- The crypto market is in a difficult phase, with prices falling and the assets straddling the lines between new technology and traditional finance.
- Cryptocurrency exchanges have taken on an increasingly central role in building the ecosystem and trying to establish legitimacy.
- Business Insider spoke to senior staff from two of the biggest Australian crypto exchanges. We also spoke with the corporate regulator, ASIC, and the government’s financial services intelligence agency, AUSTRAC.
- What they told us highlights the challenges faced by the industry to build scale within existing regulatory frameworks.
It’s been another rough month for cryptocurrencies.
Bitcoin has been threatening to push below a $US6,000 threshold that has supported it since late-June, while Ethereum — the world’s second biggest cryptocurrency — has now fallen below $US200, a decline of 85% from its highs.
Some of this has been attributed to US regulators spurning requests for new investment structures that would lend more legitimacy to the asset class.
The relative lack of regulation in the space means many funds can’t justify risking capital by investing in crypto assets. Crypto exchanges — the technology platforms that allow people to buy and sell cryptocurrencies — are among the leading advocates for a more comprehensive regulatory framework.
For example, the US-based Gemini exchange, owned by the Winklevoss twins, this week announced plans to launch a regulatory approved cryptocurrency that’s pegged to the US dollar.
And activity among Australian-based crypto exchanges is also ramping up.
Jordan Michaelides — head of institutional investment at Coinjar — told Business Insider that the exchange has now processed $1.4 billion worth of transactions.
Both Coinjar and Sydney-based exchange Independent Reserve (IR) have caught the interest of established players in venture capital.
Coinjar counts VC fund Blackbird Ventures as an investor, while IR sold a 25% interest to a group led by KTM Ventures Innovation Fund earlier this year.
Coinjar’s claim that it has seen $1.4 billion in trading volumes suggests burgeoning growth in the sector, but a spokesperson for corporate regulator ASIC was circumspect on how much volume is really moving through marketplaces.
“Tracking the actual industry is even newer than the sector itself,” they said.
However, “such aspects of the volume of transactions can be quite opaque, and you could imagine some of the claims by participants might warrant a certain scepticism.”
ASIC’s focus has largely been on dodgy initial coin offerings (ICOs). But the spokesperson told BI that parts of the market still operate outside of regulatory scope.
“Much of the so-called ‘cryptocurrency’ activity is either unregulated or regulated only in part,” the spokesperson said.
As a result, there are still many pitfalls and people considering crypto investments should do so “with great caution”, the spokesperson added.
In addition to ASIC, the Australian crypto market is also being monitored by AUSTRAC, the federal government’s financial intelligence agency.
Both Michaelides and Independent Reserve CEO Adrian Przelozny said their respective exchanges have met obligations with AUSTRAC in accordance with federal legislation, after new compliance rules were set up in April.
When contacted for comment, a spokesperson for AUSTRAC provided details on the agency’s oversight of the industry under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.
However, “AUSTRAC does not monitor or collect information that allows us to quantify total transaction volumes by a reporting entity or industry,” the spokesperson said.
Crypto exchange-traded funds (ETFs)
Throughout 2018, a number of crypto exchanges have lobbied the US Securities & Exchange Commission (SEC) to approve a Bitcoin ETF, without any success.
Their hope is that a crypto-linked product which trades on a regulated securities exchange will provide a vehicle to attract larger capital flows.
The SEC’s rejections have been cited as one of the catalysts for downward pressure on prices in recent weeks.
The local exchange operators we spoke to are optimistic that ETFs will eventually be available, but said Australia would probably have to follow lead from Wall Street.
“I think ETF discussions in Australia will have to wait until we see what happens in America,” Michaelides said.
“ETFs have kind of been the holy grail over the last 18 months to two years,” Przelozny added.
It’s a catch-22: the lack of regulation leads to volatility, and the volatility makes the regulators sceptical and reticent.
“I still think over the next 12-18 months there’ll be an ETF approved. There’s been a few groups in Australia approaching the ASX, but they’ve received push-back,” he said.
Although any key developments in ETF approval would no doubt grab headlines, Michaelides said the crypto ecosystem would benefit more from smaller projects.
“Rather than a big-ticket items like an ETF, I think it will be a lot better if there continue to be lots of individual use cases.”
He cited the example of Bitpay, a global bitcoin payment service headquartered in Atlanta.
“I think smaller products will be better than something like an ETF. Not necessarily in terms of boosting the price of Bitcoin, but just expanding the industry.”
The push for traditional financial products like an ETF is part of efforts to attract more institutional capital to the space.
Both Coinjar and Independent Reserve are optimistic they’ll be able to attract bigger investors, but it remains a work in progress.
“The last 12 months has been a period where institutional investors are kind of dipping their toes in the waters,” Michaelides said.
He said there’s also evidence of interest from high net worth individuals, sometimes via third parties.
“You wouldn’t necessarily know they’re doing it. For example, they’re probably using a subsidiary vehicle to make the investment.”
Przelozny also noted “significant activity in the space” from Australian Self Managed Super Funds (SMSFs).
He said Independent Reserve now has “around six or seven thousand customers” who are SMSFs. Opportunities in the sector were also highlighted by Ben Ingram, the new CEO of exchange service bitcoin.com.au, when Business Insider spoke with him in July.
Przelozny said that in addition to more regulation, big investors want more evidence of safety nets before they allocate funds.
“One thing institutional investors want to see is insurance,” he said. Independent Reserve recently commissioned accounting firm PWC as auditors, and is exploring avenues to insure the crypto assets it holds.
“We’re aiming in 3-6 months to have a business that’s both audited and insured.”
Queried about what kind of insurance IR wanted to implement, Przelozny said he couldn’t comment at this time because negotiations remain ongoing.
Both Coinjar and Independent Reserve take a measured approach to what kind of cryptos they list. Coinjar only supports Bitcoin, Ethereum, Ripple and Litecoin.
IR lists those four currencies plus Bitcoin Cash, and has recently added OmiseGO and ZRX — both tokens which support new protocols on the Ethereum blockchain.
It’s a similar approach to Coinbase — the largest exchange in the US — which only provides a limited trading platform to avoid falling foul of regulators.
“ASIC isn’t too keen on listing a token that could be deemed a security,” Przelozny said.
In that sense, Australian regulators are following the US lead where the SEC has classified specific cryptocurrencies — typically fully distributed ones — as tokens, as opposed to a tradeable security with centralised ownership rights.
Exchanges that trade coins which don’t meet the SEC’s definition of a token would therefore be subject to the relevant securities laws.
And after 2017’s crypto-craze gave rise to a spate of new ICOs, reports earlier this year suggested that the wheels have now fallen off hundreds of projects.
As trading platforms, exchanges such as Coinjar and IR are key providers of liquidity. And that makes them a target for the creators of new alt-coins. If new alt-coin creators don’t feature on an exchange, there’s no channel to satisfy whatever market demand may be out there.
“We find alt-coins always hit us up. Many question us to say ‘what’s your price for listing?'” Michaelides said.
However, Coinjar is “very cautious” about what it includes on its platform.
“Most people want to see that it’s a legit token before they invest, and see evidence that it actually has a use-case,” he said.
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