Investors in the nearly 1,500 cryptocurrencies available on the Internet must have been spooked when the founder of one of the leading digital coins tweeted recently that investors need to approach the “asset class” cautiously as values “could drop to near-zero at any time.”
In short he was saying don’t bet the house on cryptocurrencies; the nascent sector is too volatile for big bets.
Don’t bet the house
It is sage advice. Bitcoin, the best known of the cryptos, rose 1000% in 2017 as investors went mad for it. But by the start of this year half the value of the cryptocurrency had been wiped.
The problem of course is that many unsophisticated investors rushed to cash in on the craze when it looked like it was taking off. These speculators came close to creating a bubble. Many “mum and dad” investors had little more understanding of Bitcoin than is depicted in this segment from US comedy show Late Night with Seth Myers:
Not our kind of Silk Road
Governments around the world are taking notice. They are concerned that cryptocurrencies and unregulated trading exchanges and brokerages pose considerable risks. Among the risks are the potential of cryptocurrencies to facilitate criminal activities (e.g., money laundering) and terrorism-funding because of the difficulties involved in tracing transactions. Keep in mind that the Silk Road marketplace and its dark net successors and surrogates used cryptocurrencies to mask illegal drug and other trades. Other concerns surround the potential for unsophisticated traders to lose their life-savings in volatile trading environments.
China for one has outlawed cryptocurrencies, particularly as Beijing fears the potential for corrupt officials to move large sums of money out of the country, as well as general concerns around capital flight following the recent crackdowns on Chinese businesses investing in non-productive sectors overseas and individuals speculating on foreign property markets.
Looking for better odds
Other countries, like Japan, the US and Australia have sought instead to regulate the sector. They understand that it would be futile to try and completely ban these digital currencies. Australia is seen to be leading the way in attempts to regulate the sector. Last year the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office (ATO) both issued stringent guidelines aimed at regulating the industry and ensuring brokers and traders pay the right amount of taxes. Late last year the Federal Government required cryptocurrency exchanges to register and the Australian Transaction Reports and Analysis Centre (AUSTRAC) was given authority to monitor digital exchanges under amendments made to the Anti-Money Laundering and Counter-Terrorism Financing Act.
A place to call home
Some commentators have suggested that these changes could make Australia the world’s centre for cryptocurrency (and blockchain – the technology that supports cryptocurrency trades). This is likely to occur because regulating and taxing the sector gives it standing.
Of course, that brings another set of challenges for the sector. As the government begins regulation and as the industry grows and evolves demands for better and more regulation are likely to follow. Cryptocurrency and blockchain companies setting up in Australia will need to engage in public education programmes to promote their contribution to the national economy and to substantiate their trustworthiness amongst local investors and traders. And they will need to engage in lobbying to ensure the government’s efforts at regulation do not result in stifling red-tape and the strangulation of innovation.
Don’t be a voice crying in the wilderness
It would be best if these public education and lobbying efforts were not conducted by individual companies. That approach would be disparate and runs the risk of some companies going off message and doing more harm than good. Rather; the companies concerned would be well advised to establish an industry association that can speak on their behalf and possibly influence legislative and regulatory outcomes. An association should also put in place a code of conduct that respectable and trustworthy companies could sign up to.
The industry has a window of opportunity to get organised while AUSTRAC, ASIC and the ATO are busy bedding down the new legislation and regulatory changes. Not making that investment soon could leave them susceptible to regulatory volatility.
By Alistair Nicholas
Executive Vice President – Director, Special Projects.
Powell Tate is experienced in establishing and managing industry associations, lobbying governments, and managing public education programmes.