Asic strengthens its cryptocurrency team and seeks to regulate more digital assets | Cryptocurrencies

The Australian Securities and Investments Commission has bolstered its cryptocurrency team as it seeks to regulate more digital assets by classifying them as financial products, a move that would make it harder to sell them to Australians.

Asic has yet to decide whether to classify Ethereum, the second most popular cryptocurrency after bitcoin, as a financial product after the way the currency works changed last week.

Most cryptocurrencies have not been regulated by Asic because they do not meet the definition of a financial product, which deprives the authority of jurisdiction.

However, the regulator increased the size of its crypto team in March amid a wave of industry crashes that devastated investors who poured money into the sector as prices soared in late 2020.

Other regulators have also begun to take a closer look at cryptocurrency, with the US Securities and Exchange Commission becoming aggressive in its approach to whether individual coins, including Ethereum, qualify as securities, bringing them under its regulatory umbrella.

“We’re not going to be cheerleaders for crypto assets,” said Asic’s executive director of markets, Greg Janko.

As cryptocurrencies are mostly not financial products, exchanges that trade them are largely unaffected by Australian law, apart from the requirement to report transactions to financial intelligence agency Austrac.

But if Asic decides that one or more of the most popular coins are financial products, exchanges will either have to delist them or become subject to a list of regulatory requirements.

They will need financial services licences, which may require proof that they hold large sums of capital on reserve, and will be required to keep client funds segregated – something that collapses overseas have revealed is not standard practice.

A bigger challenge would be meeting new design and distribution obligations on financial products that came into force last October as part of reforms following the banking royal commission.

In particular, dealers will need to identify the target market.

Who that might be was “a good question,” Janko said.

“Possibly only those people who are willing to take extreme risk, extreme risk for highly volatile products with no underlying asset, where the custody arrangements might not be, you know, maybe at risk or unusual.”

Until recently, crypto was not on Asic’s hit list – there was only one person dedicated to this area.

In March, Asic added a second full-time employee and expanded its capabilities. Crypto assets are now one of its “core strategic projects,” the regulator said last month.

“While I would say, even in the last year when we were doing our business planning, crypto was not the big priority,” Janko said.

“We’re seeing products that mimic financial products because there seems to be some crypto twist, they seem designed to avoid regulation. So we’ve seen that and you’ll see that with similar products overseas, people have lost a lot of money on them.”

The regulator is also concerned about the convergence of crypto-trading platforms with stock-trading platforms, along with an investigation into it by SEC Newgate in November. This research showed that 44% of Australian retail investors held crypto, and of those who did, only 20% felt they were taking a risk.

“If people are trading stocks, all of a sudden cryptocurrency is offered to them and they start thinking that maybe they’re not riskier than trading stocks,” Janko said.

The regulator has received legal advice from senior counsel on whether certain coin offerings qualify as financial products.

“There are so many of these things that we probably won’t get to them all,” Janko said.

“But we have a couple that we are looking at very carefully. And if we have to take enforcement action, we will.”

In the case of Ether, last week it switched from awarding new coins to miners who have completed energy-intensive mathematical calculations, a process called “proof of work,” to awarding new coins to coin holders who agree to lock Ether, a process , called “proof of pledge”.

The change, known as the “merger,” raises the possibility that Ether may now pass legal tests in the US and Australia, meaning it should be regulated as a financial product.

Asked if Asic has decided whether or not Ether will be a financial product after the merger, Janko said: “No, no, we haven’t.”

“We’re technology agnostic and we’re looking at these things right now because it’s not as simple as one thing – once you start putting assets together, it’s how it’s done. Is there a common goal? Or are you just in the pool and just getting a share? This could be something different,” he said.

“So this is where a lot of work becomes for Asic to get to the bottom of how things are designed.”

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