FTX collapse renews urgent need for cryptocurrency exchange regulation

The Labor government has commented on crypto regulation off the back of the massive FTX collapse. But with little to no timeline or transparency on when or what these regulations will look like, investors are left wondering if their coins could be pulled at any time.

This has resulted in renewed calls to action for crypto regulation, particularly when it comes to cryptocurrency exchanges in Australia.

FTX has renewed the crypto regulation conversation in Australia

The cryptocurrency exchange filed for bankruptcy in the US and has gone into administration in Australia. ASIC is also suspending its licence.

This all happened off the back of Binance backflipping on its announced acquisition of the company, liquidity issues and suspicious transactions in the company’s final hours.

Customers discovered that their accounts had been frozen after US$10 billion of customer money had been transferred out of the platform to be leveraged on another.

This has left customers unable to extract tokens from the platform and has led to a renewed conversation in Australia around the lack of crypto regulations to protect investors.

Treasurer Jim Chalmers commented on the FTX crisis, reiterating a need for more consumer protection.

“We are closely monitoring the fallout from the FTX collapse, including further volatility in crypto-asset markets and any spillovers into financial markets more broadly,” a spokesman for the Treasurer told the AFR.

“These developments highlight the lack of transparency and consumer protection in the crypto market, which is why our government is taking action to improve the regulatory frameworks while still promoting innovation.”

The last we heard on this from Labor was back in August when it announced its token mapping program, to “help identify how crypto assets and related services should be regulated”.

“Our government is ready to start consultation with stakeholders on a framework for industry and regulators, which allows consumers to participate in the market while also better protecting them.”

The announcement also pointed to the increasing amount of crypto advertisements appearing in sporting events, and the influence it may have on customers.

In fact, FTX was still listed as the sponsor of the men’s T20 World Cup during its explosion, with SmartCompany breaking the news of the partnership halt last week.

While the statement promised that a public consultation paper on token mapping would be released soon, the government has been largely quiet on the matter until now. Even so, no real timelines have been offered on when we might see some of this happen. Meanwhile, crypto investors continue to be at risk.

Senator Andrew Bragg criticises Labor’s stance on crypto regulation

Senator Andrew Bragg has been a prominent cryptocurrency voice in Parliament. This has included a consultation paper under the Coalition back in December 2021, as well as a draft bill titled Digital Assets (Market Regulation) Bill 2o22.

A key recommendation is that the government establish a market licensing regime for digital currency exchanges, including capital adequacy, auditing and responsible person tests.

Senator Bragg has criticised Labor’s approach to crypto regulation this week, citing a lack of consistency between Treasurer Jim Chalmers and Assistant Treasurer Stephen Jones

“The Labor government is all over the shop when it comes to cryptocurrency regulation,” Bragg said in a statement.

“The Treasurer is now belatedly promising new laws on crypto markets… yet Stephen Jones said on 22 August 2022 that he would not focus on this. Rather he would ‘prioritise token mapping… ” and ‘the previous government dabbled in crypto asset regulation but prematurely jumped straight to options without first understanding what was being regulated’.

“At Senate estimates last week, the Treasury reported they were focused on Jones’ priority of token mapping rather than continuing the work on crypto market licensing. It was clear the Treasury was being sent down the wrong path.”

Bragg called on Treasury to release draft legislation on regulating crypto markets in Australia and took the opportunity to link out to his own work on the subject.

“The government can fashion a bill from my private Senators’ bill and their own department with a view to passing it in the first quarter of 2023. That way consumers will be protected and investment in Australia will be promoted.”

Some investors don’t know that crypto isn’t protected on exchanges

The FTX debacle is freshly igniting fear around rug pulls as well as the idea that investors could lose their assets at any time. And this fear is valid — they don’t actually own these assets.

Lisa Wade is the CEO of blockchain finance company DigitalX and sits on the board of Blockchain Australia. She also has nearly 30 years of experience in the finance industry. It’s her belief that there needs to be regulated custody of assets on Australian crypto exchanges.

“Exchange pools are unregulated. And that means that the exchange actually owns your assets.  You don’t own them, you just have an account that gives a reflection of what the value is,” Wade said in a call with SmartCompany.

“If you wake up tomorrow morning and they close down, you have no legal recourse.”

Australian cryptocurrency exchange, Swyftx, confirmed with SmartCompany that it agrees that more regulation is needed, including custody regulation for users. 

“We’ve been Australia’s top-rated and most trusted exchange for a long time and that’s why we’ve already committed to providing proof of reserves,” Alex Harper, co-CEO and founder of Swyftx, said to SmartCompany over email.

 “An absolute majority of businesses in the Australian cryptocurrency industry will welcome regulation. FTX is not in any way reflective of the domestic cryptocurrency industry. But you need trust and that means you need a referee on the pitch.

 “We support appropriate rules around custody, cyber resilience, and capital requirements that reflect the nuances of crypto, including its real-time settlement and underlying blockchain technology.”

 Harper also said the business is committed to supporting the government in its regulatory endeavours.

While not all exchanges are built equal, and according to Wade, you shouldn’t have assets sit in one.

“You should only use exchanges to transact on and then you should move your tokens to your own cold storage wallet,” Wade said 

Wade also says that Blockchain Australia believes that all exchanges should have regulated custody.

“That would mean that any exchange in Australia could not do what FTX has done,” Wade said.

“It would be the way stock broking works, which is all client funds are put into what’s called an escrow account. That means if the stockbroker goes bankrupt, the escrow account acts as a trust and everybody gets their money back and then those funds also can’t be leveraged.”

Wade says that this return to ‘hypothecation’ and ‘rehypothecation’ has returned due to this lack of regulation.

“It’s dodgy behaviour if it’s not your money. That kind of behaviour is what caused the GFC.”