Move over Malta and Switzerland. Australia could become the world’s next cryptocurrency hub. Here’s why…

This month, the Australian treasury released an issues paper exploring the pros and cons of Initial Coin Offerings (ICOs).

What has gone largely unreported, is the many positive observations it made throughout the 27 page document.

The treasury talks about how ICOs offer “potential advantages” for businesses, “opportunities” for the Australian economy and possible profits for investors.

Rather than outlawing the new fundraising model, the government is actually looking at ways to harness its potential.

It knows there are risks, but it believes overcoming them could bring benefits to the nation’s economy.

Australia as an ICO hub

The treasury discussion paper notes that innovations in financial technology – or ‘Fin Tech’ – could be “potentially transformative” for the Australian economy and that ICOs should not be ignored.

“There is widespread anecdotal evidence to suggest that the organisers of ICOs are choosing to issue from jurisdictions where regulatory settings are seen as most accommodating,” the paper says.

“A number of jurisdictions are actively competing to attract ICO activity and establish themselves as a hub for innovative technology companies that favour ICO fundraising.”

The treasury says its paper aims to gather views on the opportunities and risks posed by embracing ICOs in Australia.

“(We need to look at) whether our regulatory framework is well placed to allow those opportunities to be harnessed whilst appropriately managing the associated risks; and, whether there are other actions that could be taken to best position Australia to capitalise on new opportunities.”

“Potential advantages” to business

Micky has closely analysed the issues paper and discovered several references to the benefits cryptocurrencies, and in particular ICOs, could bring the nation’s economy.

“The ICO fundraising model offers a number of potential advantages to businesses,” the paper says.

“An ICO may allow businesses to raise funds by, in effect, issuing equity, accepting funds for management, or bringing forward sales revenue.

“The money raised can then be spent on early-stage platform and product development.

“This could enable the business to start up quickly and allow early-mover advantages in rapidly evolving markets.”

The treasury department says that because ICO tokens can be issued to a large number of small investors, businesses can tap into new investor groups and create and additional funding stream.

“(It) may be an attractive option for start-ups that are not yet mature enough to access venture capital or to undertake an IPO (Initial Public Offering),” the paper explains.

“For some Australian businesses, accessing new sources of capital has also allowed them to stay onshore rather than relocating overseas in search of capital.

“Finally, the functionality of digital tokens can allow for transactions on the businesses’ platform to take place without requiring the services of traditional payment and settlement intermediaries typically required for transactions involving fiat currencies.

“In contrast with the way in which businesses typically transact across borders, a digital token enables a singular payments system that obviates the need to operate in multiple fiat currencies.”

What about investors?

The paper even suggests that Initial Coin Offerings may – in some cases – be profitable for investors.

“While industry and media reports indicate that a large number of digital tokens lose value after the ICO, token-holders may benefit if the token’s value appreciates over time,” the paper says.

“Further, the digital tokens offered via ICOs may, over time, become a more accepted asset class in a diversified investment portfolio.

“So long as the incentives faced by fundraisers and investors are sufficiently aligned, ICOs could help to improve the efficiency of capital allocation and contribute to economic growth.”

The treasury then talks about how an ICO-friendly jurisdiction could attract other cryptocurrency related businesses and generate positive flow-on effects for the wider economy.

“Examples of such services include digital token exchanges and wallet providers as well as legal and financial consulting services,” the treasury says.

“In particular, it is reasonable to expect that increased ICO activity would result in law and professional services firms investing in these capabilities as well as new specialist firms entering the market.”

The risks

Micky needs to stress that in no way does the Australian treasury ignore the very obvious risks that Initial Coin Offerings can pose to businesses and investors.

It acknowledges that a large number of ICOs have failed, and that many have turned out to be scams or have raised money illegally from public investors due to non-compliance with regulatory obligations.

“The resulting ‘wild west’ notoriety of the ICO industry has challenged the reputation of some legitimate businesses, and even technologies, related to ICOs,” the paper says.

“Another key concern raised by businesses considering raising funds via an ICO is the legal and regulatory risk due to uncertainty or unfamiliarity on the application of the regulatory regime.”

“There is also a high degree of uncertainty as to how much money will be raised by an ICO.

“Given the increasing effort and cost involved in preparing for an ICO funding round, businesses may also underestimate the upfront costs involved.

“There may also be challenges in valuing the business and estimating the future financial needs of the business, given the volatility of token prices and that digital tokens may be listed at different prices on various exchanges.”

Ideas from abroad

The country of Malta is known as one of the most crypto-friendly locations in the world, and that is acknowledged in the issues paper.

“Policymakers in Malta have enacted a new set of laws that define various categories of tokens, including ‘virtual financial assets’ which are subject to separate rules from financial products.”

“Similarly, the Wyoming state government in the United States has implemented measures to exempt utility tokens from certain financial services laws, so long as the tokens are exchangeable for goods and services, and not marketed as investments.”

The treasury also referred to regulations created in Switzerland, which is also considered a crypto-friendly country.

Positive Politicians

Micky has already reported on comments made by Australia’s Prime Minister Scott Morrison, who says he “believes” in the disruptive power of blockchain.

Mr Morrison, who won a Liberal party ballot in August 2018 to secure the leadership, told reporters that we’re seeing the “biggest change in our payment rail system … for decades and decades.”

“Distributed ledger technologies and Blockchain, working in the financial sector, that’s going to open up massive opportunities,” Mr Morrison said.

The Prime Minister has also thrown his support behind a major blochckain precinct in Adelaide, South Australia.

The ‘blockchain hive’ is planned as part of a massive technology and innovation hub being built on the site of an old hospital in Adelaide’s CBD, and is also supported by the South Australian Premier Steven Marshall.

Mr Marshall has also been linked to blockchain groups and projects (although at least one link was dubious) and in February 2019 tweeted that “blockchain is an emerging technology that is transforming the way businesses work around the world.”

Blockchain is an emerging technology that is transforming the way businesses work around the world. We're helping South Australians develop their ideas through #BlockchainChallengeSA. To go in the running to share in $100,000 apply by midnight tonight at https://t.co/Kex53QZt7d pic.twitter.com/Wq9WPCFsGW — Steven Marshall, MP (@marshall_steven) February 4, 2019

Public consultation

Following the release of its issues paper, the Australian Government’s Treasury department has now opened a consultation period for Initial Coin Offerings.

This means general public has a chance to respond to comment on any potential future policies.

Blockchain Australia, a leading industry group, is calling on industry participants to have their voices heard. M

Closing date for submissions is 28 February 2019. Submissions can be sent to [email protected]