Australia’s on the crypto bandwagon, but without the right license, are we paddling out to a tidal wave? We find ourselves in a new global wave of digital assets. We’re having a tough time jamming square pegs—like crypto—into the round holes of our existing financial regulatory regimes. ASIC's attempt to use the AFSL regime is commendable, but it's like using a butter knife to perform surgery. It might work in a pinch, but the risks are significantly higher.

Systemic Instability Risk Is Looming

Think of the 2008 financial crisis. What began as a challenge in the housing market quickly cascaded across the whole economy. Now, imagine that one of Australia’s largest crypto exchanges goes bust. It ain’t the market forces that ice it, but failures in cybersecurity, risk management or even fraud. That's the systemic instability risk we're facing.

The current AFSL regime wasn’t made for the 24/7, borderless and hyper-volatile world of crypto. It fails to grapple with the radical challenges posed by digital asset custody, algorithmic trading or DeFi. In other words, we’re trying to build a skyscraper on a foundation that’s designed for a bungalow. Notice the recent failures of FTX, ACX.io, and MyCryptoWallet as your flashing red warning sign. TNCs are not just a blip on the radar. These were not one-off events, but signals of an underlying systemic issue.

Regulatory Arbitrage Luring Bad Actors

Absence of clear-cut crypto licensing invites a culture of regulatory arbitrage. What does that mean? Simple: companies will flock to jurisdictions with the weakest regulations, allowing them to operate with minimal oversight and potentially put Australian consumers at risk. It has the appearance of a whack-a-mole game. When we close down a shady exchange in Australia, it just pops up in a different, poorly regulated country.

To make matters even worse, this arbitrage discourages innovation from staying in Australia. So, why would a law abiding crypto business even want to come here to do business? They all experience the same regulatory challenges that legacy financial institutions do, but without the specialized guidance and regulatory clarity that they so sorely lack. We may be halting a developing industry that has just begun to barely scratch the surface of its growth potential. This is a brain drain… but for blockchain!

Cross-Border Enforcement Becomes Impossible

Here's a cold, hard truth: the internet doesn't respect borders. If a crypto scam comes from outside the country, you can wish on a star for any hope of recovering those funds. Without a robust, internationally recognized licensing framework, Australian authorities have little to no leverage to pursue bad actors operating outside our jurisdiction.

Imagine a scenario: an Australian investor loses their life savings in a sophisticated crypto scam orchestrated from a country with no extradition treaty with Australia. What recourse do they have? Practically none. Without a bespoke crypto licensing and regulatory framework, consumers are left vulnerable. It stymies essential cooperation with our allies in the global fight against crypto-enabled crime. The U.S. is, in effect, losing a global contest with one arm handcuffed to its side.

How could you trust an unregulated player to be trusted with your hard-earned dollars.

We need a bespoke crypto asset services licensing framework that addresses the unique risks and opportunities of this emerging asset class. This framework should include:

Ignoring these risks isn’t just irresponsible. It’s a high-stakes bet on our fiscal future. We must act now before the crypto tsunami crashes on our shores.

  • Specific capital requirements tailored to the risks of crypto asset custody and trading.
  • Robust cybersecurity standards to protect consumer assets from hacking and theft.
  • Clear guidelines on consumer protection to prevent scams and misleading promotions.
  • A framework for cross-border cooperation to combat crypto-related crime.

Ignoring these risks isn't just negligent; it's a gamble with our financial future. We need to act now before the crypto tsunami hits our shores.