When it comes to investment matters Down Under, the Australian Securities and Investment Commission (ASIC) is the regulatory bigwig in town. While the digital asset sector was seemingly able to avoid major scrutiny in years gone by, those days are over, thanks in part to its growing success. In its recently released Corporate Plan for 2022-26, ASIC specifically identified ‘crypto-assets’ as one of its core strategic projects of focus for the coming years.
Regulatory eyes on crypto
While traditionally focused on misconduct in the financial sector, ASIC appears to have adopted a broader role in Australian policy, noting in its document that:
“Our [Australia’s] regulatory environment is changing and evolving — climate risk, our ageing population, emerging data and digital technologies, and significant volatility in the crypto-assets market are all having a transformational impact.”ASIC Corporate Plan 2022-26
Within a few short years, it seems as if ASIC has recognised that new technologies are increasingly becoming utilised by scams, given that over $99 million in crypto investment scams were reported in 2021 alone. The regulator goes on to add, “Crypto-assets and decentralised finance (DeFi) are global phenomena that reach beyond geographic jurisdictions and the remit of any single Australian regulator. ASIC will take action to protect investors from harms posed by crypto-assets that fall within our remit.”
Fighting words indeed, but what exactly is the ASIC Corporate Plan talking about? In their document it outlines a suite of actions that include establishing a regulatory framework, enforcement for misconduct, disclosures, public awareness and coordination with international bodies.
ASIC Corporate Plan: Digging deeper for subtext and possible implications
Regulators are sometimes criticised for being out of touch with industry, and to ASIC’s credit, it appears to have hit the nail on the head in terms of identifying issues that warrant the most attention.
But of course, the devil lies in the details as to how the issues will be addressed. In this case, there simply isn’t sufficient information to draw any meaningful conclusions. However, there is some compelling subtext that, to date, appears to have escaped the attention of most.
There are two actions identified by ASIC that, read together, have the potential to dramatically alter Australian crypto regulation. These are actions relating to:
- “Supervising and assessing Product Disclosure Statements and target market determinations of major crypto offerings within our jurisdiction”; and
- “Taking enforcement action to protect consumers from harms associated with crypto-assets, including those that mimic financial products but seek to circumvent regulation”.
Coupled with comments made about scams and consumer protection, there are some interesting questions that arise:
- Will newly launched crypto projects (whether NFTs, DeFi tokens or otherwise) be compelled to make disclosures in a Product Disclosure Statement, as is the case with all other financial products?
- What form will “enforcement” take and will it apply retrospectively? Further, how would it apply to offshore offerings that Australians have participated in?
- What specifically would be classified as mimicking a financial product “to circumvent regulation”?
At its core, these questions raised by the ASIC Corporate Plan go to the heart of the debate that is playing out globally as to whether, and which, digital assets amount to an unregistered or unlicensed security. For clarity, a security refers to a tradable financial asset, such as a share (like in Qantas). Public offers to purchase securities typically require registration and disclosures, all of which purport to protect the investor.
Some of the required information to be disclosed includes the history of the company and its founders, shareholding structure, financial statements, executive compensation, risk factors (both current and future), management’s explanation of operations and any other material facts relevant to the offering. This, of course, is designed to help investors make an informed choice.
In the US, this is an increasingly topical issue, with the discussion centred around whether crypto assets meet its securities test, known as the ‘Howey Test’. For their part, Bitcoiners like MicroStrategy’s Michael Saylor have long held the view that only Bitcoin isn’t a security — a view that currently appears to align with regulators:
We know that regulators talk to their equivalents offshore, which is what makes the timing of ASIC’s Corporate Plan all the more intriguing. As the US begins to grapple with how to classify and regulate crypto, it’s becoming evident that a day of reckoning is on the horizon for Australia when these questions and more will be settled, once and for all. Get your popcorn ready.