BTC Markets' response to Treasury

9th March 2023.

“BTC Markets were in the room on Tuesday evening to hear the Treasurer, Dr. Jim Chalmers, address Australian senior business leaders. Dr. Chalmers spoke of how digitisation was a priority for him, positioning Australia to benefit from the digital revolution. Australia is to take advantage of cutting-edge innovative opportunities, in his words “best captured by a collaborative working relationship between industry and government.” The Treasurer later went on to describe markets as a powerful and positive way to address our economic challenges.

Labor has history with embracing non-traditional, market-orientated economic policies, during the financial deregulation years. A similar opportunity presents itself today. A pragmatic approach to governing that embraces digital assets will strengthen our modern economy and buffer it from the “big shift” underway.

BTC Markets has long understood the need for appropriate, proportionate regulation of our sector. In our policy consultation submissions, we look to ensure that any regulation protects Australian crypto investors while supporting the Australian digital economy in the longer term. We believe that embracing digital assets, including cryptocurrency, is a key path to achieve that.” – Caroline Bowler, CEO of BTC Markets.

The submission

BTC Markets Pty Ltd is a Melbourne-based cryptocurrency or digital asset exchange. This year marks our tenth in operation. We have over 325,000 Australian-only clients who have traded more than $23bn dollars. Our sister company, BTCM Payments, holds AFSL No. 525840 with respect to issuing and providing general advice on non-cash payment products. We hold ISO 27001 certification (BSI IS 737848) and are working towards SOC certification. This reflects our commitment to operating at the highest standards and mirror international best practices.

We welcome the recent comments from the Treasurer that digitization is a priority. Digital assets including cryptocurrency will play a key role in meeting the government’s aspirations for Australia as a modern economy. We echo the Treasurer’s views on the need for a pragmatic approach to governing, in preparation for the future big shift in our economy.

It is the position of BTC Markets that there is a need for appropriate, proportionate industry regulation. We have been public with this expectation for some time and are grateful for the work that has taken place in this arena so far.

We agree that exchanges need to operate in a fair, efficient and transparent manner. Likewise, we agree with the requirement for industry standards to confer safety and quality. Also for the need for guardrails to encourage or discourage certain activities.

BTC Markets understands that Chapter 7 of the Corporates Act follows a functional approach (vs. a risk-based approach for example.) This is in line with recommendations from the Bank of International Settlements. Local regulation of financial products is based on a functional perimeter of financial investment; managing financial risk; and non-cash payments.

The functional approach leads to the outcome that functionally equivalent products should be treated equivalently.

It was from the perspective of functional equivalence that the token-mapping consultation paper was created. The token mapping paper states “In the context of crypto, the relevant ‘function’ is the target of the assessment in the same way as any non-crypto product.” We have taken the concept of functional equivalence to be at the centre of this matter.

There will be a blurring between traditional finance and digital asset or crypto finance.

Functional equivalence as a regulatory lens means that certain crypto products will be considered financial products. They will be treated the same as other financial products. From a regulatory and operational point of view, this means that where the functional test is met with respect to a crypto token, 1 x crypto token is regulated the same as 1 x share, bond or other existing financial product.

This equivalence will transform crypto from being on the edges of our financial system, to being at its heart.

Much more guidance is required to determine how the functional test will apply to tokens, particularly in light of the peculiarities that only apply to crypto assets. Assuming some tokens are properly categorised as financial products – crypto exchanges will need to be licensed in a fashion similar to traditional market licensees. This brings digital currency exchanges into the mainstream Australian financial ecosystem, in time, becoming key players in the Australian economy.

Mainstream investors, previously reluctant to engage with crypto, will have greater trust to place their capital in the new financial products. It will attract international investment in the Australian crypto eco-system, as other crypto businesses look for surety and a place to innovate.

It also means that the freshly licensed crypto exchanges will be able to list a greater range of financial products, due to the functional equivalence rule. For example, an Australian-licensed crypto exchange may then be able to list crypto, a traditional equity, and a digitally wrapped version of that traditional product.

All of which would be possible, due to the functional equivalence regulatory approach.

This is a different move compared to the approach favoured by Europe. Their Markets in Crypto Assets (MiCA) maintains regulatory walls between crypto assets and other asset groups including finance. It does this by providing bespoke regulation specific to the crypto ecosystem, with any crypto financial products viewed as covered by existing financial laws.

While there are a number of positives to the Australian proposal, there may be some unintentional side impacts.

There could be retail investor confusion between financial vs. non-financial crypto products, and potential risks involved. It may be challenging for some to distinguish between those crypto products which are financially regulated versus unscrupulous projects who use it as cover for their own, unregulated offerings. A tailored, single set of crypto standards may help here.

Australia may end up in a scenario where an international digital asset exchange, headquartered overseas, could become a dominant player on the domestic financial market. Greater competition is to be welcome, bringing increased scrutiny on to the Australian market. However, this would be a unique position for any financial services industry. Alternatively, international competitors may look at the operational requirements under a functional equivalence market license and determine it has limited cost-benefit. Dissolving Australia’s opportunity to become a crypto hub.

Functional equivalence also breaks down when looking to tackle Decentralised Finance (DeFi.)

Inconsistent regulatory treatment excludes same function via DeFi & CeFi.

As understood, crypto products and services viewed as similar in function to traditional finance are to be regulated akin to traditional finance. The intention is to mitigate risks of financial loss to consumers, industry and to limit the impact of mainstream adoption of novel products with greater risk.

The Australian functional approach is based on outcomes from the Wallis inquiry. Wallis focuses on “promises, intermediaries and agents.” Those outside of the categories are outside of existing regulations. It is intended to be technology neutral.

However, technology has moved on. It has now created a scenario where it is possible for individuals to be within the function perimeter, but outside the focus of Wallis. Using DeFi, it is possible to purchase crypto (functionally equivalent) but without intermediaries, agents or promises (Wallis.) They sit outside of the Australian regulation, but Australian investors can access them at will.

Under the proposed regulatory structure, this creates a two-tier system that doesn’t match up with a functionally equivalent approach. Buying crypto via locally regulated BTC Markets versus buying from a decentralised exchange - the function is the same, but their investor risks widely differ. This puts centralised exchanges both in crypto and traditional finance at a disadvantage to their DeFi peers.

As MiCA does not rely on functional equivalence, it can carve out DeFi and Decentralised Autonomous Organisations (DAOs) from regulation, if they are truly without intermediaries.

The consultation paper appears to have set aside DeFi for the immediate term. It will undoubtedly come under regulatory scrutiny in the coming years. The problem may be trying to force a square peg into a round hole or face backlash from those regulated under functional equivalence looking at a ‘lighter touch’ regime for competitors.

BTC Markets Responses:

Q.1. What do you think the role of Government should be in the regulation of the crypto ecosystem?

The government’s role is to position Australia to capture the crypto opportunity ahead. Regulation can straddle the needs of today without inhibiting the opportunities of tomorrow. The government is in the enviable position that if we can strike the right balance, regulation can achieve that mix.

Leveraging Australia’s reputation and geographic position while absorbing best practices from peers overseas is a strong start. After that, it is the government’s role to support local industry as it rapidly flourishes in that new environment.

Q.2. What are your views on potential safeguards for consumers and investors?

It is our belief that with freely available education, Australian consumers and investors are best placed to make the right decisions for themselves. This includes knowledge on risk management and the appropriateness of any purchase or service.

Education can then be combined with a well-run industry with unified best practices and standards such as separation of assets, operating fair, orderly and transparent market with applicable complaint mechanisms.

Q.3. Scams can be difficult for some consumers to identify.

a) Are there solutions (e.g. disclosure, code auditing or other requirements) that could be applied to safeguard consumers that choose to use crypto assets?

BTC Markets has been in existence for nearly a decade. In our experience, in almost all cases of consumers becoming victim to a scam token, the purchasing takes place outside of centralised exchanges via events like ICOs.

However, crypto exchanges can take steps to protect their clients. To prevent listing scam tokens, crypto exchanges can carry out comprehensive due diligence on each listing. This includes research on the teams behind the tokens, history of token and company etc. BTC Markets currently undertakes these steps prior to any listings.

Introducing standardised due diligence as a regulatory requirement (or as a form of safe harbour) may prevent scenarios where a scam token is listed. It will provide regulators with a framework to hold exchanges accountable on their listing practices.

BTC Markets also proposes an actively managed list by the regulator such as a ‘Red Alert.’ It lists all suspicious investment and brokerage opportunities that have been reported by consumers or exchanges.

In BTC Markets' experience, the most effective mitigation came when ASIC produced a suspicious investment alert in 2021 for a suspected Ponzi scheme. This enabled BTC Markets to successfully highlight the risks to consumers who dismissed our earlier warnings. It proved exchanges can better communicate the dangers of suspect schemes when reinforced by an official government entity alert.

The legitimacy of an ASIC alert has indirect benefits across the industry. It minimises the risk of consumers simply migrating to an exchange after being restricted for scam activity on another. Currently, exchanges recommend victims to report their situation to Scamwatch, ACSC and the police. However, this data does not appear to be utilised or communicated in any way to mitigate further consumers from falling victim to the exact same scams.

The last stand for the mitigation of scam victimisation can happen on exchanges. With an actively managed investment alert list, we can effectively work with regulators to increase awareness and protect users.

b) What policy or regulatory levers could be used to ensure crypto token exchanges do not offer scam tokens or more broadly, prevent consumers from being exposed to scams involving crypto assets?

From a policy perspective, the focus needs to be placed on reducing how easily Australian consumers are being exposed to scams. The majority of cryptocurrency related scams are associated with fake investment or brokerage websites that utilise fake automated trading engines and portfolios to promise unrealistic returns.

These scams are promoted through advertisements displayed on social media websites such as Facebook, Twitter and YouTube. It enables the scams to reach a large audience with minimal investing knowledge. These ads often use the likenesses of public figures to effectively lure consumers into believing they are endorsed by famous and financially knowledgeable persons. The targeted individuals lack the knowledge of the risks of instantaneous, unrecoverable, and irreversible cryptocurrency transactions.

BTC Markets endeavours to warn clients about these risks. Unfortunately, the consumers are often already convinced by these scam websites and ignore the warnings, driven by the belief BTC Markets is not acting in their best interest. This is a result of consumers being lured into a false sense of security, with an expectation that these investments would not be promoted on such platforms, or by people of such following, unless they were legitimate.

We believe one of the most effective ways to protect consumers is to reinforce advertising regulations on these platforms, and for a proactive regulatory approach to monitoring the content of advertisements on social media platforms. This will ensure such ads are increasingly prevented and swift response procedures are in place for when a post or ad is reported. BTC Markets believes a simple and effective solution that prioritises the safety of Australian consumers, requires an active legislative approach that attempts to restrict a scam at its source.

Q.5. This paper sets out some reasons for why a bespoke ‘crypto asset’ taxonomy may have minimal regulatory value.

a) What are additional supporting reasons or alternative views on the value of a bespoke taxonomy?

Cryptocurrency and distributed ledger technology (DLT) are new iterations on existing processes. Their fluidity and novel use cases are without precedent. It is appropriate and necessary to use a bespoke taxonomy as it is not the same as prevailing technology. For example, the proposed language of “Token Systems” and “Intermediated Assets” does not currently exist in corporation law. These are already bespoke terms that have meaning only within the crypto sphere. The centralised/intermediated sector is only one half of the broader crypto ecosystem. Decentralised finance, although in its nascency, is currently outside the existing regulatory bounds. It may also require a bespoke approach and taxonomy to reflect that reality.

b) What are your views on the creation of a standalone regulatory framework that relies on a bespoke taxonomy?

Our view is that it is entirely reasonable to draw upon elements of existing regulation that cater to known and specific functions, weaving them into a standalone framework that reflects the burgeoning, variable nature of the crypto economy.

It then draws the functional equivalence between crypto operators ie. centralised vs decentralised exchanges, NFT marketplaces etc rather than squeezing future products into pre-existing paradigms.

Q.7. It can be difficult to identify the arrangements that constitute an intermediated token system.

a) Should crypto asset service providers be required to ensure their users are able to access information that allows them to identify arrangements underpinning crypto tokens? How might this be achieved?

b) What are some other initiatives that crypto asset service providers could take to promote good consumer outcomes?

Our earlier suggestion on standardised methods of due diligence could be leveraged here. Service provides can utilise the same research materials as an educational resource. A consistent format among service providers will familiarise users and give them the confidence to safely navigate crypto projects.

Also, it is important for Australian investors to be told if they are using an exchange or broker as an example. The risks differ and this needs to be a requirement to distinguish between the platforms.

Q.9. Some regulatory frameworks in other jurisdictions have placed restrictions on the issuance of intermediated crypto assets to specific public crypto networks. What (if any) are appropriate measures for assessing the suitability of a specific public crypto network to host wrapped real world assets?

The challenges of naming specific networks is that while the logic may be true for today, that same logic may not provide the best outcomes in the future. For example, if technology overtakes the network or the use cases.

If there are to be appropriate measures, it may be better served by assessing the technical capabilities of the network, including its robustness and capabilities of the development community supporting it.

Q. 10. Intermediated crypto assets involve crypto tokens linked to intangible property or other arrangements. Should there be limits, restrictions or frictions on the investment by consumers in relation to any arrangements not covered already by the financial services framework? Why?

No. If there are due diligence disclosure requirements on intermediated crypto assets, available via the intermediary serving the Australian market, then any actions are at the discretion of the consumer.

If it is not considered a financial product, or sits outside the financial services framework, then additional protections should not be required for consumers. This is applying the law in an equivalent manner, a tenet at the core of the consultation paper.

Q. 11. Some jurisdictions have implemented regulatory frameworks that address the marketing and promotion of products within the crypto ecosystem (including network tokens and public smart contracts). Would a similar solution be suitable for Australia? If so, how might this be implemented?

This draws in our earlier point from Q.3. The focus needs to be placed on reducing how easily Australian consumers are being exposed to scams. We believe one of the most effective ways to protect consumers is to reinforce advertising regulations on these platforms, and for a proactive regulatory approach to monitoring the content of advertisements on social media platforms.

In terms of advertising crypto products & services (financial, non-financial), we believe enforcing existing rules as they apply e.g., true, accurate and based on reasonable grounds are sufficient.

As an organisation, we are committed to supporting the growth of digital finance in Australia. BTC Markets would welcome the opportunity to discuss any of the points raised in more detail.

- End submission -

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