Regulation has been a divisive topic since the very beginning of crypto digital assets, with many touting decentralised finance as an alternative to the current regulatory framework. Yet this year’s Australian Blockchain Week showed a striking acceptance of the need for guardrails if the digital asset industry is to move forward safely and reliably. It’s as if we’ve now seen enough of what can go wrong to realise that regulation is key to its future growth – and even its survival. 

In short, if more consumers suffer losses due to bad actors on platforms associated with blockchain, the technology may never fulfil its potential. 

“Regulation will help fight scams,” said Sophie Gilder, Managing Director, Blockchain & Digital Assets at Commonwealth Bank. “Without it, how can the average Aussie work out which are the good exchanges?” 

“Payments and crypto are showing most innovation, but also the greatest risks, including cyber hacks, scams, and privacy issues,” said Trevor Power, First Assistant Secretary of the Financial Systems Division, Commonwealth Treasury. “Government has a role to regulate and balance safety with the benefits.”

“There’s place for DeFi and decentralised assets – they’re not going away,” said Jessica Renden, CEO of Cointree. “They are a challenge for regulation though.” 

Jess is right, of course. The question is not whether blockchain-based financial services should be regulated, but how? It’s a fast-moving, heterogeneous and dispersed complex of activities spanning a range of potential players from heavily regulated banks to start-ups. 

To protect and promote

I’d go so far as to say that the new acceptance of regulation’s role has ushered in a fresh understanding of regulation itself. Traditionally, crypto OG’s have tended to view regulation as the kind of centralised oversight they want to avoid. However, after the collapse of FTX,  there’s an understanding that the right kind of regulation will be a key factor in building up the trust needed to enable the uptake of blockchain-enabled financial services. 

Among regulators, there is a global consensus that action is necessary to prevent fraud and mismanagement. Last year in Bali, G20 leaders discussed the need to raise awareness of risks, aiming to achieve better regulatory outcomes and a level playing field in the crypto industry. 

Yet there is still no agreement on the specific form of regulation, its enforcement, or its coverage. 

Things are changing fast. In May this year, the European Council adopted a harmonised EU-level legal framework for cryptoassets, known as MiCA, to regulate the industry across all 27 member states.

Hong Kong introduced a new regulatory framework for virtual assets on 1 June, allowing retail investors to trade digital tokens on licensed exchanges. Singapore already regulates some digital payment tokens under the Payment Services Act 2019. 

The US appears to be taking a more aggressive stance. US Treasury Secretary Janet Yellen has called for more effective oversight of cryptocurrency markets, and the Securities and Exchange Commission has initiated enforcement actions against major cryptoasset exchanges Binance and Coinbase – to the dismay of many at the Australian Blockchain Week event. 

Policies for the next generation 

In the fast-moving blockchain world, innovation also means risk. 

“There are many gaps,” said Aaron Boyd, Vice President, Payment Security & Risk, Cyber & Intelligence at Mastercard. “When new technologies emerge, regulation has to catch up. There’s a window for scammers and opportunists.”

Thankfully, lawmakers are proactive and are learning fast. 

“Australia is looking at the next generation of financial services,” said Commonwealth Bank’s Sophie Gilder. “The country does not hate crypto but is also not wide open. Thankfully, the regulators are showing up and are engaged.” 

Nigel Dobson, Banking Services Portfolio Lead at ANZ, pointed to detailed publications on the subject from the Monetary Authority of Singapore and the Bank for International Settlements as a sign that regulators have improved their understanding in the past few years. “Regulators are asking more sophisticated questions,” he said. “This shows the evolution that’s underway.” 

The Treasury’s Trevor Power illustrated this point when he referenced the Payments Reform Plan recently released by the Australian Government. 

“Modernisation is a big part of the government’s agenda, including productivity,” he said. “We will take an enhanced leadership role; the plan will be updated every 18 months and there will be consultation.”  

Keeping it competitive

In Australia, market participants see regulation as a decisive factor in establishing our future as a blockchain hub. 

“Regulation decides whether Australia moves ahead or drops behind. Investor protection is important,” opined Michael Bacina, Chair, Blockchain Australia. 

“There is a risk we will fall behind if the regulators go the wrong way,” said Ryan McCall, CEO at Zerocap. “Hong Kong is trying to reopen and digital assets are key, so their regulations are supportive. The UAE has a virtual assets regulator, which is not perfect but is progressive.”

Policymakers are conscious that regulation must not stifle continued development. 

“Our regulation must be tech-agnostic, futureproof and leave room for innovation,” confirmed Trevor Power at the Treasury. 

Charlie Karaboga, CEO & Co-Founder at BlockEarner, agreed. “Issuing stablecoins under regulation should not dictate the kinds of coins or their uses,” he said. “Let the customers do what they want with cryptocurrencies.” 

Based on what we heard at Australian Blockchain Week, regulation is coming, but there’s still a long way to go. In my opinion, investor protections are important and that’s why broad adoption of blockchain-based financial services will take time. Nobody wants to see ordinary savers lose all their super. We need to get regulation right.