Cryptocurrency investments are growing. But banks and regulators are taking a cautious approach
Cryptocurrency may have found some of its first uses on the dark web, but increasingly it's being considered and traded as a legitimate asset. A large part of what is underpinning its legitimacy is the growing number of large corporations actively participating in the space.
In Australia, the first that signalled its plans to enter the market was the Commonwealth Bank of Australia (CBA) when it announced in November it would begin offering customers the ability to buy, sell, and hold crypto assets through its mobile Commbank app. A pilot program of this feature is currently underway.
Speaking to ZDNet, CBA head of blockchain and digital assets Sophie Gilder said the strategic move for the bank to roll out crypto services is being driven by the growing uptake of cryptocurrency by its customers.
"There's, at last count, about 700,000 of our customers who are already transferring money to crypto exchanges, so we can see that they're already active in this space. Our customers are already there, whether we're there or not," she said.
She also believes the narrative around cryptocurrency of where it used to "exist on the fringes" is no longer the case as it becomes "more and more mainstream".
"Customers have learned more about it; it's been more widely adopted," Gilder said. "We're seeing it's certainly still very appealing to the younger demographic, but there's also plenty of middle-aged or slightly older customers."
Gilder added there is an opportunity for CBA to help customers address common issues they face when handling cryptocurrency.
"Our customers will come to us, for example, saying if we can help them if they lose money transferring to an exchange, which turns out to be a scam, for instance, or if they're tricked into transferring cryptocurrency to someone," she said.
"We're very across the problems that some of our customers have…so that's when we thought, how could we provide a more secure and simple service for people to access cryptocurrency as an alternative investment, not as a payment mechanism. So, our product is trading cryptocurrency as an alternative investment, not as a method of moving money around."
When asked whether this service would eventually be extended to enable cryptocurrency as a payment mechanism, Gilder said it is not being considered "at this time".
"Initially, it's giving customers exposure to the value of the cryptocurrencies and only on- and off-ramps via a CBA bank account, so it's a closed loop, if you like. It gives us greater transparency," she said.
As CBA progressively rolls out more features of its crypto service this year, it plans to provide customers access to up to 10 crypto assets including Bitcoin, Ethereum, Bitcoin Cash, and Litecoin.
The bank has partnered with crypto exchange and custodian firm Gemini and blockchain analysis company Chainalysis to develop the platform. The bank has also structured the product in a way that it is bound by existing financial regulations.
"We are very careful in selecting our partner [Gemini] who provides the crypto exchange and custody services because we want to ensure that we've got enterprise-grade security and they've got scaled exchange, so they can provide best price execution," Gilder said.
"We wanted to go for a partner who is regulated, so Gemini is regulated in New York state, so they need to comply with all of the requirements under that scheme -- they've got to comply with things like anti-money laundering and capital provisions. We feel that strengthens their offering. The way that we've designed this is we've tried to go with trusted names, and it's a measured first step into the space.
"We've also structured this as a financial product, so there is a product disclosure statement that customers can read. This is a regulated product and has the oversight of ASIC, so it's quite different to some of the other propositions in the market in the way that we've approached it, which I think you would expect from a regulated institution."
Finance
But CBA is not the only major traditional player entering the crypto market. Last month, Visa launched its Global Crypto Advisory Practice, a new service within its Visa Consulting and Analytics (VCA) business that will advise clients on all aspects of crypto investment and adoption.
"We believe it's an asset class that is here to stay and is here for the long haul," Visa Australia and New Zealand head of innovations and partnerships Anthony Jones told ZDNet.
Like CBA, Visa has seen customer interest in cryptocurrency in the last 12 months take off. Based on a global study by the financial services giant, The Crypto Phenomenon: Consumer Attitudes and Usage [PDF], nearly a third of Australians have directly engaged with crypto either as an investment vehicle or as a medium of exchange.
"We've seen a significant increase where usage has increased by about 50% over the last 12 months. We've seen a huge amount of increase from consumers…we see increasing interest from our traditional clients, and also our new digital partner clients in digital currency and digital assets," Jones said.
Despite the eager uptake, both Jones and Gilder warned of the importance of erring on the side of caution.
"We're not suggesting that people go out and buy crypto currencies necessarily. We need them to do their own research from that perspective…but it comes down to making yourself aware of the capabilities of cryptocurrencies and crypto assets," Jones said.
Gilder noted despite the growing legitimacy of cryptocurrency, it is still a volatile asset and therefore along with it comes potential risks.
"We think it has a place for people in terms of having some money to buy cryptocurrency, but we have a lot of warnings, and we also have transaction apps within our product to ensure that people don't overextend," she said.
Further signals of cryptocurrency being solidified as an asset in the Australian financial market was marked by the Australian government's announcement that it would be implementing crypto-related reforms this year. Some of the expected reforms include requiring Digital Currency Exchanges (DCEs) to hold the assets of Australian investors onshore. It will also begin consultation early this year on a licencing framework for DCEs that will allow the purchase and sale of crypto assets by consumers within a regulated environment.
The taxman cometh
Australia's Board of Taxation, meanwhile, will begin research for advising on a policy framework for the taxation of digital transactions and assets.
The move is off the back of the Australian Transaction Reports and Analysis Centre (Austrac) gaining authorisation in late 2017 to extend anti-money laundering and counter-terrorism financing regulation to cryptocurrency exchanges.
As a result, digital currency exchange service providers must apply the same obligations as other financial sector businesses, and are required to identify, manage, and mitigate risks of money laundering, terrorism financing, and other serious crime. They are also required to report suspicious matters to Austrac.
"Austrac and our law enforcement partners are highly focussed on preventing and detecting criminal abuse of the financial sector. This includes targeting new and emerging methods to launder money -- including cryptocurrency. As part of these efforts, we are also increasingly partnering with businesses and new technologies to detect and disrupt criminal activity," an Austrac spokesperson said.
"Austrac will continue to invest in our cryptocurrency capability to provide specialised intelligence to our domestic and international partners."
CBA's Gilder doesn't doubt these new regulations will help further shape the cryptocurrency narrative in Australia, and hopefully for the better.
"There'll be significant changes in regulation [globally]. There will be continued innovation in the DeFi (decentralised finance) space -- some of it will work and some of it won't, but it'll be fascinating to watch. It's a crucible of creativity," she said.
"And, I think we'll continue to see this mainstreaming of cryptocurrencies where many more people enter the market, and that's both institutional and also at an individual level, so we see it growing."
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