Australia’s financial regular is looking to develop rules for cryptocurrencies but for the most part, investors are on their own for now, Australian Securities and Investments Commission (ASIC) chair Joe Longo told a superannuation summit recently.

Longo cautioned consumers from rushing into crypto investing without fully understanding it, given there’s little regulation.

“Consumers should approach investing in crypto with great caution,” he said.

The warning comes as ASIC pursues millions of dollars held in Bitcoin, allegedly the proceeds of a superannuation scam.

The pandemic coupled with lockdowns and low interest rates have accelerated the pace of change in the market.

And while technology underpinning these changes brings many potential opportunities, it also brings a new set of challenges.

In particular, it can be hard for advisors to guide investors, according to Longo.

"What can they do when clients are banging down the door wanting to divert their savings into Ethereum or Dogecoin, a currency originally conceived as a joke?”

The corporate watchdog can’t offer protections for consumers at the moment, but is working with Treasury on some of the issues raised in the recent senate committee, chaired by Senator Andrew Bragg.

“Crypto is on our doorstep, here and now, and being driven by extraordinary consumer and investor demand,” Longo added.

Little investor protections at present

Right now, most crypto assets are not currently regulated, but as its acceptance grows, so will the need for formal regulation.

“The demand-driven nature of the rush into crypto has thrown up some unique challenges,” Longo said.

Pointing to CommBank’s crypto investing pilot project, Longo said it shows we’re moving toward accepting cryptocurrencies.

“… The overall direction is clear. This debate is no longer on the fringes of the financial services industry,” he said.

Exchange traded funds (ETFs), which include investments linked to crypto assets, are a financial product and, as such, have some ASIC-regulated protections. This is the only crypto-related investment that does at this stage.

But most cryptocurrency-based assets can’t properly be defined as ‘financial products’, which means the usual laws and requirements, such as trading organisations needing to hold an Australian financial services (AFS) licence, won’t apply.

The ASIC chair believes the implications for consumers in terms of innovation in financial products, as well as potential risks, are huge.

“It is almost an article of faith that no one should invest in something they don’t understand.

"Who among us can say they really understand crypto assets and cryptocurrencies?” asked Longo.

The challenge of regulating decentralised organisations

The senate committee’s recommendations covered cryptocurrency and digital asset regulation, tax and anti-money laundering and counter-terrorism regimes in the digital world, as well as the new form of collective enterprise known as decentralised autonomous organisations (DAOs).

As DAOs are organisations governed by artificial intelligence in the form of smart contracts, using blockchain technology to record transactions with and between their members and third parties, Longo noted that it is not clear who is accountable if things go wrong.

“Nor is it clear how a DAO itself can be held accountable in a court of law,” he said.

"With DAOs, it’s almost the case that the ‘rule of code’ replaces the ‘rule of law’. The modern corporation, with its limited liability and boards of directors, all of whom are now required to apply for lifelong, unique director IDs, seems a world away from this virtual community."

ASIC is looking at how legal frameworks can keep up with the fast-moving nature of technology, and while the regulator can’t eliminate risk, the potential pitfalls shouldn’t be ignored.

“We need to be careful those laws keep pace with change, and with the community’s realistic expectations and demands,” he said.