India’s approach serves as a warning
Broadly speaking, regulation is a good thing for any asset class. An effectively regulated market means more security for investors, better screening of exchanges and financial institutions, transparency, stronger platforms for distribution and trading, and can result in better access to education and information.
If regulation moves from helper to hindrance, however, we often see the motivation and ideology behind regulation as the key driver. Intervention in markets must be for the sake of protecting both investors and financial institutions, building trust, and ultimately stimulating trading. This is not always the case.
The crypto industry in India is one of the largest in its region, but the government agenda opposes the opportunity for wealth generation that cryptocurrency offers its citizens. India’s rupee is only partially convertible, which gives the regulator insight and control over who can access the country’s markets. Although this allows the government to tax effectively and regularly, it deters the global investment community and restricts opportunities for many Indian companies to access capital.
Cryptocurrencies are freely traded and mostly anonymous, denying authorities oversight on how much currency is moving in and out of India, the level of household savings held in cryptocurrency, and the ability to tax transactions. As such, the government reacted first by banning currencies, and now backflipping and treating these like gambling assets.
By wavering between regulation and prohibition, and taxing heavily, the government caused a market downturn on Indian exchanges that could hurt any Indian investors holding a significant portion of their household savings in crypto.
Deliberation with industry critical
One of the big takeaways from India’s approach is that a thorough process for collecting an industry level perspective is imperative. Exchanges and the issuers of cryptocurrency are the closest organisations to the asset class, collecting investment data and observing trends in real time that paint a better picture of the market and what it needs.
Fortunately, Minister for the Digital Economy Jane Hume announced that the government does not see cryptocurrencies as generating the same risks as financial products and that they won’t be regulated in the same way, but wisely pointed out the impact of trust when it comes to third parties managing cryptocurrency assets and facilitating trades, such as exchanges.
By developing a framework that is built on feedback from these organisations on how exchange platforms are used, trends in investor behaviour, barriers to entry, and long-term price movements, a path to regulation that builds trust while encouraging investment activity can be established.
The adviser channel is also a critical avenue to gain insight into what investors are thinking at all levels of the market. Advisers are on the ground having conversations with clients about their portfolios, and in particular, their allocations to crypto, to have a strong connection to the needs of the investment community.
The interest from the government in implementing a more comprehensive and modern legislation framework, if done effectively, will be good news for cryptocurrency in Australia. An overall price increase from more sophisticated investors, including institutional and SMSF investors, joining the asset class in greater volumes is something we could expect to see.
On the other side, increased regulation may push short-term traders and speculative investors out of the market, and an increase in investors that employ the principles we encourage, who sensibly seek advice on developing their investment strategy and carefully consider the role of cryptocurrency and its underlying assets in their portfolio, may be a positive outcome.
This will hopefully reduce some of the buy-and-sell swings we see in the market as “punters” with a get-rich-quick mentality exit, allowing cryptocurrency and blockchain assets to grow more predictably and serve as a tool for long-term wealth generation. This is a role that Cointree supports and believes in.
An introduction of a new licence for crypto exchanges like Cointree will also allow us to further demonstrate a high level of commitment to customer protection and integrity. This is imperative to the success of exchanges and is one of the main motivations for our free education portal which advisers and investors can find on our website, no account required.
Since the conversation around regulation began, Cointree has always supported any movement that will help cement crypto as a legitimate asset class alongside the likes of equities, gold, and property, and we look forward to working with the government this year to ensure that regulation is centred on benefitting investors.
Jessica Renden, chief operating officer at Cointree.