Australia’s hidden blockchain crowd emerges

It is an asset exchange for tokens linked to fiat currencies, cryptocurrencies and commodities, with no central governing authority pushing towards a fully decentralised governance structure.

Its founder, Kain Warwick, told the event this has required a leap of faith for his team but is true to the company’s vision. Synthetix describes this as a “decentralised synthetic asset issuance protocol… [under a] pooled collateral model [that] enables users to perform conversions between Synths directly with the smart contract, avoiding the need for counterparties”.

The recent big Coinbase float showed the value of bringing bitcoin into a regulated system. While bitcoin has rebellious roots, now it’s being adopted in institutional markets it has to come into the mainstream.

Big banks

Blockchain Australia members want to be part of a policy conversation that recognises the area might attract scammers, but that they represent a small minority, with most tokens being traded legitimately.

The major banks, which perhaps have the most to lose if DeFi really takes off, are taking notice. Lisa Wade, a director in National Australia Bank’s institutional bank, told the event she believed “DeFi is the future of finance”, while ASIC commissioner Cathie Armour pledged to lift its communication efforts with local developers.

Senate fintech committee chairman Andrew Bragg also addressed the blockchain week event. The ASX auditorium was three-quarters full, including many suits from banks and regulators.

Bragg said Parliament will examine Australia’s digital asset policy and report in October; this comes as the European Union, Britain and Singapore have all modernised blockchain regimes, while China has launched a digital yuan.

Synthetix’s Warwick mostly had praise for local regulators. But he says the capital gains tax regime is out of whack.

Originally an Australian not-for-profit foundation, it moved to Singapore to issue tokens. He says “it’s been pretty smooth sailing so far” but it is only a matter of time before an issue comes into focus that will test the resilience of its coded decentralised governance frameworks.

In conversation with Piper Alderman partner Michael Bacina, Warwick suggested developers try to engage with regulators transparently.

“There is a tonne of uncertainty, there is a lot of risk,” Warwick said.

“As long as you are operating in good faith, saying ‘we are trying to build something and we genuinely believe there is value in what we building’ … and [that] we are going to do our best to get through the regulatory and governance frameworks and risks and work through this together as a community.

“That is what we have done, and the ideology has flowed through to the rest of the project.”

Existing intermediaries like banks and exchanges are on notice: protocols running on Ethereum remove the need for central authorities all together.

Part of the policy focus over the next few months in Australia will be around the definition of security tokens.

In Britain, if a token carries ownership rights or an entitlement to passive income or revenue sharing, it will be regulated by the Financial Conduct Authority. That makes them “e-money tokens”, analogous to a non-cash payment facility in Australia.

However, the FCA recognises the nature of tokens can change, and some tokens will eventually be subject to multiple regulatory regimes, while others won’t need to be regulated at all.

Australia has been relatively ahead of the global pack regarding blockchain R&D. Harvard Law School professor and internet law guru Lawrence Lessig addressed Sydney Blockchain Workshops, organised by COALA, in December 2015 and by May 2017, the CSIRO and Data 61 published landmark reports on distributed ledger technology.

The government produced a national blockchain road map in 2020. Before that, AUSTRAC was an early regulator of crypto exchanges while Standards Australia has been leading the global development of blockchain standards.

Open blockchain projects

Local companies also jumped on board, developing private blockchains with defined members, such as the ASX’s widely watched CHESS replacement, or the banks’ Lyon system to manage bank guarantees.

While the “permissioned” systems will undoubtedly deliver efficiency benefits, last week’s event showed it is open blockchain projects that are the most vibrant, and most likely to push the limits of DeFi.

Existing intermediaries such as banks and exchanges are on notice: protocols running on Ethereum remove the need for central authorities all together – the code establishes the trust. The middle man is not needed to stamp approvals.

A prominent example is Uniswap, which allows holders of cryptocurencies to trade them directly, by using smart contracts on Ethereum. No central exchange is required. Some are using it to pool and lend cryptocurrencies in exchange for interest and fees.

Senior officials in the space have noted a change in conversation at the start-up level too, which is partly related to the rising bitcoin price.

Chloe White, the National Blockchain Roadmap lead in the Department of Industry, Science, Energy and Resources, told last week’s conference that a year ago, most discussions were about getting funding, but now, as bitcoin winnings are reinvested, more entrepreneurs are asking “can I do it?“, seeking advice on the guide rails and what is possible.

The message from the Australian Securities and Investments Commission was clear: make sure you can clearly explain both the DeFi idea and how it could fit within the existing law. But ASIC is also keen on getting more guidance from the government on how to define the “regulatory perimeter” in an area travelling at warp speed.