The government could help keep Australian cryptocurrency investors safe from financial harm by operating a risk register that warns people off potentially fraudulent or especially risky investments, the Australian Computer Society (ACS) has stated in its submission to a Treasury paper on crypto regulation.

“Helping Australian consumers and investors understand the risks and requirements of a given class of crypto asset service will hopefully serve to reduce losses due to fraud and mishandling,” ACS said.

“In practice, this could work similarly to [the Department of Foreign Affairs and Trade] DFAT’s Travel Advisory system, providing Australian consumers with advice on the level of risk associated with a specific class of service.”

ACS suggested individual crypto projects could submit to a “voluntary certification/tick scheme” that would see a regulatory body like the Australian Securities and Investment Commission (ASIC) conduct analyses “of both risk and legal compliance” for the project.

In its consultation paper, Treasury recognised the “increased mainstream interest” in cryptocurrencies over the last decade, saying it expects “over 1 million Australians will have crypto assets on their tax returns for the 2022-23 financial year”.

According to Chainalysis, Australia ranks 40th in the world for cryptocurrency adoption, just behind the Netherlands and Portugal.

The growing use of cryptocurrency among Australians had costly effects last year.

A recent Reuters report estimated self-managed super funds exposed to crypto assets could have lost a total of $600 million during the market’s latest downturn.

The catastrophic collapse of major exchange FTX was triggered by questions about its solvency and how appropriately the company was managing customer funds.

Some 30,000 Australians were left on the hook when FTX's Australian arm went bust and customers were left without the crypto assets they thought they owned.

ACS is calling for “stronger regulation of exchanges and other custodial entities operating in Australia”.

This may include measures like auditing on-chain assets to make sure customer funds are safe, outright banning the investment of customer funds “without explicit and informed permission”, enforcing a strict separation of a company's exchange and investment arms, and mandating custodial requirements.

“Beyond exchanges, it will be difficult for the Australian government alone to protect consumers.”

Treasury has described custodial and licensing requirements for crypto exchanges as “the logical next step” in regulation that the government has been dragging its feet to draft and implement.

Despite Treasury saying it wants to fold crypto into existing financial services framework, ACS said “bespoke laws for cryptocurrency seem required and inevitable” but added that the government “should try to avoid laws that stifle innovation or make Australia ‘unfriendly’ to blockchain and crypto enterprises”.

“We have the potential to be a leader in the sector, and overly restrictive legislation will quash that potential,” ACS said.

“In particular, there is a strong desire among businesses and blockchain developers for more certainty with respect to crypto asset regulation.

"Uncertainty around regulation is a major barrier to the technology right now.”