The recent crash in the value of cryptocurrencies has once again cemented their reputation as the financial industry’s wild west. The market cap of all crypto assets has fallen more than $2 trillion since its peak last November, a decline of about 50 percent.
Crypto was once owned by a small group of investors who were enamored with the potential of the new currency that uses cryptography to provide a high level of security and blockchain technology that maintains a decentralized register of transactions. Over time, rising prices attracted larger numbers in search of a financial windfall. Australians are excited to join the rush. More than 800,000 Australians have transacted on crypto markets in the past three years, according to the IRS.
While most investors would be aware that cryptocurrencies have suffered from wild swings in the past, the promise of huge profits if you sell out at the right time has boosted their popularity. Crypto also started to go mainstream. In November last year, Commonwealth Bank was the first of the four major banks to announce it would launch a pilot program to enable its customers to trade up to 10 cryptocurrencies – including bitcoin – through its app, citing strong demand. from younger customers.
But doubts about digital currencies have started to grow in recent months, especially with the emergence of two cryptos called Luna and TerraUSD. Started by a South Korean entrepreneur, they received financial backing from respected financiers, who promised that unique software algorithms would provide them with stability that other cryptos did not have. It turned out to be smoke and mirrors as the price of both collapsed this month, subsequently leading to a broader crypto market collapse.
In Australia, while different regulators oversee different aspects of crypto, there is no overarching policy regulating them. Late last year, the federal government announced its intention to crack down on the sector and released a discussion paper outlining its views on reforms and asking for feedback from the public. Essentially, what is being proposed is a new regulatory framework that would provide stricter guidelines and standards for those Australian companies that access and store crypto assets.
It’s not before time. In December last year, Melbourne-based cryptocurrency exchange MyCryptoWallet collapsed after a barrage of user complaints and allegations of missing funds. It was later revealed that it owed nearly $4 million to customers who had invested money in the exchange. Around the same time, administrators chased another Melbourne-based company, Blockchain Global Limited, which collapsed with $21 million in creditors as crypto traders seek millions of dollars more in lost investments.
These deficiencies are indicative of the risks investors face as Australian exchanges currently only need to be registered with the financial crime watchdog AUSTRAC for anti-money laundering purposes. Following the latest market turmoil, Commonwealth Bank ended its pilot program, with its director, Matt Comyn, saying he would wait for the federal government to introduce further regulations. That’s a wise move.
The reality is that despite all the hype, cryptocurrencies are rarely used in any meaningful economic transaction. They seem far from reaching the point where they can be trusted as a stable long-term investment. Leading US economist Paul Krugman recently posed the question, “Could it really just be a bubble inflated by FOMO, fear of missing out?” Based on the latest crash in the crypto markets, the answer appears to be affirmative.