ASIC Chairman warns of crypto risks, but supports innovation

In a wide-ranging interview with the AFR yesterday, new ASIC Chairman Joseph Longo outlined the regulator’s top priorities for 2022 which not surprisingly included the regulation of crypto assets (or lack thereof).

Longo’s message was essentially two-fold.  First, he warned retail investors of potentially large losses on “risky crypto assets”.  However, he also said ASIC supports innovation in the crypto sector.

On the risk side, Longo said retail investors too often are investing in products they don’t understand without getting financial advice first, a side effect of the rising cost of financial advice which he is aiming to address in part by lightening the regulatory burden on advisors.  

Longo said his “…personal warning to people is to be careful and don’t put all your money into crypto”, a variation of the traditional “don’t put all your eggs in one basket” caution for consumers.

On crypto scams or “rug pulls”, Longo said he is “…worried about consumer harm and the number of people in Australia exposed to crypto…there is definitely an uptick in the number of scams and misconduct leading to people losing money by attempting to invest in cryptocurrencies and assets”.

ASIC has very limited powers to intervene in crypto scams, because the assets are generally not considered financial products or involving a financial service, or the decentralised autonomous nature of many organisations involved which are not captured by the Corporations Act 2001 (e.g. they are not registered companies).

On innovation, Longo said “ASIC is not against innovation.  I’m not here to stop legitimate business activity”.  

Although he did not elaborate, one accepted area of innovation is in crypto asset-related investment products such as exchange-traded funds (ETFs).  Last year ASIC released guidance on crypto ETFs, which precipitated the BetaShares Crypto Innovators ETF listing on the ASX, breaking debut trading records.

Throughout 2022, ASIC will work with the Treasury and Reserve Bank of Australia to develop a comprehensive licensing and consumer protection framework for digital assets following a Senate inquiry, as well as consult with industry.

ASIC’s first steps into a public dialogue on crypto and in turn its regulation are interesting.  Our experience with crypto clients who have a sophisticated level of understanding of the assets and their markets, indicates a mix of suspicion and dismissiveness as to regulatory authorities and government’s moves into crypto.  While Longo’s comments were not directed at them, but retail clients, it demonstrates the challenge ASIC and regulators face in making ground in what is viewed as an alternative to mainstream finance by many, in particular young, investors.  Not all of them have the deep understanding that our clients do.

But another thing one of our crypto contacts noted was the increasing intersection between mainstream finance and crypto, and agreed that this is a key area of risk for retail investors.  Their products are aimed solely at sophisticated crypto investors with a genuine understanding of these assets and markets, and whose crypto investments are relatively small and certainly not putting all eggs into the crypto basket.

The issue of this intersection will also be on the ASIC Chairman’s mind.  The International Monetary Fund (IMF) warned last week that the increased correlation between equity markets and crypto meant that a crash in either market (primarily the crypto market but not exclusively) posed a systemic risk to the financial system.

In our opinion this is a critical issue in the vexed question of crypto regulation – what are the systemic risks its poses, how and where do they arise, and what is done to address them.  Increased retail investor knowledge of scams is good, but it doesn’t address systemic risk.

Disclaimer

The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.