ASIC mission control hole leaves investors alone in crypto-universe

Ian Rogers

Who will be held accountable before, during and after the inevitable crashes in the crypto-currency fads, ASIC chief Joe Longo more or less asked yesterday.

“ASIC now oversees laws and obligations barely thought of 20 years ago. In less than half that time we’ve landed in the crypto-universe,” Longo told an industry conference.

“As the corporate and markets regulator, I have to admit to a certain fascination with DAOs – decentralised autonomous organisations. What are they? What do they do? How can DAOs be regulated? 

“Put simply, DAOs are organisations governed by artificial intelligence in the form of smart contracts, using blockchain technology, to record transactions with and between their members and third parties. 

“No boards of directors or employees in sight, and the rules of engagement are encoded in smart contracts. Indeed, it has been said to a large extent DAOs work on the basis that the ‘rule of code’ replaces the ‘rule of law’. 

“The modern corporation, with its limited liability and boards of directors, all of whom are now required to apply for lifelong, unique director IDs, seems a world away from this virtual community.

“To paraphrase a concept familiar to corporate lawyers, to whom does ASIC turn to ascertain the directing mind and will of a DAO? It is not clear who is accountable if things go wrong, or don’t go as intended or anticipated. Nor is it clear how a DAO itself can be held accountable in a court of law.

“The policy challenge for traditional forms and methods of regulation is readily apparent. Legal analysis of how DAOs work is at an early stage, with many unanswered questions: what is the nature of a member’s interest in a DAO? Is it like a share in a company or a unit in a managed investment fund?

“The implications for consumers are potentially huge. It is almost an article of faith that no one should invest in something they don’t understand. 

“Who among us can say they really understand crypto-assets and cryptocurrencies?

“The demand-driven nature of the rush into crypto has thrown up some unique challenges. At present many crypto-assets are probably not ‘financial products’, making it difficult for financial advisers to offer counsel. So, what can they do when clients are banging down the door wanting to divert their savings into Ethereum or Dogecoin, a currency originally conceived as a joke?

“ASIC has already provided some guidance on exchange traded funds linked to crypto-assets – they at least are financial products, and traded on a licensed exchange, so there will be some protections there – but for the most part, for now at least, investors are on their own. 

“The fact Australia’s largest bank is already proposing a means of crypto-exposure for its retail customers is telling. Yes, it’s only a pilot project, but the overall direction is clear. This debate is no longer on the fringes of the financial services industry.”