Cryptocurrency Market Downturn and Australian Regulation Update

By Daniel Knight and Kithmin Ranamukhaarachchi

In the wake of the drawn out cryptocurrency market downturn, increased regulation of the sector seems inevitable. With nearly one million Australians transacting in cryptocurrencies last year, there have been widespread calls to enact additional protections for retail investors.

This table outlines key regulatory developments from Australian financial regulators on possible treatment of crypto-assets.

RegulatorCurrent WorkTimeline
TreasuryConsidering the introduction of new licensing and custody requirements for businesses providing services related to crypto-assets (such as exchanges and other intermediaries).Public consultations recently concluded.  Any reforms are likely to include a substantial transition period for existing operators
ACCCEstablishing mechanisms that allow ACCC to take action under Australian Consumer Law to protect consumers.Ongoing
APRAPreparing an internationally aligned prudential framework on crypto-assets and related activities.Effective by 2025
ASICContinues to apply the current regulatory regime, awaiting any developments from Treasury.See above
RBAReviewing the introduction of a Central Bank Digital Currency.Ongoing

The key priorities for regulators appear to be the protection of consumers, maintenance of a fair and efficient financial system (including in respect of crypto-assets), and the promotion of innovation and foreign investment in Australia. Accordingly, the Financial Services Minister, Stephen Jones, has recently suggested that the new government will be reviewing crypto regulation as part of the larger digital payments system overhaul.

The key challenges for regulators will be delivering on these contrasting and somewhat competing objectives. The existing framework for financial markets is unlikely to translate well into crypto exchanges.  A more tailored approach will be necessary in order to deliver on both the consumer protection and competition aims.

The Council of Financial Regulators (comprised of the regulators in the table above, except ACCC) has explicitly advised banks against de-banking the crypto space and recognised the importance of a robust regulatory framework for this market. Further, in its first interim report on financial services legislation reform, the Australian Law Reform Commission briefly recognised cryptocurrencies as a new market in Australia. 

With more Australians exposed to this volatile sector than ever before, there is no doubt that crypto-assets are now part of the mainstream financial system (and perhaps less uncorrelated as was once thought), and many organisations see benefits in applying more traditional regulatory supervision to this asset class.

The last few months of crypto volatility has been instructive – showing that market risks are real and cannot be ignored.

Copyright © 2024, K&L Gates LLP. All Rights Reserved.