Crypto exchanges face capital adequacy, ‘fit and proper’ manager laws

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Senator Bragg said applying capital adequacy rules and responsible management tests could lead to the number of exchanges falling to about 20 or 30. He said he does not want an undercapitalised crypto sector repeating mistakes of the superannuation system, which has had funds with no capital hitting up members to pay regulatory fines.

“The idea of ​​a $2 company running billions of dollars in AUD equivalent trades each year is a real risk to consumers and the economy overall. I do not want to see the crypto markets become the next $2 company which hits consumers when they go to the wall,” his comments prepared for delivery say. Nor should the proposed Compensation Scheme of Last Resort (CSLR) be expanded to deal with crypto losses.

Treasury is currently working on the design of a crypto market license and local custody requirements. It is expected to release a consultation paper before the federal election slated to occur before the end of May.

The capital requirements should involve minimum levels along with a floating component, recognizing that smaller exchanges should operate with less capital than larger one, the senator said. Crypto exchanges “wouldn’t face the same level of obligation as the ASX, but a new market licensee would meet stringent tests for capital adequacy, responsible persons as well as auditing rules, control frameworks and product disclosure requirements”.

Senator Bragg, who was in Tasmania on Tuesday inspecting Firmus’ hydro-powered bitcoin mining data centers that cool servers using oil and plans to employ 120 people in Launceston, said he found consensus during five roundtable consultations with 58 industry leaders, experts, peak body representatives and Treasury officials last month.

The market also wants custody requirements to be separated from those involving the operation of crypto markets. The new digital custody license could be set up as a standalone, new chapter in the Corporations Act.

Retail interest in crypto has been surging, prompting Commonwealth Bank to enter the space late last year. Crypto assets held by CBA customers will be held in New York given the bank is working with Gemini, a US exchange. The government reforms should encourage Australian institutions to use local custodians.

About $11 million per day is traded via Coinjar, which also has more than $100 million under custody and services more than 400,000 users. Another exchange, Independent Reserve, trades over $6.7 million in crypto a day with more than 200,000 customers. Both companies are supportive of proposals for new licenses.

In its consultation paper, Treasury will seek more detail on the new custodian model that has been developed by Wyoming, which has passed crypto legislation that Australia will use as a model. The law in the US state has led to the creation of digital banks, such as Avanti. “These institutions are going to be a critical bridge between the crypto world and the legacy financial system,” Senator Bragg’s prepared comments say.

As well as introducing tougher investor protection regulation, the government is also considering changes to the Corporations Act to encourage blockchain entrepreneurs to create new business models, including in ‘decentralized finance’ (DeFi).

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