While some technology sectors might baulk at the idea of regulation and red tape stifling innovation, Australia’s major cryptocurrency exchanges welcome the certainty that regulation will bring.
It is the lack of regulation which is stifling innovation, says Caroline Bowler, CEO of Australian cryptocurrency exchange BTC Markets. Founded in 2013, BTC Markets has a client base of 300,000 investors with more than $14 billion traded on the platform.
Without the support of a clear regulatory framework, cryptocurrency exchanges are hesitant to innovate, invest and expand their offerings, says Bowler, who has a background in US investment banking, hedge funds and fintech companies.
“For us, the single biggest inhibitor is the lack of regulation in this space,” she says. “The lack of a robust regulatory framework inhibits how we can be proactive and bring in innovations that you’re seeing in other markets like Singapore and Hong Kong, with the US and European Union not too far behind.”
Beyond cryptocurrencies like bitcoin, Bowler sees great potential in the broader area of decentralised finance or DeFi. Using smart contracts stored on blockchains, DeFi breaks the reliance on central financial intermediaries such as brokerages, exchanges or banks to offer traditional financial instruments.
“To me, DeFi is an extremely exciting area of potential,” Bowler says, “but it’s very hard for us to partner with a DeFi project without assurances in place around regulation.”
Regulation is also welcomed by Jordan Michaelides, head of partnerships with Australian cryptocurrency exchange CoinJar. Founded in 2013, CoinJar’s 500,000 customers have bought and sold billions of dollars worth of cryptocurrency.
With a background in foreign exchange, Michaelides would like to see the requirement for cryptocurrency exchanges to hold an Australian financial services licence.
“I think the industry needs licensing, I really think it needs to be regulated by some sort of AFSL ( Australian Finance Services Licence) similar to the FX space,” Michaelides says.
“I think every prominent founder and every prominent executive in the industry wants licensing.”
The industry’s call for regulation comes as cryptocurrencies stake their claim on the mainstream financial landscape as a growing financial asset class.
Defying the stereotypes, cryptocurrency investors are becoming more sophisticated and spread across a wider range of age and socio-economic demographics, says Tim Wilks, marketing executive with Australian cryptocurrency exchange CoinSpot. Established in 2013, CoinSpot has more than one million customers.
Customer education is a key element for CoinSpot, Wilks says, not just to drive uptake and volumes but also to nurture more sophisticated investors.
“Our customers aged over 40 have increased by 350 per cent over the last 12 months, with a lot of interest in adding a cryptocurrency component to self-managed super funds,” he says.
“Our customers are clearly focused on longer term investing; only 10 to 15 per cent are consistent day traders, others are holding for longer and diversifying their portfolios with five or six different currencies.”
Likewise, BTC Markets’ customers are primarily retail investors but it has seen a five-fold increase in the number of SMSF account holders since the onset of the coronavirus pandemic.
As more mainstream investors come onboard, BTC Markets’ Bowler says crypto is taking its place as a valid alternative asset class. This comes as JP Morgan, Morgan Stanley and other major US investment banks turn their attention to cryptocurrencies.
“I expect to see an increasing number of crypto announcements coming out of financial institutions across the developed world,” she says. “A central bank digital currency, CBDC, isn’t strictly a cryptocurrency, because it’s centralised, but it’s still moving the conversation along with regards to digital assets in finance.
“I think CBDCs will be a very useful stepping stone for people to get comfort with cryptocurrencies within broader financial services.”
With a broader range of cryptocurrency investors comes demand for a broader range of offerings, but once again the conservative financial sector is deterred by a dearth of regulation.
“When I started with CoinJar, I came on board to launch an index fund,” Michaelides says. “I use Vanguard for my super and I don’t see why you can’t have this sort of product in the crypto space.
“Unfortunately, we didn’t get any pick-up with the institutional market – not helped by the lack of regulation – so the idea was shelved in favour of creating CoinJar Bundles to make it easier for our retail customers to diversify their portfolios.”
For now, CoinJar remains focused on retail customers, and will soon be introducing a cryptocurrency-based Mastercard supporting Contactless as well as Apple and Google Pay.
Australia’s cryptocurrency exchanges are also beginning to forge partnerships with the likes of cashback services and Buy Now Pay Later providers. As crypto players push into the broader financial services space, more established financial players are likely to push back – once a regulatory framework is in place.
“I think as soon as there’s an AFSL for crypto, the banks and large financial institutions will jump into it headfirst as the margins are very good,” CoinJar’s Michaelides says.
“I imagine every bank in Australia and other developed markets are looking at crypto,” adds Bowler. “They can see the opportunity, including from a technology point of view when it comes to innovative applications for blockchain.
“There’s a seat at the table waiting for crypto, once the regulatory conditions are right.“