Federal Treasurer Josh Frydenberg has flagged sweeping reforms that will bring alternative private currencies and emerging payment methods within the regulatory ambit of Australia’s financial regulators.
Under a reform roadmap outlined in Melbourne on Wednesday, Frydenberg said the government was looking to fast-track implementation of a consultation process aimed at establishing new licensing and compliance regimes for cryptocurrency providers and exchanges and rapidly growing payments channels such as Apple Pay and buy now pay later schemes.
The treasurer underlined the urgent need for regulatory reforms to the payments system given the decline of traditional payments methods such as cheques and cash that he said were being replaced by digital wallets, buy now pay later and crypto assets.
“Given the pace of change and those leading it, if we do not reform the current framework it will be Silicon Valley that determines the future of our payments system - a system that represents a critical piece of our economic infrastructure,” he said.
“At the same time, with several central banks around the world now developing their own digital currencies, we cannot allow ourselves to be disenfranchised in this new digital payments era.
“Australia must retain its sovereignty over the payment system.”
Frydenberg said the government would also commence a consultation process with a view to establishing a central bank digital currency (CBDC) in Australia that was expected to be completed by the end of 2022.
His support for a CBDC coincided with the release of a report by an RBA-sponsored working group that found that a wholesale digital sovereign currency delivered through a distributed ledger platform could lead to significant efficiency gains and reduce operational risks in the financial system.
Frydenberg indicated by the middle of next year the government will have finalised changes to include BNPL and digital wallets as designated payments methods under the Payments Systems Act.
At around the same time the details of new legislative powers for the Treasurer’s office to set payments policy would also be finalised.
Frydenberg also wants a separate consultation on regulation of crypto exchanges to be completed by around June.
The deliberations on crypto regulation will also involve consultations with the Council of Financial Regulators to grasp the “complex issue” of Australian banks allegedly debanking cryptocurrency providers.
By end of 2022, the government is hoping to have settled on a new framework “to replace the current one-size-fits-all payment licensing arrangements with a functionally based framework adopting graduated, risk-based regulatory requirements”.
Frydenberg said he had enlisted NSW Liberal senator Andrew Bragg to work with him to implement the reform program.
Senator Bragg chaired the senate committee that earlier this year recommended new licensing arrangements for crypto exchanges.
Bragg wants such exchanges to be subject to capital adequacy, auditing and responsible person tests.
“This is a substantial and complex body of work,” Frydenberg said. “Implementation will be key.
“It represents the most significant reforms to our payments system in 25 years.”
The last root and branch reforms of the regulatory framework for payments were made in 1997 after the Howard Government implemented the recommendations of the Wallis Committee.
That reform package included the formation of the Payments System Board as the main regulator of payments in Australia.
The government’s move to normalise crypto trading in Australia drew a mixed reaction from the financial services industry.
Fred Schebesta, the founder of Finder and outspoken advocate of cryptocurrencies, hailed the Treasurer’s policy roadmap as a milestone.
“This is a great day for Australia with the Government acknowledging the huge opportunity offered to our economy by digital asset innovation,” he said.
“Australia can be the regional hub for this decentralised revolution and we are already seeing one in five Australians owning cryptocurrencies.”
Canstar director Steve Mickenbecker, whose financial products comparison service does not offer product ratings for cryptocurrencies, was more circumspect.
“Canstar has no immediate plans to introduce ratings on cryptocurrencies or crypto exchanges,” he said.
“The reason why we don't provide ratings on cryptocurrencies is the speculative nature of them as an asset class - their values tend to rise and fall quite dramatically in short time frames.
“There's also a black box around some crypto exchanges too and we don't like black boxes because they don't allow us to make informed judgements about the value of a financial service.”
The ATM industry downplayed the significance of the government’s move to establish a digital sovereign currency, saying that it would not be able to replace physical banknotes because Australians did not trust “digital dollars”.
“Across the world, we are seeing governments and central banks taking strong action to secure the role of cash as a method of payment,” said ATM Industry Association executive director, Sandra Smith.
“Australia risks being left behind and vulnerable to large scale cyber-attacks unless there is action to ensure payment choice is maintained.”
Sydney-based risk consultant Patrick McConnell questioned the RBA working group’s finding that a central bank digital currency was likely to reduce operational risks in the financial system.
“Major operational risks would be created when the major banks are required to reconfigure their systems to accommodate the CBDC,” he said.
“In other words it will introduce considerable operational risk.”