Australia ‘really falling behind’ on crypto protections after FTX collapse

We’ve seen a lot of things come out in the press, and it’s obviously still early days. John J. Ray, who’s been engaged to lead FTX in the post-bankruptcy period, mentioned in his testimony that Chainalysis has been hired to help with blockchain forensics. And we’ve already been able to secure more than a billion dollars in digital assets from the risk of theft or further unauthorised transfers.

So I think that there is a lot that we’re still learning about that process, and obviously, it probably limits how much we can say about it, but I think there’s a lot still to unfold over the coming weeks, months and maybe even years about what exactly took place.

What’s your opinion on the likelihood of Australian customers getting their funds back, given the local entity and the international entity were relatively separate?

I probably can’t really comment too much on that, to be honest. There are very significant sums involved, and at this stage, it’s still very early on in that process.

This year we’ve seen the collapse of Terra/Luna, Three Arrows Capital and Celsius, and now FTX. Of those three incidents, which one do you think is the most likely to have a direct impact on regulation?

They’re all quite different. There are a few questions that are coming up on the policy front. One is around this question of segregation of customer assets, and custody of those assets. And we have frameworks in some countries already that look to deal with those issues. The second is around bankruptcy protections generally – where customer funds sit in the bankruptcy hierarchy.

The third is this issue around different activities a firm might be taking on, and how you mitigate the conflicts of interest that can arise with those different sorts of activities. Then there are the more general governance and prudential requirements that we see in traditional finance that hasn’t bled through into crypto yet.

We’ve started to see globally some countries put in place those regimes or at least parts of those regimes, and that’s where Australia really stands out. We don’t yet have any sort of holistic framework, even from a consumer protection standpoint, and in that regard, we’re really falling behind. Even if your only policy objective is the consumer protection objective, there needs to be some sort of framework. It’s not sufficient to just warn customers not to invest.

Why do you think Australia has been so slow to set up that sort of regulatory framework? It’s interesting it has been so delayed considering that the industry is crying out to be regulated.

It’s a really good question. Just before the change of government earlier this year, we had the draft regulation come out, but we haven’t seen a huge amount of progress since then, except regarding the token mapping exercise.

I think it’s time to look beyond KYC/AML [know your customer/anti-money laundering protocols]]. If there’s any silver lining beyond the devastation FTX has wrought, it is that it shows there does need to be a response to that, looking beyond AML, to put a broader framework in place.

Chainalysis does a lot of tracking of fraud and other illicit activity on the blockchain. Has the level of criminal activity been affected by the drop in price over the last 12 months?

As a general rule for illicit activity, yes, but that’s not true across all different types of illicit activity. If we think about scams, for example, we’ve seen them drop off, and we’ve seen dark net marketplace activity drop off as a result of the drop in price.

One area where that’s not true though is in relation to hacks. We’ve seen growth this year in hacks and October was the largest month ever for hacks, particularly for DeFi [decentralised finance] protocols. For October alone I think we reached nearly $1 billion worth of digital assets hacked.

How do you think this will all play out in 2023? If the bear market continues for another 12 months or so, do you think we’ll see more or less illicit activity?

Given what we’ve seen since the market downturn, we don’t expect to see very significant changes in those trends. So that’s generally illicit activity trending downwards with price, but with a few of these outliers.

If we think about scams, there are probably a couple of reasons why, as price declines occur, there’s less opportunity or less attraction for scammers, especially as fewer people are thinking about trying to make quick money, so there’s less enticement to fall for these less sophisticated attacks.

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