The Australian Securities and Investments Commission has strengthened its cryptocurrency team as it seeks to regulate more digital assets by classifying them as financial products, a move that would make it more difficult 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 are not regulated by Asic as they do not meet the definition of a financial product, thus depriving them of jurisdiction.
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However, the regulator increased the size of its crypto team in March amid a wave of industrial meltdowns that devastated investors pouring money into the sector as prices rose.
Other regulators have also begun to take a closer look at cryptocurrency, with the U.S. Securities and Exchange Commission becoming aggressive in its approach to determining whether individual coins, including Ethereum, qualify as securities, and placing them under the regulatory umbrella.
“We will not be the cheerleaders for crypto assets,” said Asic’s executive director for markets, Greg Yanco.
Since cryptocurrencies are not usually financial products, the exchanges that trade them are largely unaffected by Australian regulations, with the exception of the requirement to report transactions to Austrac financial intelligence agency.
But if Asic decides that one or more of the most popular coins are financial products, exchanges should remove them from the list or be subject to a list of legal requirements.
They will need financial services licenses, which may require proof that they have large sums of capital in reserve, and they would have to segregate clients’ money – which collapses, revealed abroad that it was not common.
More challenging would be meeting the new design and distribution requirements for financial products that came into effect last October as part of the reforms following the Royal Banking Commission.
In particular, dealers must identify a target market.
Who that might be was “a good question,” Yanco said.
“Could it just be people willing to take extreme risks, extreme risks on highly volatile products with no underlying assets, where custody arrangements might not, you know, might be risky or unusual.”
Until recently, the crypto was not on Asic’s hit list – there was only one person dedicated to the region.
In March, Asic added a second full-time employee and expanded its capabilities. Crypto assets are now part of its “core strategic plans,” the regulator said last month.
“Until what I would say, even last year when we were doing our business planning, crypto was not the big priority,” Yanco said.
“We see products that mimic financial products because there seems to be a certain crypto twist, they seem designed to avoid regulation. And so we’ve seen that and you’ll have seen that with similar products abroad, people have lost a lot of money on it.
The regulator also expressed concerns about the convergence of crypto trading platforms with stock trading platforms, as well as the investigation conducted by SEC Newgate in November. This survey showed that 44% of Australian retail investors owned crypto, and of those who did, only 20% believed they were taking a risk.
“When people trade stocks, they are suddenly offered a crypto and begin to think that maybe they are no more risky than trading stocks,” Yanco said.
The regulator has sought legal advice from senior counsel as to whether certain coin offerings qualify as financial products.
“There are so many of these things that we probably won’t discuss them all,” Yanco said.
“But we have a few that we’re looking at very closely. And if we need to take enforcement action, we will.
In the case of Ether, last week went from awarding new coins to miners who performed energy-intensive mathematical calculations, a process called “proof of work,” to awarding new coins to coin holders who agree to Ether. to lock, a process called “proof of stake”.
The change, known as the “merger”, raises the possibility that Ether will now pass legal tests, both in the United States and Australia, meaning it must be regulated as a financial product.
When asked whether Asic has decided whether or not Ether will be a financial product after the merger, Yanco replied, “No, no, we don’t.”
“We’re technically agnostic and we’re looking at these things now because it’s not as simple as one thing – once you start collecting assets, it depends on how it works. Is there a common goal? Or are you just in the pool and do you just get a piece? It could also be something else,” he says.
“And that’s where it becomes a lot of work for Asic to get to the bottom of how things are designed.”