“[Cryptocurrencies] are used as a means of making payment, and an alternative payment mechanism, a number of different use cases for a new approach to money, and the transfer of value. Bitcoin, as well as being a payment mechanism, has become an asset that many people see as an investment, or as an asset to invest or speculate in. And so that’s why we see bitcoin price being fairly volatile,” he outlined.  

“Open banking is a set of rules that have been introduced in the last couple of years in Australia to put consumers in control of their data. So, the concept here is that banks hold a lot of data about our transactions and about our activities and that consumers ought to be able to have access to that data and be able to share it in a safe and secure way. And the government a few years ago introduced what they called the Consumer Data Right, which requires banks to share that data with consumers and with whoever the consumer directs them to share it with.”

In terms of regulation and new legislation within this space, Mr Knight said that the laws have struggled to keep pace with the way new technologies and cryptocurrencies are developing.

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“The financial services regulatory regime is designed to be technology agnostic, so it ought to keep pace as much as possible with new products and new ways of delivering those products. But cryptocurrencies have been such a seismic shift in a new asset class, a new approach, and in many cases, a decentralised approach that the current regime just doesn’t fit. And that’s really been amplified [recently] with the collapse of the Global Exchange FTX,” he added.

“And what it’s like there is that crypto exchanges in many cases are performing dual roles. They’re an exchange, they’re a market maker, [and] they’re possibly even the counterparty or the broker that you’re transacting with. And they might be out there, acting a bit like a custodian, but perhaps not holding the assets like a custodian would. What that meant has been a number of consumers impacted by the collapse of this exchange. And that risk exists because of a lack of bespoke regulation for exchanges and other businesses operating in this space.”

The recent FTX collapse has, in turn, demonstrated the need for greater regulation — as currently, crypto exchanges in Australia don’t need a formal licence.

“What that means is the typical consumer protections that are there when people are transacting in traditional markets, buying shares on the ASX, the protections that exist in those places are not present when people are transacting and buying cryptocurrency,” he said.

“So, situations like FTX, where consumers have lost money that they thought was being held for them, and it turns out that exchanges might instead be holding the assets on their own, using it for their own purposes, making investments with it, and it’s then exposed to the other liabilities of the exchange. And so that’s a risk that people just don’t understand. And also, it’s a risk that wouldn’t exist if there was a more robust regulatory framework.”

However, the Australian Treasury is currently looking into designing a licensing regime for cryptocurrency across Australia, which Mr Knight said would achieve two key things.

“First is consumer protection, making sure that people transacting in crypto markets get the level of protection and the sorts of protections that exist in other markets. And the other element is providing certainty to industry. At the moment, there is a level of doubt or concern among cryptocurrency exchanges in Australia about their activities, what the regulator might do, [and] what regulator attitudes are to their activities. So, that level of uncertainty has been viewed as a barrier to further development in the sector,” he said.

“It’s hoped that licensing would address both of those challenges. It’s likely that any regime would be modelled on a combination, perhaps, of the financial services regime that’s in place already and the market’s licence regime. A combination of those two is the expectation. But a key feature would be the protection of client assets. So, any money and any assets being held on behalf of clients, as distinct from the current arrangements.”

Furthermore, a framework has already been created to legislate and regulate open banking; but whilst the banks are currently on board and sharing data as required, Mr Knight said that consumer uptake has been limited.

“The hope is that over the next few years, consumer awareness would grow, use cases would expand, and also the rules around open banking would expand. So, I’m calling it open banking, Consumer Data Right, using those terms interchangeably, but the Consumer Data Right is in the process of being expanded to other industries, so telecommunication, utilities as well, with more to come.

“[Hopefully] as the consumer data ecosystem grows, there would be more use cases, more sophisticated use cases, that develop around how consumers can access their data. So, the typical example of open banking use case is some sort of budgeting app that pulls together information from your various bank accounts, from your credit card providers, from your lenders, anyone else, and provides you with a consolidated view of where your money’s going and where it’s coming from,” he concluded.

“And then on top of that, saying, OK, what’s the next best decision for you to make? Is it a loan that you’re trying to apply for, facilitating that? Or if it’s switching providers, facilitating that as well. So, the hope is that as the ecosystem grows and matures, it puts more power in the hands of consumers to make informed decisions.”

The transcript of this podcast episode was slightly edited for publishing purposes. To listen to the full conversation with Daniel Knight, click below: