ASIC's Crypto & Blockchain Challenge

In his opening address at ASIC’s annual forum on 3 November, Chair Joe Longo spoke about the impact of technology innovation and digitisation on traditional financial services products and markets, including blockchain technology and crypto.

Longo acknowledged the rapidly shifting landscape in new technologies, and the challenge that these rapid shifts present to the corporate watchdog. He specifically mentioned how to effectively regulate crypto and encourage new technologies such as blockchain as key questions to answer. The separation of crypto and blockchain is notable and provides a signpost to how ASIC might act in fulfilling its regulatory responsibilities.

ASIC’s strategic priorities specifically call out crypto-assets and digital technology as core strategic projects, while its externally focussed priorities particularly emphasise protection for consumers:

• Reduce the risk of harm to consumers of financial and credit products, caused by poor product design, distribution and marketing.
• Protect consumers, especially as they plan and make decisions for retirement, with a focus on superannuation products, managed investments and financial advice.
• Focus on the impacts of technology in financial markets and services, drive good cyber-risk and operational resilience practices, and act to address digitally enabled misconduct, including scams.

Given this, Longo’s comments at the annual forum make sense. Regarding crypto specifically, Longo said: “The inherent risks associated with investing in cryptocurrencies are often opaque, and the risk equation is never static. They are highly volatile, inherently risky, and complex.

“Crypto and the crypto eco-system continue to pose challenges and opportunities for regulators and policymakers alike. You will be aware that work continues at the domestic level to formulate a regulatory response.

“In the meantime, ASIC continues to utilise the current laws and its expanded regulatory toolkit – including the design and distribution obligations regime, or DDO – to protect investors from harms arising from risky, volatile, and complex products.”

Clear Intent

The message is clear: ASIC intends to employ the full force of its powers to reign in product issuers offering crypto products that ASIC deems put investors’ funds in harms way.

Longo’s comments weren’t just platitudes. On 17 October, ASIC announced that it had placed interim stop orders preventing Holon Investments Australia Limited (Holon) from offering or distributing three funds to retail investors because of non-compliant target market determinations (TMDs). The funds affected were Holon’s Bitcoin, Ethereum and Filecoin funds.

ASIC noted that Holon’s TMDs included investors:

• with a potentially medium, high or very high risk and return profile; and
• intending to use the fund as a satellite component (up to 25%) of their investment portfolio; and
• intending to use the fund as a solution/standalone component (75-100%) of their investment portfolio.

ASIC said that “Holon has not appropriately considered the features and risks of the Funds in determining their target markets”, and that “the Funds are not suited to the wide target market defined in the TMDs”.

Reducing Risk of Harm 

ASIC provided background to its decision in the 17 October announcement:

“ASIC is focussed on reducing the risk of harm to financial consumers caused by poor product design, distribution, and marketing, especially by driving compliance with the design and distribution obligations (DDO). ASIC is also committed to taking appropriate action to prevent consumer harm associated with crypto assets”.

It’s interesting to speculate precisely which aspects of Holon’s TMDs were found wanting. On the surface, it would seem likely that ASIC felt that “intending to use the fund as a solution/standalone component (75-100%) of their investment portfolio” might be putting too many crypto eggs into an investor’s basket.

Similarly, suggesting that Bitcoin, Ethereum or Filecoin has “a potentially medium, high or very high risk and return profile” may have been a factor. In any case, Holon now has an opportunity to respond to ASIC’s concerns to stave off further regulatory action.

Encourage New Technologies

Returning to Longo’s address, the ASIC chair also wants to “encourage new technologies such as blockchain”. Eureka Report readers will be aware that blockchain technology underpins most crypto assets including Bitcoin, Ethereum and Filecoin. How might Longo’s differentiation of “crypto” versus “blockchain” manifest in ASIC’s application of its regulatory powers?

Libertarian-leaning crypto enthusiasts might suggest that ASIC and other corporate regulators are aiming to thwart the development and proliferation of “crypto” in favour of state-sanctioned digital assets such as central bank digital currencies (CBDCs) based on blockchain. Some might observe that CBDCs potentially extend the state’s ability to monitor and control our use of money (this case has already been made with respect to more authoritarian regimes).

Regulation Over Prohibition

But the truth may be more nuanced than this, at least for democratic states. Gary Gensler, the Securities and Exchange Commission (SEC) chair in the US has weighed in on the debate concerning crypto regulation. For example, he’s previously said that he considers Bitcoin a commodity and that other “crypto financial assets have the key attributes of a security”.

This at least suggests that he favours regulation using existing legal and regulatory frameworks as opposed to outright prohibition.

It will be interesting to see if Australian regulators hold a similar view about Bitcoin versus other native crypto. In any case, it’s very clear that financial products based on underlying crypto assets will need to meet the minimum thresholds to be approved for issue.

As with all financial products, smart investors should remain vigilant in constantly assessing the evolving regulatory environment to inform any investment decisions. This is especially true for crypto and emerging digital assets, and how the landscape unfolds will likely have a significant bearing on the return profile in years to come.