Tiered rules proposed for mobile wallets, Bitcoin

The Government inquiry investigating regulation of Australia’s financial services industry has shied away from proposing strong regulatory action on virtual currencies and mobile wallets, suggesting a “graduated” regulation framework.

The issue of virtual currencies, and Bitcoin in particular, has been plaguing governments the world over in recent years.

The Australian Taxation Office has been considering how it will tax the crypto-currency but recently pushed back the deadline for its ruling for a second time, seeking further expert advice.

In submissions to the current Financial System Inquiry, Australia’s largest banks complained of an uneven playing field being created as a result of unregulated new entrants into the payments space, compared to the heavy legislative burden authorised deposit-taking institutions (ADIs) are required to adhere to.

The big four banks all highlighted concerns that new, unregulated competitors - such as mobile wallet providers like PayPal and Google and alternate currencies like Bitcoin - risk upsetting consumer confidence in the stability of Australia's financial system.

Westpac told the inquiry [pdf] that while it supported the entrance of new players in the market, all financial services needed to be subject to the same prudential regulation in order to avoid risks associated with disruption of service.

The bank urged the Reserve Bank to reconsider its recent decision to remove a series of requirements that non-ADIs were required to meet in order to participate in the payments system. 

To date, new payment mechanisms and alternate currencies operating outside of the regulated payments system proposed little risk as they did not represent a “material portion” of Australia’s transaction activity, according to a submission by the National Australia Bank [pdf], but they may do so in the future. 

But NAB warned that regulation will be required when these alternatives grow to a point where they are storing large amounts of value or processing material transactions.

At that point, the NAB suggested the Reserve Bank of Australia step in and do whatever it takes to stem the effect on the wider financial system and national economy.

CommBank [pdf] went as far as to call the uneven playing field a “risk to customers’ finance and personal information”, as well as the stability of the overall banking sector.

“While innovation in the system must be encouraged, allowing new players to enter an uneven playing field distorts the market. This may discourage entities which invest in the safeguards mentioned above from making the investments that have to date improved the system for customers while maintaining its stability.”

The bank was specifically concerned with the rise of virtual currencies including Bitcoin, highlighting the recent collapse of the largest Bitcoin exchange Mt Gox as one of the dangers posed by digital currencies. 

“While Bitcoin is a cost efficient system, its conversion rate volatility, the recent bankruptcy of a major Bitcoin exchange, security challenges and facilitation of payments for illegal activity creates instability and poses a risk to the payments system and the economy.”

CommBank lobbied for such currencies to be closely monitored and regulated where necessary, and urged the Government to afford the same level of supervision to all members of the financial services sector, regardless of technology platform or service provider.

Suncorp [pdf] similarly urged the Government to make sure new entrants were appropriately regulated to maintain the “safety and soundness” of the payment system.

But the inquiry panel opted against offering any strong responses to these concerns, suggesting the nature and scale of the risk posed by these new entrants would first need to be established.

The panel urged [pdf] the Government to strike a balance between innovation and stability, which could best be achieved through a graduated framework approach. 

Such a framework would set compliance requirements on a tiered approach based on the individual provider’s risk profile and scale. 

“Failure to apply equivalent regulation may result in an uneven playing field and regulatory arbitrage. It may also incentivise those within the current regulatory perimeter to lower their own standards of compliance to compete. 

However, applying the full weight of prudential or conduct regulation to small players and new start-ups, regardless of the materiality of the risk they represent, may stifle valuable innovation unnecessarily.”

- Interim Financial Services Inquiry report