Speaking to the American Chamber of Commerce in Australia (ACC), the chair of the Australian Prudential Regulation Authority (APRA), Wayne Byres, confirmed that the regulator is looking closely at the technological revolution in finance and how it is regulated.
Mr Byres told the ACC that the digitisation of money and financial services has heralded possible new forms of money, including central bank digital currencies (CBDCs), digital currencies/stablecoins and crypto assets, which “have the potential to significantly reshape the financial system”.
While new forms of money, such as cryptocurrencies, are increasingly becoming mainstream with more players launching into these offerings, Mr Byres said that there still remains “significant uncertainty over what a more digital and decentralised financial system will ultimately look like, which new types of money will gain prominence, which products and services will take off, and which will fade away”, adding that the future of money is dependent on where users “decide to place their trust”.
Mr Byres outlined the role that financial regulation had to play in helping build trust in an evolving financial landscape, stating that the Council of Financial Regulators had been “collaborating actively on the design and implementation of new regulatory measures”, which include work to “develop a new Australian regulatory framework for stored-value facilities”, such as certain types of digital wallets and stablecoins (which APRA views as “a high priority issue”).
“These products can have many of the same features of traditional bank deposits, but without (at the moment) the same consumer protections. Given it is difficult for consumers to understand and compare the respective risks, the playing field is not level. We are keen to work with the Government and our peer agencies to make sure we have a fit-for-purpose framework for the future,” he said.
Indeed, the Australian government recently proposed new crypto-asset licensing requirements. In essence, the government has suggested that the most appropriate subject of regulation is the crypto-asset secondary service providers, which interact with consumers and allow them to engage more easily and seamlessly with the crypto ecosystem.
The chair of the prudential regulator revealed that APRA is now “in the process” of finalising a letter to regulated firms on how it expects them to manage their dealings with digital assets, including stablecoins and crypto assets.
“The letter will not introduce new regulatory requirements,” Mr Byres said, adding that instead, its “underlying message is primarily one of: ‘by all means innovate, but proceed with care and in full knowledge of the risks’.”
“We are first and foremost a safety regulator, with a mandate from the Australian Parliament to promote stability. That does not, however, translate to limiting change with a view to preserving the status quo. Nor does it mean protecting incumbent financial institutions, when better, safer and more efficient ways of doing business emerge.
“If technology can deliver a financial system that is indeed better, safer and more efficient, our task is to embrace the changes for the benefit of the Australian community.”
Finding the Goldilocks point for regulation
Looking forward, he said that it was a “challenging task” to ensure the regulatory framework is “just right – now and into the future – for a financial system that is rapidly evolving”.
“What we know is that the digitisation of finance is reshaping the financial system, at speed. The move towards a more digital, decentralised financial system has the potential to deliver major benefits: faster, more efficient payments, lower costs to businesses, job creation and economic growth. It also poses risks, given the financial system’s propensity to instability and community harm if not carefully managed,” he said.
Mr Byres told delegates that regulation of the financial system is necessary “because history has taught us that, left to its own devices, the system is prone to bouts of instability and considerable harm to society”.
“But equally we know a dynamic and innovative financial system – with participants able to take risk and innovate to deliver better products, services, and ways of doing business – generates important and long-lasting economic benefits for society,” Mr Byres told the ACC.
“Finding that Goldilocks point for regulation – not too much, not too little – so as to allow the digitisation of finance to generate maximum economic benefit, but doing so within society’s risk tolerance, is what we strive for.
“That, of course, is much easier said than done….
“Getting the regulatory balance right requires a clear plan, a flexible approach, and a coordinated response. In Australia, we are well on the path to having those important foundations in place.”
Several major players have been eyeing crypto assets in recent months, with the Commonwealth Bank of Australia (CBA) having become the first big four bank to offer its customers the ability to buy, sell and hold crypto assets through its banking app.
The big four bank announced last year that it had partnered with crypto exchange and custodian Gemini and blockchain analysis firm Chainalysis, to design a crypto exchange and custody service to be offered to customers through the CommBank app.
CBA will provide access to up to 10 selected crypto assets, including bitcoin, ethereum, bitcoin cash and litecoin.
Speaking at the time, CBA chief executive Matt Comyn stated the growing demand for digital currencies has created both challenges and opportunities for the financial services sector.
“We believe we can play an important role in crypto to address what’s clearly a growing customer need, and provide capability, security and confidence in a crypto trading platform,” Mr Comyn said.
[Related: CBA jumps into crypto]
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.