we often hear from industry, and a recurring theme in the Government’s consultations.
There isn’t yet an internationally consistent approach to regulating crypto activities. 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.
These differences mean that when crypto is regulated, there will need to be some tailoring of the existing regulatory framework.
As IOSCO’s crypto and digital assets report emphasises, the key issue isn’t whether new or existing regulation is used, but that regulatory outcomes for investor protection and market integrity are the same as, or consistent with, those that are required in traditional financial markets.
As announced by the Assistant Treasurer this morning, Treasury has released its consultation paper on future regulation of crypto-asset service providers. This consultation is an opportunity to design a framework that’s fit for purpose.
One that addresses the lessons of crypto failures and losses, while recognising crypto’s differences. Whatever regulatory model the Government decides is appropriate, ASIC needs access to the same – or similar – tools as we have for other products and related services.
ASIC will continue to take action wherever we think we can, but we can’t protect the consumer, we can’t be an effective regulator, with a limited tool kit. Which brings me to the need for strong enforcement.
Effective regulation requires strong enforcement
The most comprehensive regulatory framework in the world would be incomplete without strong enforcement to support it.
ASIC has already taken a number of enforcement actions against crypto service providers operating at the regulatory perimeter. Those cases are working their way through the courts, so I won’t comment further at this time.
There is anecdotal evidence that some in the crypto industry are keen to be regulated to enhance their standing and credibility. But credibility doesn’t come just from being subject to regulation.
It comes from compliance with the law. And compliance is not simply a box-ticking exercise. Some of you will need to fundamentally change how you do business in order to achieve compliance.
Also, importantly, I want to stress that creating a culture of compliance means putting the consumer first. that should underpin every aspect of what you do.
ASIC will take action within our regulatory mandate; we are after all, a law enforcement agency.
We will not hesitate to act where we see harm – the likelihood of which is heightened by the risky nature of crypto-assets.
Risky for consumers: Think twice before investing
But, of course, regulation and enforcement are not a panacea. They do not and cannot eliminate all risk for consumers. Crypto-assets will continue to be inherently risky and volatile. Businesses that deal in crypto may fail, as with any other type of financial product or business.
Ultimately, the real consumer consequences of crypto activity remain ASIC’s focus. Key risks remain unresolved, like the selling of potentially inappropriate products and services to customers; the appropriate safekeeping of customer assets; and the use of crypto-assets in scams.
Addressing this is not easy. As economist Eswar Prasad points out in his recent book, The Future of Money, crypto operates beyond any one regulator’s borders, meaning it requires ‘coordination and harmonisation of regulatory efforts across national regulators. This ‘makes it difficult to subject them to national rules and regulations, especially with respect to investor protections.’
To address this, ASIC is actively engaged in international fora used by national regulators to share lessons and assist one another on specific matters.
But, at the end of the day, while fixing the regulatory framework is crucial, it will not change the core realities of crypto.
Crypto-assets are inherently risky and complex. Buying them remains highly speculative.
Despite the common term ‘cryptocurrency’, this isn’t ‘currency’ in any conventional sense. Nor is it a financial investment like buying ‘shares’ or ‘bonds’ in a company. People should be careful about putting money into crypto.
