BTC Markets CEO sees silver lining in Australian banks’ crypto clampdown

Transcript

Angie Lau: A three year court battle between Ripple Labs and the United States securities regulator had the crypto community on the edge. Then the judge ruled Ripple’s XRP is not a security when sold to retail traders, sending the token soaring. While the SEC said it is still reviewing the decision, the case could have far-reaching influence on crypto regulations around the world. 

Halfway across the globe in Australia, crypto firms are facing tighter licensing requirements and possible de-banking as leading local banks like the Commonwealth Bank (CBA) and National Australia Bank (NAB) restrict payments to crypto exchanges to curb scams and fraud. 

The need for regulatory clarity has never been more evident, but at the same time, regulatory disparity between different geographies also has never been more pronounced. 

What is it that the crypto industry wants? What is the need of the hour? 

Let’s dive into all of this and more in this edition of Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast. I’m Editor-in-Chief Angie Lau.

What ripple effect will recent events have on crypto exchanges and the markets? Who better to break it down for us than Caroline Bowler, CEO of BTC Markets, one of the largest and oldest digital exchanges in Australia. 

Caroline, welcome to the show. Great to see you again today. A lot has happened since the last time we talked. I think it was right before the FTX meltdown in November of last year was when we last spoke.

Caroline Bowler: Wow, things have changed ever so slightly since last we spoke and in some ways maybe for the better. We went from FTX, December was practically dead in crypto, and then we started to see the return in January and now here we are in July and we’re definitely seeing a return in terms of liquidity, not necessarily in volatility. And then we have Ripple.

Lau: Yeah, and then we have Ripple. I mean the liquidity is the start of it. But as I reflect on what really happened, you were really at the front of the battle lines in that we saw not only the degradation of trust from FTX, but it was really a contagion effect. And exchanges after exchanges got hit. What was the experience that you had with the trust you had been building up? 

One of the oldest exchanges in crypto in Australia, having built up that trust level even from the regulatory front, and then to be confronted by just this event that was really out of your control.

Bowler:  For us, as a business, as an exchange, we saw an inflow of clients. People were transferring their funds back onshore, back into Australian exchange, particularly because we’re only Australians. So they were moving their funds and their trading activity back onshore into an Australian exchange. 

In some respects, we were a net beneficiary of what happened with FTX. We’ve certainly heard a lot from clients and understanding of the positions in terms of the cautious note that we’ve taken, in terms of really strongly looking at it from a regulatory point of view in every move that we’ve made, though we’ve certainly walked away from some profitability in that decision making. But for us, it was about understanding that there is, in this early stage of the business, a very real need for that cautious note. It’s paid off for our clients. We don’t take that trust lightly at all, and we work very hard to maintain that. 

But to that point, the FTX debacle, for everybody, degraded trust across the industry and something that’s going to take some time to rebuild and get back. We need legislation to come in. Certainly here in Australia, we’ve seen a change in successive governments, both of which have had crypto regulation as part of their remit. We’ve certainly seen that kind of progress slowly come through here locally, but take away the pace of that and just push it to the front. Certainly what we’ve seen out of the U.S. now, I would imagine it’s very high on the agenda for a number of different legislators.

Lau:  I absolutely want to check in on Australia. Right now, no one has really pierced that holy grail of mass adoption. For that to happen, as you’ve said, there’s got to be legislative rails, there’s got to be regulatory rails, institutional support, liquidity services, vendors, firms and of course, investors. But what do you think the crypto sentiment in Australia is right now, with XRP potentially back in play?

Bowler: There is a cautious note of optimism in Australia and I say that as somebody who’s been sitting in the crosswinds as sentiment has blown one direction or the other. It’s as much to do with the fact that, with all of the carry on that’s happened in the industry, it hasn’t been Australian exchanges, it hasn’t been Australian projects. Yes, people have been caught up in it, but the local industry around blockchain and cryptocurrency has managed to get through this relatively unscathed and with pretty good behaviors in place.

I don’t think I want to see the same scale of exuberance. We saw a lot of froth in the market in the last bull. The reason why I don’t want that is because, ultimately, retail investors get burnt out by that. So instead, we can see a steady progressive growth across the market as more of the infrastructure gets built out, as more of those payment rails and legislative rails get built out here locally. 

Australia is a prime opportunity in the region and internationally and particularly since it’s traditional financial network — I use that term not disparagingly as a former bank employee — that’s a very well-built-up, very well-regulated and understood industry here locally. Cryptocurrency specifically can very easily fold into that and Australia can really take its place regionally as a cryptocurrency center. 

But it’s now on things like the government and [Australian Securities & Investments Commission] to lead the charge, to break that way and support the local Australian businesses that have tried so hard to keep going through these more challenging times.

Lau: Well, you’re definitely among the leading ones who have been working with legislators and regulators and really being that industry influence. 

Do you see other traditional finance peers in Australia also wanting to come into the digital asset space where we’re starting to see that emerge across Asia Pacific. But I’m curious, what is the landscape and environment like in Australia right now?

Bowler: It’s a space that’s only going to get bigger, particularly when we look at international trends. If we look at what the Europeans are going to be doing once [Markets in Crypto Assets] comes into play, that is going to go gangbusters, it’s going to go crazy. The development that’s going to come out of that region and that’s going to be hugely influential as well as if we look at what Asia-Pacific has done. If you look at Singapore now, Hong Kong, you look at the Japanese centers, these are areas in countries that have been closely looking at crypto and digital assets for years.

There’s a lot to come through. It’s very exciting, but it is so important that we get the right grounding. Take the lessons that we need to learn as an industry from both traditional finance and from recent events in our own sector. Incorporate that and off we go. The good behaviors that we need to deliver on are challenging things like separation of client assets. That’s not particularly difficult to do in huge parts of your technology to succeed in that. If you look at IOSCO (International Organization of Securities Commissions), they’ve got their recommendation documentation that’s out at the moment, their white paper out, which I’m going through avidly. But the recommendations that they’re putting forward are things like providing information on an ongoing basis around each of the projects that you list, why you’ve listed them, what your listing criteria are, any disclosures you need. These are things that don’t require a rebuild of a tech stack. You can do this stuff. It just adds so much to the investor and gives comfort as well to regulators that you’re doing the right thing.

Lau: I note what’s happened with the SEC and the U.S. judge finding that XRP is not a security when it comes to mass retail. But when it was sold to institutional participants, it was considered a security. 

So these nuances coming out of the U.S., do they have influence on jurisdictions like Australia? When you take a look at that, does that have a precedent-setting impact? How do you, as industry leader, and how does Australia, from a legal perspective, view a ruling like that?

Bowler: The SEC is influential around the world and you would think any regulator or legislature is going to look at what they do and take it into consideration. But its decision that XRP is not a security mirrors what we saw out of Japan years ago where they said it was security. in Australia it didn’t it didn’t match up with the local tests around what security was for XRP. You can’t retrofit a lot of what we saw in traditional finance into crypto because of the fact that this is so new. And there is then that opportunity for nuance, which nobody really wants, apart from lawyers perhaps, but certainly anybody who’s running a business doesn’t want there to be any legal nuance. 

Australia looks very closely at the U.K. anyway. There’s obviously the historical connections between the two countries, but from what I can understand, there are close relations between the two from a government and regulatory point of view. But I also think with the U.K., they’ve got a history of taking on opportunities in financial services and really making something of it. There are a lot of very smart people in the U.K., in and around London, in the financial services industry who are working on what will probably be the next big thing. Though they’re sitting outside of Europe now, I still think that their impact will be felt across the European Union and certainly across into the U.S. and hopefully here to Australia.

Lau: Hold on to that thought. When we come back, we’re going to be breaking down with Caroline Bowler on the crypto landscape in Australia, its impact and beyond. Stay with us.

Welcome back to Word on the Block. I’m Angie Lau. I’m here with Caroline Bowler, and we’re talking about all things crypto in Australia. 

You’ve painted a global picture for us. But I also want to understand the economic dynamic that is happening in Australia right now. Much like the rest of the world, it’s battling multi-decade high inflation levels. The Reserve Bank of Australia (RBA) also hiked interest rates to its highest in 11 years in June. It’s the hike heard around the world. Every nation, I feel, is experiencing this. And the country’s central bank governor, Michelle Bullock, has quite a task ahead of her. What are some of the challenges or opportunities that you see, Caroline, for the crypto industry in the current macro environment?

First in Australia, and I think we can take a page out of that and extrapolate it for the global economy too.

Bowler: The pace is just too frenetic. This bear cycle and now the economic experience that we’re going through has perhaps given the impetus for us all to really closely examine our businesses. Why that’s important is because, when you’ve got that kind of core strength coming out of your business, you have the opportunity when the cycle turns, which inevitably it does, to really take the springboard out. 

So I think that there is an opportunity for Australian businesses in this sector to become leaders regionally and then globally simply because of how well they will then be retooled through this process.

What does it mean then for us on a day-to-day level? We certainly saw the drawback of liquidity from our market, both from an institutional point of view, but also from a retail trader point of view. So what that told me is that there were a number of participants and particularly retail, who were sitting on the sidelines and waiting. There are perhaps pockets within the economy here locally where they have got some liquidity that’s just sitting and waiting for opportunities, either in crypto where they saw that particular movement and they thought, okay, this is a position we want to trade on or else they’re hoarding their cash, waiting for the rest of the cycle to play through. I suspect that in other Western developed nations that’s probably what we’re going to see play out. I certainly get the feeling locally that we’re starting to really feel the impact of both the interest rate increases and really starting to feel the pinch in terms of prices.

It’s really starting to hit here and in the rest of this calendar year it is certainly going to hit businesses and hit bottom lines. For us in crypto, though, we’re kind of contrary to those markets with the Bitcoin halving expected in April of next year. Generally what that means is that in the buildup we see the increase in action, increase in price movement and then from April onwards, the expectation certainly is that we’ll enter into another bull cycle. 

We’ll wait and see how much all of that plays through, but also see the size of that because what’s also going to come into play and hadn’t in prior cycles is far more of that institutional money is going to be there.

Lau: The RBA, back in March, announced the pilot programs to test out CBDCs. Then big names like Mastercard jumped into the pool, ANZ, the Australian Bond exchange. I’m curious how all of this is impacting the crypto space right now in Australia. When do you expect a CBDC to come out and your thoughts there?

Bowler: That’s been a really, really interesting project — the whole CBDC project end-to-end — because the institutions that have come in to join alongside crypto, alongside payments, alongside traditional finance. So an absolute boom. The fact it happened in a bear cycle. If this had happened in a bull, it would have been an awful lot more noise and bluster around it. They’ve been given the opportunity to properly experiment, to properly run this. These aren’t all going to work. That’s the point. It creates a strengthened matrix for Australia in traditional finance and crypto as we move into the next blockchain economy that is to come, that’s hugely beneficial. Probably not something that we’re going to see the benefit of in 12 months. It’s more like eighteen, two years, three years time that we start to see it really blossom. Singapore did really well. The way that they tried to blend traditional finance, fintech and then blockchain, I thought that was very clever. Hopefully Australia has picked up on that.

Lau: And then the irony of the Commonwealth Bank saying it will restrict crypto payments to A$10,000 per month. On the one hand you have this innovation where people get to participate in. There’s a playground sandbox effect and anything is possible. And then real life day-to-day is kind of restricting crypto payments, obviously the intention to catch fraud and scams. 

These restrictions seem like they would have a negative impact. It feels more restrictive than innovative. As Australia grows, you’re in an environment where, if that happens, does that threaten liquidity? Does that potentially push capital offshore?

Bowler: The CBA’s decision, we understand the data that’s come out with regards to the number of fraudulent scam money that exits from the banking industry through crypto exchanges. It’s not that the crypto exchanges are corrupt or it’s not that the cryptocurrency itself has anything wrong with it. It’s simply the escape route for a number of those scams and the banks, they’re getting the pressure that they have to do something with scams. They saw the sheer percentage points that were going out through crypto exchanges and so decided to put the pressure point on them. 

What I think needs to happen with that conversation is not just that the pressure is put on banks or that the pressure is put on crypto exchanges. There is a need for a whole crossbody collaboration. You also need a huge amount of education in Australia around what’s happening with scams. Why are people so vulnerable to them in Australia compared to other countries? That needs to be rooted out, understood and educated on the decisions. Then to put those restrictions in place? Absolutely they have negatively impacted a vast number of our crypto users. I know for ourselves, we see it in client feedback all the time, repeated attempts to try and deposit money and they’re being rebuffed by one of the big four. That’s really challenging for us as a business.

Lau: You’ve been an advocate of the industry’s interaction with regulators. When we come back, we’re going to deep dive into crypto regulations in Australia with Caroline. Stay with us.

Welcome back to Word on the Block. Caroline, I note that not every business is created equally. It really takes leadership but also making sometimes really tough decisions to not necessarily always go for the bottom line. You’ve noted that a few times over the past couple of years the froth and the hype of no doubt which you benefited from, but where did you also hold back?

Bowler: Probably the single biggest and most obvious one is in our listings. We list less than 30 trading pairs, and that during the bull was a hard line to hold. We do that because we look at the projects quite forensically as best as we can with the best of information that’s available to us. 

We get legal opinions, we have a technical review, we have a client review that we view across loads of different verticals within the business because we want to make sure that what we list to the best of our ability has got some longevity, has got some kind of legs to it. It’s got some benefit to the investor and to the blockchain economy more broadly. Doesn’t mean we always pick a winner, but we certainly try to use tools of refinement around what we select. That’s because we want to have a business that’s going to be around, for as long as we possibly can, and try not to cut the legs out from under the investors. 

The shorthand test is, if my dad trades on the exchange and so if my dad bought this, whatever the project might be, how would my mom react to that?

Lau: Can I explain it to my mom? If she doesn’t kill me?

What we’re experiencing right now on exchanges, with cryptocurrency I would hearken to it’s probably not going to look a lot like what we’re going to see in the future. I think the future very much is the tokenized expression of the assets that we’re trading in right now. It could be equity, it could be real estate. It could be gold, it could be commodities in that way. These tokenized future products, how is Australia thinking about them? 

I bring that up because the token mapping was an important step in establishing a crypto framework in Australia. I believe the consultation ended in March. How did that go?

Bowler: We’re expecting the results to come out probably the tail-end of this month is the general sense on that. That’s a really ambitious project to undertake and I don’t think that it’s necessarily been appreciated to the same degree. Trying to figure your way through that maze and then set it against the framework of what currently exists in Australia. Hugely ambitious, and we wait and see what will come out. From our point of view, it was a very positive consultation and certainly the tone I got from it was positive and collaborative, not illusionary. But certainly the impact was we’re coming at it with an open mind and we want to take onboard the industry feedback. 

We are open to what it is that you have to say and they’re willing to put the work in and come back on numerous occasions. It wasn’t just one and done on numerous occasions. So I’ve got a degree of faith that it’s been conducted in as open a manner as possible. Obviously they also heard from people who have different views on crypto and blockchain as they should. We’ll see what they come out with. 

To the point around real world assets in tokens, it’s the future 100%. I don’t think that that’s up for discussion. Certainly not amongst the people within the industry. There are so many benefits that come out of it but also then the movement of illiquid assets into a more liquid form is just going to open up so much more liquidity within broader financial services using crypto and blockchain. It’s just fantastic. We list a gold token at the moment on our platform and a couple of other gold tokens — although gold is not a financial product — that are out there. I don’t think necessarily that right now there is as much appetite for traditional financial products in crypto yet because I still think we’re the very early advocates and they are gung ho about crypto specifically. But as time rolls on, it’s just so much more convenient to be able to use something that you can trade with such speed and such transparency. It’s just the inevitability of it. You can’t hold back the tide, right? It’s just this is where it’s going.

Lau: It’s going there. It’s where we’re going at Forkast Labs. These are data tools that need to exist to support that system that is coming. I know that you’re building towards that future. We are as well. And there’s so much to talk about, but I think we’ll catch up in a few years from now when we’re going to look back and say, do you remember when I think that conversation is what, six months to about eight months? I think we’ll catch up. We’ll catch up in about half a year and we’re going to have that conversation.

Bowler: You’re looking at it going, I can see how many new businesses are going to be built in this next cycle that are going to just be jetpack to what we’re what we’re going to need. It’s so, as I said, exciting. But it really is. I am such a nerd for this subject because how often do you get a ringside seat to this kind of amazing innovation and change in an industry that doesn’t really generally do a lot of this? We had the big bang, but that was in the 80s and 90s. Now we’re back at it again. So, yeah, I’m exhilarated.

Lau: Caroline, it’s always a pleasure to hang out with you, and I really appreciate it. And it’s not rare to have a female leader like you in this space, but it is, it is one that I thoroughly enjoy and I think we should have more of. So anyway, it was great to have you on. Really appreciate it.

Bowler: Thank you very much. Thank you.

Lau: And thank you, everyone, for joining us on this latest episode of Word on the Block. I’m Angie Lau. Forkast, editor-in-chief. Until the next time.