Is crypto finally going mainstream?

Just as my last blog on crypto regulation went to press, news broke that CBA (one of Australia’s “four pillar” banks) will be adding crypto assets to its mobile banking app. Add that to the launch of a crypto equities ETF by BetaShares, and further media coverage of local digital asset fund manager Apollo Capital, and you may start to believe that crypto is finally going mainstream in Australia.

But, before anyone gets too excited, a few caveats are in order.

First, the recent flurry of announcements from the Australian Senate, ASIC and AUSTRAC are simply the latest stages in a long-running debate about how crypto assets should be regulated, serviced and distributed. Despite these positive noises, there is still some way to go before crypto reaches critical mass (even though data for Australia shows we have one of the higher rates of market adoption).

Second, there is a lot of noise out there, and not all of it here in Australia. The SEC, FATF, ISDA, Cboe and SGX are just a few of the institutional voices making announcements on crypto and digital assets in recent weeks. On top of that, of course, there is the President of El Salvador (and the Mayor-Elect of New York) weighing in on behalf of the politicians. Some of this commentary is mere posturing; some is about being seen to be doing something; and a large part is just the legacy markets trying to catch up (and hoping to take control?).

Third, a closer look at CBA, BetaShares and Apollo Capital reveal some significant limitations in terms of what their products actually offer:

The CBA is planning to launch a trial among a small sample of their mobile banking users (although, no doubt, if things go well, it will be rolled out more extensively). But it does not mean the app becomes a fully-fledged crypto wallet: customers will only be able to buy/sell crypto within the app, and they won’t be able to send crypto to third parties. Plus, only a small set of crypto assets will be available.

The BetaShares ETF is not offering direct exposure to Bitcoin or other crypto assets. Instead, the fund is designed to invest in companies (mainly crypto exchanges, miners and technology providers) that are significant or strategic industry players. While that may mitigate the market volatility (and price fluctuation) that crypto experiences, it doesn’t necessarily make for higher returns.

The Apollo Capital fund is only available to wholesale or accredited investors – not retail customers. And while Apollo has done a reasonable job of growing its AUM, I don’t believe there are any major allocations from Industry Super Funds (which manage 27% of Australians’ retirement savings), Retail Funds (21%) or Public Sector Funds (18%). And despite anecdotal evidence that Self-Managed Super Funds (SMSF) are more active in crypto assets (along with Family Offices and HNWIs), recent data from the ATO suggests crypto assets held within SMSF are not much more than $200m.

Having worked in this industry since 2016, it’s always been apparent from an institutional perspective that few want to go first, but nobody wants to be last, when it comes to launching crypto products and services. Of the three Australian stories this week, the most significant is probably the CBA; it certainly got a lot of attention at the recent State of Play presentation by Blockchain Australia, in large part due to the industry implications, and how it will help bring crypto to an even wider audience.

Next week: Summing Up (and Signing Off)

 

 

Crypto Regulation in Australia

You wait ages for a bus, then several come along at the same time. The past week has seen three major developments in Australia regarding the regulation of cryptocurrencies, digital assets and the industry in which they operate.

First, there was the Final Report of the Senate Select Committee on Australia as a Technological and Financial Centre. Among other things, the Committee has recommended a specific regulatory framework for Digital Currency Exchanges, a formal custody regime for digital assets, a classification (or “token mapping exercise”) for the various types of digital assets, and a legal framework to recognize Decentralised Autonomous Organisations as a form or company structure.

Second, AUSTRAC issued a Statement on De-banking, that urges banks and financial institutions to take a case-by-case approach when reviewing potential risks associated with clients engaged in Blockchain and cryptocurrencies. Rather than applying a blanket ban or refusal to deal with Blockchain and crypto businesses, banks and other providers should exercise more discretion, and adopt workable and practical solutions to meet their risk management and KYC/AML obligations. Echoing the overarching theme of the Senate Select Committee, AUSTRAC recognises that de-banking crypto risks stifling innovation, and/or forcing crypto businesses to resort to less than ideal alternative service providers.

Third, ASIC released its Response to submissions made under the recent consultation on Crypto-assets as underlying assets for ETPs (aka Report 705 on CP 343). While there is some overlap with the scope and terms of reference of the Senate Select Committee, ASIC maintains its position that it does not want to be responsible for developing policy on regulating digital assets (that’s the role of Government); while at the same time stating in very clear terms how it believes cryptocurrencies should or shouldn’t be classified (and regulated). For example, ASIC did not accept the view of many respondents that crypto-assets which are not deemed financial products should be treated as commodities. In part, because there is no definition of “commodity” in the Corporations Act; but also because the discussion has been more about market operators, rather than the specific nature of the assets themselves.

Meanwhile, ASIC remains very prescriptive about the criteria for approving certain cryptocurrencies as the underlying assets for exchange traded products (ETPs) – including criteria which received push back from the industry as being too restrictive or inflexible. On the other hand, ASIC does appear to accept that if crypto-assets cannot be defined as financial products (or commodities), then a distinct category is required. This is the case that has often been put forward by the industry, namely the need to define instruments commonly known as utility tokens. To its credit, ASIC has made a fair stab at coming up with a workable definition of crypto-asset as:

“a digital representation of value or rights (including rights to property), the ownership of which is evidenced cryptographically and that is held and transferred electronically by:
(a) a type of distributed ledger technology; or
(b) another distributed cryptographically verifiable data structure.”

While the overall tone of these developments is encouraging, they still reveal a need for greater consistency (and inter-agency co-ordination), and the lack of a well-articulated policy on this fast-growing FinTech sector.

Next week: Is crypto finally going mainstream?

 

Responsibility vs Accountability

One of the issues to have emerged from the response to the current coronavirus pandemic is the notion that “responsibility” is quite distinct from “accountability”.

In the Australian political arena, this is being played out in two specific aspects, both of which reveal some weaknesses in the Federal and State delineation. The first is the Ruby Princess, the passenger cruise ship that appears to have been a significant source of Covid19 infections from returning and in-bound travellers. In this case, blame or liability for the breach in quarantine measures is being kicked around between Border Force (Federal), and NSW Health (State): who was responsible and/or accountable for allowing infected passengers to disembark?

The second arises from the number of Covid19 cases among aged care residents in the Melbourne Metropolitan area. Here, the issue is the governance of aged care facilities as between privately-run homes (Federal oversight), and public homes (State operation). As an example of the strange delineation between Federal and State, “…the Victorian government mandates minimum nurse-to-resident ratios of up to one nurse for every seven residents during the day, the Commonwealth laws only call for an “adequate” number of “appropriately skilled” staff – both terms are undefined.”

As with all key areas of public policy and administration (health, education, social services), the relationship between different government departments and administrative bodies can be confusing and complex. In very broad terms, public funding comes from the Commonwealth (via direct Federal taxes and the redistribution of GST back to the States), since States have limited options to raise direct revenue (land taxes, stamp duty, payroll tax, and fees from licenses and permits). The Commonwealth funding can be allocated direct, or co-mingled with/co-dependent upon State funding. Likewise, service delivery can be direct by the Commonwealth, jointly with the States, or purely at the State (or even Local) level.

Within Victoria, there is an added dimension to the “responsibility” vs “accountability” debate, largely triggered by apparent failures in the oversight of the hotel quarantine programme. This in turn led to the second wave of Covid19 infections via community transmission (and the tragic number of deaths among aged care residents). The Premier has said he wasn’t responsible for the decision to use private firms to operate the security arrangements at the relevant hotels. In fact, the Premier appears not to have known (or wasn’t aware) who made that decision (or how/why it was made). But he does admit to being accountable for it.

Meanwhile, his departmental ministers have similarly denied knowing who made the decision, or they have said that it was a “multi-agency” response – maybe they are trying to shield each other in a strange show of cabinet collective responsibility, and to avoid apportioning direct blame to their colleagues. But if the government didn’t know who was supposed to be running the hotel quarantine programme, then surely the private security firms certainly couldn’t have known either – if so, who was paying them, and from whom did they take their orders and direction?

We are being drip-fed information on the failures in the hotel quarantine programme: did the AMA “write a letter” to the Victoria Department of Health & Human Services about their concerns over the hotel quarantine programme? did the DHHS provide “inappropriate advice” on the use of PPE by hotel security staff? did the Victorian Premier actually propose the hotel quarantine programme at National Cabinet, and then omit to request support from the police and/or the ADF?

It’s not surprising, therfore, that confusion reigns over who was responsible, and who is accountable; more importantly, who will be liable? What would be the situation if, for example, front line medical staff or employees in “high risk settings” have died from Covid19 as a result of community transmission within their workplace (itself stemming from the hotel breakout), and where there were inadequate workplace protections, especially if the latter were based on government advice and supervision?

The new offence of criminal manslaughter applies in Victoria since July 1, 2020. It will only apply to deaths caused since that date and as a result of “negligent conduct by an employer or other duty holders … or an officer of an organisation, which breaches certain duties under the Occupational Health and Safety Act 2004 (OHS Act) and causes the death of another person who was owed the duty”.

Finally, in reading around this topic, I came across an academic paper which discusses the treatment of responsibility, accountability and liability in the context of professional healthcare. In trying to define each from a clinical, professional and legal perspective, the author concluded that:

“….[R]esponsibility means to be responsible for ensuring that something is carried out whilst accountability moves beyond this to encompass the responsibility but adds a requirement that the healthcare professional provides an account of how they undertook the particular task. Liability moves the definition forward by adding a dimension of jeopardy to the definition of accountability. In a strict legal sense once the accountable person has provide their account they have fulfilled their duty. However, if the healthcare professional is liable rather than accountable for their action then the account they provide will be judged and, if found to be wanting, there may be a penalty for the healthcare professional.” (emphasis added)

I wonder if we should be assessing political and administrative liability by the same standard?

Next week: Startupbootcamp Demo Day – Sports & EventTech

 

 

Australia’s Blockchain Roadmap

The Australian Government recently published its National Blockchain Roadmap – less than 12 months after announcing this initiative. While it’s an admirable development (and generally, to be encouraged), it feels largely aspirational and tends towards the more theoretical rather than the practical or concrete.

First, it references the US Department of Homeland Security, to define the use case for Blockchain. According to these criteria, if a project or application displays three of the four following requirements, then Blockchain technology may offer a suitable solution:

  • data redundancy
  • information transparency
  • data immutability
  • a consensus mechanism

In a recent podcast for The Crypto Conversation, Bram Cohen, the inventor of the BitTorrent peer-to-peer file sharing protocol, defined the primary use case for Blockchain as a “secure decentralized/distributed database”. On the one hand, he describes this as a “total oxymoron; on the other, he acknowledges that Blockchain provides a solution to the twin problems of having to have trusted third parties to verify transactions, and preventing double-spend on the network. This solution lies in having to have consensus on the state of the database.

Second, the Roadmap speaks of adopting a “principles based but technology-neutral” approach when it comes to policy, regulation and standards. Experience tells us that striking a balance between encouraging innovation and regulating a new technology is never easy. Take the example of VOIP: at the time, this new technology (itself built on the newish technology of the internet) was threatened by incumbent telephone companies and existing communications legislation. If the monopolistic telcos had managed to get their way, maybe the Post Office would then have wanted to start charging us for sending e-mails?

With social media (another internet-enabled technology), we continue to see considerable tension as to how such platforms should be regulated in relation to news, broadcasting, publishing, political advertising, copyright, financial services and privacy. In the music and film industries, content owners have attempted to own and control the means of production, manufacture and distribution, not just the content – hence the format wars of the past in videotape, compact discs and digital file protocols. (A recurring theme within  Blockchain commentary is the need for cross-chain interoperability.)

Third, the Roadmap mentions the Government support for Standards Australia in leading the ISO’s Technical Committee 307 on Blockchain and DLT Standards. While such support is to be welcomed, the technology is outpacing both regulation and standards. TC 307 only published its First Technical Report on Smart Contracts in September 2019 – three years after its creation. In other areas, regulation is still trying to catch up with the technology that enables Initial Coin Offerings, Security Token Offerings and Decentralized Autonomous Organizations.

If the ICO phenomenon of 2016-18 demonstrated anything, it revealed that within traditional corporate and market structures, companies no longer have a monopoly on financial capital (issuance was largely subscribed via crowdfunding and informal syndication); human capital (ICO teams were largely self-forming, self-sufficient and self-directed); or networks and markets (decentralized, peer-to-peer and trustless became catch words of the ICO movement). Extend this to DAOs, and the very existence of, and need for traditional boards and shareholders gets called into question.

Fourth, the Roadmap makes reference to some existing government-related projects and initiatives in the area of Blockchain and cryptocurrencies. One is the Digital Transformation Agency’s “Trusted Digital Identity Framework”; another is AUSTRAC’s “Digital Currency Exchange” regulation and registration framework. With the former, a more universal commercial and government solution lies in self-sovereign identity – for example, if I have achieved a 100 point identity check with Bank A, then surely I should be able to “passport” that same ID verification to Bank B, without having to go through a whole new 100 point process? And with the latter, as far as I have been able to ascertain, AUSTRAC does not publish a list of those digital currency exchanges that have registered, and exchanges are not required to publish their registration number on their websites.

Fifth, the need for relevant training is evident from the Roadmap. However, as we know from computer coding and software engineering courses, students often end up learning “yesterday’s language”, rather than acquiring flexible and adaptable coding skills and core building blocks in software development. It’s equally evident that many of today’s developers are increasingly self-taught, especially in Blockchain and related technologies – largely because it is a new and rapidly-evolving landscape.

Finally, the Roadmap has identified three “showcase” examples of where Blockchain can deliver significant outcomes. One is in agricultural supply chains (to track the provenance of wine exports), one is in education and training (to enable trusted credentialing), and one is in financial services (to streamline KYC checks). I think that while each of these is of interest, they are probably just scratching the surface of what is possible.

Next week: Brexit Blues (Part II)