Elvira Sojli, Head of Digital Currency Research Centre

The Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry delivered 76 recommendations aimed at driving cultural change and improving customer service within the sector, including strengthening the powers of regulators to rein in the activities of brokers.

UNSW Associate Professor Elvira Sojli, Head of the CMCRC-SIRCA Group’s Digital Finance Research Centre – which examines the fairness and efficiency of new and emerging digital currencies and markets – agrees this was appropriate and necessary.

But it got her thinking: Is it time to consider regulating the activities of intermediaries in the digital currency market?

“A broker is an intermediary between the bank and the client, and the broker has best execution obligations for the client while getting paid by the bank. This intermediary is well-regulated and the Haynes report reaffirmed and added to this regulation,” she says.

However, there are many other intermediaries in markets in general, including in the digital currency markets “so why are we not willing to regulate in the digital space?”

The Hayne report, she says, has nothing to do with anything in the digital space.

“But when you think about the logic behind its recommendations on brokers, you start asking, ‘Okay, so why are these rules/regulations not applicable to other areas of financial markets, like decentralized exchanges?”

“Do any of these crypto exchanges provide best service to their clients? I don’t know. Nobody knows.

“But looking at the evidence that we in the Digital Finance Research Centre have found through our research, there is definitely a lot of activity that is going on that is not in the best interests of the market participants.”

“Should we regulate that? By extension from the Royal Commission recommendations, then yes, we should. It’s not as large as the mortgage market, but is a very large trading space.”

Unregulated markets open to anyone

In recent years Bitcoin, Ethereum, ERC20 tokens, blockchain and distributed ledger technology, smart contracts, digital certificates and other crypto instruments have created unregulated markets open to anyone – not just the traditional players such as banks and institutional investors.

Sojli leads a team with expertise in international economics and finance, market microstructure and financial econometrics that investigates issues around digital currencies and the efficiency and integrity of cryptocurrency markets.

The Royal Commission, she points out, is attempting to regulate “a particular market which is a generally pretty well regulated – it’s just adding more regulation on top of what already exists because it sees that is in the customer’s interests”.

“So then, by extension, one should think – if you’re willing to regulate that space, why not think about all the money that is going from Australian customers into all these digital exchanges where they are not protected? And, where a lot of the times, they are being ripped off through scam operations like pump and dump, wash trading and so on.”

Digital currency exchanges can move their country of operation should they wish. However, she says, they can be compelled to not “go after an Australian customer base”.

There are no basic rules

How can people have trust in digital currency exchanges?

“By participating in a decentralized, unregulated exchange, you already agree to the fact that there are no basic rules,” she says.

“Or people actually inherently trust it because they are individuals that don’t believe in the traditional banking system – they think that the banking system is rigged, and that is extracting rents from them, and so they want to move to unregulated space because they firmly believe that is where they get the best value.

“There are different groups of people that are co-existing in this environment simultaneously.”

Sojli says she believes digital exchanges have a future – “the younger generation appears to like this market” – although it probably will have to be regulated at some point in the future

“We are relearning how to build a financial market. We spent 120 years or more building the current system and now we’re relearning how to do it in the 21st Century. We’re just re-spinning the same wheel, basically.

“Eventually we’ll end up with regulation, but with a slightly different implementation technology and convertibility between assets.

“I’m sure the flexibility will win and the system will survive. But we will go back to regulating it because we know that this regulation is necessary.”

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