Failed cryptocurrency platform FTX bypassed the regular process for obtaining a financial services licence in Australia and the industry regulator did not assess its fitness to hold one in the lead up to the company’s unprecedented collapse.
The Australian Securities and Investments Commission last week suspended the Australian financial services licence (AFSL) for FTX Australia after it went into administration alongside its global parent company, which filed for bankruptcy in the US.
The spectacular collapse of FTX and the downfall of its former billionaire founder Sam Bankman-Fried earlier this month resulted from the cryptocurrency equivalent of a bank run, when questions were raised about its solvency. It was later revealed the company did not have assets worth the billions of dollars claimed.
It is estimated the company has around one million creditors, with a reported 30,000 customers in Australia alone.
FTX obtained an AFSL in December 2021, allowing the company “to deal in, make a market for and provide general advice relating to derivatives and foreign exchange contracts to retail and wholesale clients”, Asic said when it suspended the licence last week.
The company was able to obtain a licence through the takeover of a company that already held a licence – IFS Markets. IFS Markets had been given the licence through the takeover of another company – Forex Financial Services – the year before.
Dr Angel Zhong, an associate professor of finance at RMIT, said this was considered a “shortcut” to obtaining an AFSL, without the rigorous checks in place for otherwise obtaining a licence.
Cryptocurrency exchanges are not currently regulated in Australia beyond “know your customer” laws, which are designed to counter money laundering. But Zhong said the licence would have allowed FTX to provide financial advice and offer other non-crypto products, such as foreign exchange contracts or trading derivatives.
Zhong said many investors do not know what AFSLs cover and might assume it would cover cryptocurrency exchanges, giving the company more credibility.
“I think many have this impression that if [the company has] an AFSL … then [they’re] protected, but in fact they’re not really fully protected,” she said. “[An] AFSL gives you the impression, especially for the general public, that it is legal, but what is legal is not the cryptocurrency, it is the general financial product they are otherwise providing.”
Dr Pamela Hanrahan, a professor of commercial law and regulation at the University of New South Wales, agreed.
“There’s no doubt that having an AFSL gives people who are inclined to deal with that company more comfort than they would otherwise have.”
Asic told Guardian Australia on Friday the Corporations Act required a company like FTX to notify the regulator when taking over a licence, but “Asic does not approve a change in control or receive material to reassess the business model or compliance with the Corporations Act or licence conditions”.
This has previously been recognised as a loophole that might pose problems for financial services licensing in Australia.
The 2017 Asic enforcement review taskforce report noted but did not explicitly recommend that licensees should provide enough information to Asic to “assess whether the new controllers are fit and proper to control the license and the licensee continues to be competent to provide the relevant services and comply with its licence obligations”.
A change to allow Asic to request information of licensees and determine whether they were still fit and proper to hold a licence was implemented in 2020 legislation passed by the Morrison government, but Asic indicated assessment is not automatic when a licence changes owner.
“Asic does not assess fit and proper persons on the change in control because the licensee does not have a statutory obligation to provide fit and proper checks for Asic’s assessment,” a spokesperson said.
“If we became aware that the licensee does not meet the fit and proper person obligation, as with any other breach of a licence obligation, we could take a range of regulatory actions, for example taking administrative action to have the individual banned, or to have the licence suspended or cancelled.”
There was a lack of action on the FTX licence despite the fact that Asic bolstered its cryptocurrency team in March, and stated that crypto assets were a “core strategic project”.
Experts agreed that regulating cryptocurrency in Australia was the best path to address uncertainty around the exchanges.
“They’re trying to hit a moving target, and I have some sympathy [for] that but … I think they should be regulated,” Hanrahan said. “They are markets and I can’t see any reason why you wouldn’t regulate them the way you regulate other markets.”
Zhang said “Australians deserve a robust and efficient crypto regulatory framework. First to protect investors’ financial wellbeing and second, we also want the sector to grow because I would say the digital finance sector is the future of finance.”
Legislation to safeguard cryptocurrency custody and regulate exchanges will be introduced into federal parliament in 2023, and a spokesperson for the treasurer, Jim Chalmers, told Guardian Australia the government was hoping to learn from the FTX collapse.
“We are closely monitoring the fallout from the FTX collapse, including further volatility in crypto asset markets and any spillovers into financial markets more broadly,” the spokesperson said.
“These developments highlight the lack of transparency and consumer protection in the crypto market, which is why our government is taking action to improve the regulatory frameworks while still promoting innovation.”
