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Australia announces biggest overhaul to payments in 25 years — eyes now set on crypto

Jacob Scott

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Following a long-awaited report by a Senate committee on Australia’s fintech industry, the country’s treasurer, Josh Frydenberg, today announced sweeping new proposals aimed at updating the country’s payments sector — including cryptocurrencies. Speaking at the Australia-Israel Chamber of Commerce in Melbourne today, Frydenberg said the reforms being considered are the most significant in 25 years, as the treasury is considering requiring domestic crypto exchanges to hold digital assets for local clients on-shore, to introduce licensing regimes for exchanges and to reveal further details on the development of a central bank digital currency (CBDC) in the country.

“The call for regulation from the [Senate] report has set some wheels in motion, and it seems the treasury team are the ones that are going to be picking it up,” Jonathon Miller, Australian managing director of crypto exchange Kraken, told Forkast.News. “My hope here is that the way they look at this is as an emerging industry, not as an established one. Whether or not the custody regime maps to an existing asset class or not, it’s impossible to tell. But I would say that crypto remains a very unique asset class and needs probably its own unique treatment.”

While the recommendations announced today align with many of the recommendations made in the recent Senate Select Committee on Australia as a Technology and Financial Center report, one highly publicized one will not be adopted. The report had recommended offering a 10% tax concession to crypto mining operations that use 100% renewable energy, but that was knocked back despite industry enthusiasm. Forkast.News recently reported that Australia’s largest Bitcoin mining operation was set to open in Byron Bay and that it would be powered by 100% green energy. Spearheaded by local digital infrastructure company Mawson Infrastructure Group, Nick Hughes-Jones, CEO of the company, told local media the proposal helped justify building larger-scale projects in Australia.

Miller expressed disappointment that the proposal would not be adopted by the Australian government, which is regarded as having taken a conservative approach to climate policy in recent years. “It’s unfortunate that there hasn’t been some form of leaning in here to applying crypto to the renewable space; there’s a good opportunity there,” he said. “The recommendation was progressive and perhaps too progressive for this government.”

Licensing regimes

The treasurer will also outline a timeframe for increased cryptocurrency licensing for digital assets and exchanges, with most expecting it to be in place by the middle of next year. While few details were made available at this stage, one expert told Forkast.News she welcomed any regulation that sought to put investor protections in place, and she believed the government was on the right track to assist Australia’s crypto industry to flourish.

“Our concern was that the regulation would try to regulate us out of existence,” Caroline Bowler, CEO of digital asset exchange BTC Markets, who also sits on the board of Blockchain Australia, told Forkast.News, saying that BTC Markets had been preparing for these announcements for the past 18 months.

This announcement comes in the same week that liquidators were appointed to Australian exchange MyCryptoWallet, leaving the platform’s reported 20,000 users in the dark as to the future of their holdings. This marks the second Australian exchange to collapse recently as another exchange, ACX, had 117 BTC, or US$6.24 million, frozen in a Supreme Court order following a claim by 94 investors that they lost more than US$7.13 million when ACX shut down services in late 2019.

These two cases represent a vast minority of the close to 500 digital asset exchanges registered in Australia, Bowler said. Amid these cases and the updated licensing requirements, the local industry is likely to undergo a period of consolidation as smaller players may arise to address some of the additional costs required to upskill larger workforces.

While largely silent on the details on these requirements, one aspect Frydenberg did outline was custodianship. As it stands at the moment, there are no domestic custody options available in Australia, and any exchanges are required to outsource this to the U.S. Bowler saw this as an opportunity for the domestic custody industry, as well as to allow the treasury greater oversight if the assets are stored locally. But not everyone was so sure of the impact of such attempts at regulation.

“In particular, you’re talking about blockchain technology, which exists by definition globally,” said Miller, unsure of how best to go about ensuring local custodianship of a digital asset that is not tied to any location. “So, I’m interested in seeing how the Reserve Bank approaches this problem set because we’re talking about inherently non-spatial technology. It’s a multinational technology, it exists outside of the constraints that we apply to other asset classes, and its major strength is that it’s everywhere all at once.”

CBDCs and DAOs

Australian regulators have seemingly completed a backflip from their original standing on CBDCs, where only in September 2020 it released a report that said “at present, there does not seem to be a strong public policy case for issuance in Australia.” Now, echoing calls from Reserve Bank of Australia (RBA) assistant governor Michele Bullock, Frydenberg has announced the government is indeed looking to establish a CBDC in Australia.

Speaking at a Women in Payments event late last month, Bullock said she believed ultra-low interest rates have driven interest in cryptocurrency globally and that the RBA was looking to introduce a wholesale CBDC project to reduce transaction speeds and costs in wholesale markets and across borders. The RBA isalready part of an international group of central banks as well as the Bank for International Settlements, to participate in a cross-border payments project called “Project Dunbar.”

It is unclear as to whether Frydenberg was referring to the wholesale CBDC already discussed or is intending to expand the project out to a retail variety as well. While surely welcome news for Australian wholesale participants, Miller said introducing a wholesale CBDC does nothing but further entrench the status quo of the existing financial system as it doesn’t make use of the core innovation of blockchain-based assets — which is open-source compatibility.

“If you create a walled garden, which is what a wholesale CBDC would be, it would be a CBDC that’s only available to certain participants,” Miller said. “It just won’t be as valuable, it won’t be as useful. We have one of those already; the interbank payment system is essentially one of those. For a CBDC to be actually useful, it would need to be open and composable, much like we see stablecoins or any other cryptocurrency today.

Miller acknowledged it would be an interesting addition to the crypto ecosystem, but whether or not it actually would have any broad adoption remains to be seen.

Three weeks ago, 17,437 virtual strangers teamed up as ConstitutionDAO to raise over US$40 million to buy an original copy of the U.S. Constitution, only to be outbid at the last minute of the Sotheby’s auction. While they failed to win the auction, the huge sums they were working with and the fact they were doing so as a decentralized autonomous organization helped put the concept of a DAO on the radar of crypto watchers.

Despite this complexity, Frydenberg also announced the treasury was looking to attempt to regulate DAOs in what might be the most progressive aspect of the regulation announced today. While Bowler has no idea how a centralized organization such as a national government could possibly approach regulating something that by its very definition is so decentralized, she is impressed the government is trying to do just that.

“I was really pleased to see … the inclusion around DAO’s,” Bowler said. “I think it’s really going to put Australia on the map against our international peers. I’ve described it as audacious, but I also think it’s really ambitious and just really puts out the right signals about where Australia sees itself from the new digital economy.”

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Kazakhstan Orders Bitcoin Miners to File Status Reports

Jacob Scott

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Nur-Sultan, Kazakhstan (Image: Envato Elements)

Kazakhstan is mandating that cryptocurrency miners file regular status reports in a new ministerial order, as the Central Asian nation attempts to gain a stronger grip on the sector.

See related article: Ex-Kazakh president’s brother busted for illegal crypto mining

Crypto miners must submit information including locations of mining facilities, IP addresses, power consumption volume, number of mining rigs, staff size and planned investments, according to the order dated April 29.New miners will have to report 30 days before starting operations, and existing miners are to provide authorities with quarterly status updates.Crypto miners shutting down also need to report to authorities.Kazakhstan became the world’s second-largest Bitcoin producer in 2021 after miners moved there en masse following China’s mining crackdowns, but an unstable power supply has made for an increasingly unstable mining environment in the Central Asian nation.Former Kazakhstan president Nursultan Nazarbayev’s brother Bolat Nazarbayev was among 106 illegal cryptocurrency miners to halt operations as the government raided illegal mining activities, the Financial Monitoring Agency said in March.

See related article:Crypto mining’s Great Migration continues — out of Kazakhstan

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Original Post: forkast.news

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Pakistan Takes a Fresh Look at Cryptocurrency

Jacob Scott

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Image: Envato Elements

Pakistan’s federal government has formed three subcommittees to explore the future of cryptocurrencies and related services, local media report

See related article: Pakistani central bank echoes RBI’s concerns over crypto

The first panel is chaired by the law secretary with the State Bank of Pakistan (SBP), with the Federal Investigation Agency (FIA) and Pakistan Telecommunication Authority (PTA) as members, among others.Two other subcommittees have been set up under the chairmanship of SBP Deputy Governor Saima Kamal. Panel members include representatives from the Ministry of Information Technology, the Securities and Exchange Commission of Pakistan, PTA and others. The subcommittees will prepare their proposals and send them to a committee headed by the finance secretary, after which the country will prepare recommendations on the future of cryptocurrencies.The SBP recommended a ban on cryptocurrencies earlier this year, with one of the nation’s largest banks quickly heeding the advice by asking customers to avoid using its bank for crypto transactions.  

See related article: From Myanmar to South Korea: Breaking Down Blockchain’s Future in Asia with Paul Ulrich, GSMA

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Article: forkast.news

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Blockchain Can Transform International Trade, but Big Hurdles Remain

Jacob Scott

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The Covid-19 pandemic represents the single largest challenge to global trade for decades.  With restrictions of varying severity coming in and out of force around the world on a rolling basis for the past two years, normality for international trade is by now hard to remember. In 2020, world trade volumes plunged in a way never witnessed previously, and although trade rebounded sharply in 2021, there can be no doubt that the flows of goods and services around the world that global growth relies upon are today more fragile than perhaps at any point in recent history.

However, as research by the OECD has made clear, the impact of the pandemic has varied greatly in terms of its impact on different sectors, regions and individual countries.  Their analysis suggests that the pandemic generated trade changes in a single year roughly equivalent to the level of change that would previously have occurred over as many as five consecutive years.

The pace and severity of the disruption can, however, be seen to have had specific upsides for two highly important aspects of global trade. Firstly, the pandemic created new or intensified previous incentives toward risk mitigation strategies on the part of consumers, firms and governments, and secondly, the drive to develop, test, and implement new technologies for the management of cross-border trade has been dramatically accelerated.

Both were direct consequences of the pandemic-induced disruption, and both suggest an increased role for blockchain technology in this sector is likely in the near future — though risks and obstacles remain.

What are the main problems facing global trade today?

Macroeconomic research conducted by the Bank of England has shown that shipping costs have risen dramatically since the onset of the pandemic.

Source: Bank of England

This context has made it all the more essential for firms and governments to be looking for cost-efficiencies anywhere and everywhere, and this is where blockchain technology can make a positive impact.

Aside from Covid-related problems, the pre-existing difficulties with conducting successful cross-border trade are well-known. Primary among these are three areas to which blockchain has a huge amount to contribute: managing documents, speeding up trade finance and simplifying tariff collection.

Storing and displaying the correct documentation

Trading across borders is infinitely more complex than domestic trade, partly because the exchange now has to comply with two or more sets of regulations, rather than just one.  Demonstrating that trade is legal and compliant therefore involves a great deal of paperwork to be completed requiring input from both the importer and the exporter.

While specific requirements vary from one country to the next, an international shipment is likely to need at least some of the following documents to be prepared and ready to be displayed.

Common necessary trade documents include an airway bill, the certificate of origin, a bill of lading, a combined transport document, a bill of exchange, the insurance certificate, the packing specification, plus additional inspection certificates from customs posts that the cargo has passed through.

This generates a great deal of work for international traders, and the fact that much of this administrative work is carried out on paper creates obvious problems of trust and authenticity, not to mention efficiency.

Facilitating trade finance

Only a tiny fraction of global trade is settled in cash and prior to the goods being shipped. This is because buyers usually pay once goods have been received and inspected, and therefore some sort of financing is essential to bridge the time gap between when an exporter ships a consignment and when they receive payment.

The traditional method involves “letters of credit,” whereby a letter is issued by the buyer’s bank guaranteeing that the agreed payment to the seller will be received on time and for the correct amount. If the buyer is unable to make the pre-agreed payment on time for whatever reason, their bank is required to cover the full or remaining amount of the purchase.

This process, whereby one or both of the trading partners’ banks bear some of the risks for financing the transaction, means financial institutions are unwilling to commit to such arrangements without undertaking extensive due diligence.

This is an extremely labor- and paper-intensive process that takes considerable time and effort to complete. Research carried out by the Boston Consulting Group and SWIFT found that the process commonly involves more than 20 separate entities for a single trade finance deal, with necessary data typically contained in 10 to 20 different documents, creating approximately 5,000 data field interactions. Blockchain technology is uniquely capable of speeding up and simplifying these tasks.

Collecting tariffs and government trade data

The current inefficiencies in global trade also consume government resources. Tariff collection is a process that currently involves extensive paperwork as well as employee time from the government as well as the private sector. Tariff collection requires a great deal of infrastructure to be installed at docks, ports, airports, trains station and road entry points, and transporters often have to wait for extended periods of time while customs declarations are checked and other regulatory procedures are completed. This all adds time to delivery schedules, and therefore also indirectly raises costs for consumers.

How can blockchain applications help?

As World Trade Organisation economist Emmanuelle Ganne has argued, blockchain is “game-changer” technology with vast potential to solve some of the major problems facing global trade.

Toward paperless trade

The ability of blockchain to enhance the efficiency of business processes means we can move in the direction of fully paperless trade. By allowing the safe, secure and reliable digitization of trade documents, certain administrative procedures can be automated, with enormous impact on transaction speed.  

A host of banks and IT companies are currently working on such systems, including a Red Date Technology-built project for China’s Blockchain Service Network. These new blockchain-based systems aim to facilitate paperless trade by connecting trade partners together on a private network of blockchains, including both permissioned and permissionless chains. Once connected to this network, importing and exporting firms can then share data between jurisdictions in real time via the blockchain-powered data centers.

Trade finance on the blockchain

As explained above, the current system of trade finance is costly and slow. The digitization of trade finance processes can thus bring significant savings to international trade transactions.

The most promising developments here relate to digitizing and automating payments as well as digitizing information contained in scanned PDF documents. It is precisely the immutable and transparent nature of the blockchain that can enable full confidence in such digital processes to flourish.

One of the earliest and most impressive examples of a decentralized application of this type emerged from a collaboration between Barclays and fintech start-up Wave, which successfully conducted the first known blockchain-based trade finance transaction back in 2016.

This transaction took place on a permissioned chain and provided trade finance to facilitate the export of approximately US$100,000 worth of dairy products from Ireland to Seychelles. Crucially, the process of obtaining a letter of credit, which normally takes around 10 days, can be cut to less than four hours, according to Barclays.

Smart contracts at the customs post

A blockchain system would allow smart contracts to be encoded with the relevant legal and regulatory requirements to allow the automatic payment of customs duties.

The technical architecture to allow this would rely on a digital mechanism for monitoring external events, sometimes described as a “blockchain oracle.” The third-party services provided by the oracle can then be used to trigger smart contract execution if all the pre-defined conditions are met.

A simple example of this concept in action would be that an oracle could be designated to monitor a delivery truck equipped with sensors. A smart contract could be linked to this oracle and would then be able to automatically execute payment when the delivery crossed the border.

Decentralized applications similar to the proposal above could also be used to allow intermediaries to collect tariffs and any other taxes due on a shipment on behalf of governments. Not only would this save time at borders, but it would significantly reduce the risk of piracy or other forms of customs fraud.

Finally, the use of blockchain applications to collect tariffs would also help improve the accuracy of trade data and statistics, some of which are still based on approximations due to the challenges of collecting and systematizing all the relevant data.

Is blockchain technology the future of global trade?

The short answer to this question is that we still don’t know for sure, although several blockchain-based applications seem to open up very exciting opportunities in the field of cross-border trade.

There are risks ahead, however, particularly around scalability and whether or not such applications can be deployed as widely across dozens of organizations as they’d need to be to have the desired impact.

Cost and interoperability are also potential issues standing in the way of mass adoption. Blockchain technology is relatively new and it remains costly to build blockchain-based applications. Developers with blockchain experience are also in short supply, which again can add to the cost of application development.

For those reasons, we are still a long way away from blockchain and distributed ledger technology being as widely understood and used by companies and governments, despite their demonstrated potential to transform the global trading system for the better. Fortunately, the industry is building infrastructures and tools that address these issues. We have also seen significant momentum over the past year with mainstream global enterprises investing in or embarking upon blockchain technology initiatives. The combination of infrastructures, tools and mainstream adoption is cause for optimism that over the next several years, we will see the positive impact of blockchain technology in the international trade space.

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Article: forkast.news

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