Written by Shane Stevenson, CEO, Cointree
As we enter the new year off the back of an incredible 2021 for cryptocurrency, an asset class that displayed it can stand the test of looming inflation and many market fluctuations. But a concern remains for many SMSF holders who are considering adding this burgeoning asset class to their hard-earned retirement portfolios – the development of the regulatory environment and the likely impact on the value of cryptocurrencies.
The rapid rise and ongoing success of cryptocurrencies has pulled the attention of most of the world’s largest investors and funds, as well as many SMSFs. This attraction will inevitably be met with Government intervention, but while some investors stand against regulation into this asset class, in reality any poorly regulated investment comes with risks and can create barriers to wealth generation and the industry as a whole.
In Cointree’s opinion, increased regulation of cryptocurrencies and digital assets will likely reap long-term benefits for all.
Last year in early December the Senate Select Committee on Financial Technology and Regulatory Technology published the final issue of its three-part report into how Australia should approach decentralised technology, such as blockchains and cryptocurrency.
The recommendations in the report outlined a potentially significant leap in security for the crypto industry and demonstrates a recognition of crypto’s legitimacy as an asset. Auditing, capital requirements, and market licensing are now at the forefront of the regulation conversation.
Of particular interest to SMSF members are the considerations around market licenses. Australian Digital Currency Exchanges (DCEs) are not currently required to hold market licenses under the Corporations Act 2001, despite some of these exchanges managing billions of dollars’ worth of trades annually and holding hundreds of millions worth of assets in custody.
If the committee’s recommendations are heeded, DCEs like Cointree will require a new category of market license that enables us to demonstrate a high level of commitment to customer protection and integrity. So long as the obligations for this license are not so onerous as to push Australian operators out of their own market, we see this as a great opportunity to boost confidence in our businesses and weed out poor operators.
This increased integrity will likely result in an overall price increase for the asset class and may attract larger, longer-term mandates from institutional investors, smoothing the high volatility that many late-stage SMSFs cannot tolerate.
As for poor operators, there has been a growing conversation in Australia around scams, particularly for SMSFs, and many fund holders are inadvertently passing on access to their retirement savings to scammers. Given the untraceable nature of many cryptocurrencies, they can be a target for theft, ransom, and fraud.
As one of Australia’s premier and most secure crypto exchanges, we have seen many competitors enter the market who do not operate with integrity and on occasion are revealed to be fraudulent. This hurts the reputation of the whole industry, particularly as many investors are still learning about cryptocurrencies and remain uncertain about them. Licensing will be an appreciated step in stopping these disreputable operators and differentiating legitimate DCEs.
Another factor brought on by licensing that will boost SMSF interest in this asset class is the role of advisers. Better licenses that allow for the provision of financial advice on crypto will let qualified advisors provide advice that is tailored to the fund, and properly considers its circumstances and risk profile. Attempting to fit cryptocurrency into a framework that is not suited to these assets is a deterrent to professional advice and compromises the investor.
For example, any savvy SMSF investor considers tax carefully when developing their investment strategy, but many digital asset transactions can take place several steps away from a crypto-to-fiat-currency trade and it can be very difficult for fund holders to correctly assess their CGT liabilities under the current tax law.
Understanding these nuances is one of the reasons SMSF investors have been partnering with Cointree to access the crypto market since 2013. Our SMSF account managers offer guidance on setting up crypto trading accounts, and have established relationships with a network of experienced finance professionals who can assist with the myriad of challenges only experienced when investing in this emerging asset class. Yet there is still more needed for the industry to mature.
Fortunately, with growing conversation around the regulation of crypto in Australia, we are moving in a positive direction for the crypto industry and for all crypto investors, including SMSF holders, and the introduction of a new category of market license for DCEs and amendments to the current CGT regime will be a welcomed start.