Regulating crypto-asset–based investment products within the financial services framework
Speech by Commissioner Cathie Armour at the AFR Cryptocurrency Summit, Wednesday 6 April 2022.
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Good afternoon everyone, and thank you to the Australian Financial Review (AFR) for inviting me to speak today.
Let me begin by acknowledging the Traditional Owners’ ongoing connection to and custodianship of the lands on which we meet today, and to pay my respects to elders past and present.
Today I will discuss three issues regarding crypto-asset investments:
- the rise of the new retail investor that emerged during the COVID-19 pandemic
- the increased risk exposure that this confluence of events has led to, including the increase in scam activity, and
- ASIC’s work to regulate it as it evolves.
The world of crypto-assets
The world of crypto-assets is evolving at a lightning pace and particularly into the financial services space. As a financial services and markets regulator, ASIC needs to remain nimble and consider new and innovative products and services. When I started at ASIC nearly nine years ago, I would have given you a quizzical look if you’d asked my opinion on non-fungible tokens, Dogecoin or finfluencers.
As consumer demand – and their appetite for risk – grows, the rapid change of pace continues. And as with all new products, there are many considerations for regulators, markets, product issuers and investors alike.
Changing retail investment environment
One of the significant trends we observed since the start of the COVID-19 pandemic is a surge in the number of everyday Australians participating in the market.
We have seen increased retail investor participation in the listed equities markets in Australia, with retail daily turnover accounting for about 16% of daily turnover in 2021. This is up from pre‑pandemic levels, which was closer to 10%.
Interest in contracts for difference (CFDs) has also increased. In 2020, we used our product intervention power to impose conditions on the issue of CFDs to offer protections against significant consumer losses.
ASIC receives reports from Australians who used unlicensed platforms to trade crypto-asset–related financial products, such as options and futures. Some people experienced significant losses due to excessive leverage, platform outages, or unfair liquidations.
Some unlicensed overseas platforms are taking, or have already taken, steps to prevent Australian clients from accessing these unlicensed financial products. These steps include:
- removing references and links
- placing additional warnings and disclosures on the relevant webpages and apps, and
- introducing geographically-based IP restrictions (geo-blocking).
Last month, the International Organization of Securities Commission’s (IOSCO) Retail Market Conduct Task Force released a consultation report highlighting the rapidly evolving retail investing framework globally. Among other issues, it examines the regulatory and market implications of increasing gamification, self-directed trading, and the influence of social media.
The report also highlights the increasing popularity of crypto-assets for retail investors.
This is, in part, driven by how easy it is to access crypto-asset trading (including 24-hour online trading) and low returns from traditional asset classes.
The report also flags that many regulators are seeing a rise in scams involving crypto-assets, a trend observed here in Australia by ASIC and the Australian Competition and Consumer Commission (ACCC). In 2021 alone, the ACCC reported that Australians lost $99 million to crypto-asset scams.
In response to reports ASIC received, we issued several scam alerts to inform investors. We urge people who think they may have been scammed to lodge a report of misconduct with ASIC and report it to their bank or financial institution.
Bad actors will always attempt to circumvent regulation. Crypto-exchange hacks and extended platform downtime present cyber and operational risks with the potential to damage investor interests, and the image of the crypto industry more broadly.
Our vision is to ensure a fair, strong and efficient financial system for all Australians.
This includes crypto-asset financial products, and they continue to attract our attention.
Our role is to balance innovation and, at the same time, monitor and uphold market integrity and protect consumers.
What does this mean for crypto-assets?
We administer the regulatory regime currently in place. The extent to which our regulatory regime applies to crypto-asset investment products depends on whether they fit within the legal framework for financial products and services.
Where they fall outside of this regime, consumers may be investing in an environment where they are not afforded the same level of protection that applies to financial products and services.
Deciding if investments that don’t fit within the concepts of financial products or services should be regulated – and, if so, the nature of the regulation – is a matter for Parliament.
Last December, the Australian Government responded to recommendations made by the Payments System Review, the Senate Select Committee of Australia as a Technology and Financial Centre and the Parliamentary Joint Committee on Corporations and Financial Services (PJC) Inquiry into Mobile Payments and Digital Wallets with in-principle policy proposals that will change the regulatory framework for payments and crypto assets.
The Government’s response foreshadowed a program of consultation and policy development. ASIC is working closely with Treasury on this.
Just last month Treasury’s consultation paper, Crypto asset secondary service providers: Licensing and custody requirements, was released for public feedback.
It presents a regulatory model, which is a tailored licensing framework for crypto-asset secondary service providers, sitting beside the existing Australian financial services (AFS) and market licensing regimes for crypto-asset financial products.
It proposes obligations on firms that provide access to crypto assets and custodial services.
The consultation also seeks views on two alternative regulatory models. I encourage industry to engage with the proposals. I know you had a session earlier today on policy settings for crypto-assets which canvassed many of these issues.
The paper highlights that more than 800,000 Australian taxpayers have transacted in digital assets in the last three years. This represents a 63% increase in 2021 compared to 2020.
Where those digital assets are financial products or financial services, ASIC has a job to do. Our supervision of crypto-asset financial products is incorporated into our overall supervision of the activities of all providers of investment products.
Many years ago, the first port of call for a firm developing a crypto-asset–based financial product was ASIC’s Innovation Hub. But as this industry matures, we expect firms with more established businesses, or business models, to engage with us in the same way as other financial service firms.
ASIC’s regulatory guidance
I will now turn to my next topic, which is the work ASIC has done to date to guide product issuers and market operators on crypto-asset products.
Over recent years, a question that has exercised our minds at ASIC (and which we know has been a focus for many of you) is whether the crypto-asset you have developed, distributed, traded, or developed a platform for is regulated under the financial services laws.
To assist you we issued two information sheets:
- INFO 219, which describes how the financial services regulatory framework may apply for distributed ledger or blockchain technology
- INFO 225, which describes when and how crypto-assets may fit within the financial services regulatory framework.
In October last year, following consultation, we released guidance (INFO 225 and INFO 230) for product issuers and market operators on how they can meet their regulatory obligations relating to crypto-asset exchange traded products (ETPs) and other investment products.
To ensure these ETPs maintain investor protections and Australia’s fair, orderly and transparent markets, we issued good-practice guidance. This guidance covers:
- admission and monitoring standards
- custody of crypto-assets
- pricing methodologies, and
- disclosure and risk management.
When I reference ETPs, I mean exchange-traded products on a licensed market. I note many respondents to our consultation suggested ASIC’s mandate should cover products traded on unlicensed digital currency exchanges. This is also a matter for Government, and one which is covered by Treasury’s consultation paper.
More broadly, for funds, the responsible entities that intend to have a fund that holds underlying assets that include crypto-assets now need to hold an authorisation. To facilitate this, we introduced a new ‘crypto-asset’ category in the licensing application for these entities.
It is encouraging to see that one market operator has adjusted its rules to incorporate our guidance on ETPs.
Social media promotion of crypto-assets
Before I conclude, I’d like to mention another important area of ASIC’s work, relating to social media promotion.
Over recent years, we have witnessed the rise of social media influencers and celebrities promoting crypto-assets and other financial products. We published a new information sheet last month on discussing financial products and services online (INFO 269).
Anyone posting about financial products online must consider whether what they say is considered financial advice and whether it complies with the law.
ASIC’s message to you
In closing today, I’d like to leave you with the following:
- Take the time to read and engage with the proposals in Treasury’s consultation paper.
- Crypto-asset investments are very likely to involve financial products and financial services. ASIC supervises these activities with a focus on its core functions of market integrity and consumer protection.
- We are keen to learn more about the threats and opportunities crypto-assets may bring to our financial system. We have already provided some regulatory guidance about our expectations on how crypto-assets interact with financial services laws.
- If you are involved in crypto-asset investment products, we encourage you to campaign against and interrupt scams and focus your efforts on educating your customers. Report those scams to ASIC and we may be able to use our regulatory powers or our relationships with our co-regulators domestically or internationally to take action.
 Review of the Australian Payments System, final report, Scott Farrell, August 2021.
 The Senate Select Committee on Australia as a Technology and Financial Centre, final report, Senator Andrew Bragg, October 2021.
 Mobile payment and digital wallet financial services, final report, Andrew Wallace MP, October 2021.
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