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Australian regulator was investigating FTX, wrote memo the day of bankruptcy

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(Kitco News) –
The Australian Securities and Investments Commission (ASIC) had serious concerns about FTX’s operations in the country and was actively investigating the exchange prior to its November bankruptcy, according to a report published Sunday by Guardian Australia.

The report, based on a large trove of internal ASIC emails obtained through a Freedom of Information request, showed that the regulator began looking into FTX in March of 2022 following the publication of an interview with Sam Bankman-Fried in which he said the exchange would allow Australians to trade with up to 20x leverage.

“I’d like to know who is advising them,” an ASIC analyst wrote at the time.

Because FTX obtained their Australian financial services license (AFSL) by buying a company that already had one rather than by making a new application, they had never provided the ASIC with any detailed documentation for their business. In light of this, the regulator decided to issue an s912C notice, which would require FTX to prove they were sufficiently compliant to qualify them to hold a license.

“Given the concerns I think the best course of action at this stage is a s912C Notice,” an investor protection officer wrote. “I think we ask them all of the normal questions when there has been a change in control.”

On Mar. 30, ASIC conducted a phone meeting with the exchange in which FTX representatives emphasized the 31 financial services licenses they already had and claimed to be “well known for efforts with positive talks with regulators.”

Following the call, the ASIC issued the s912C notice to FTX, and by April they had received enough documentation to begin investigating the exchange to “further understand whether offerings comply with the licence conditions and client money obligations.”

Between the publication of the interview and the FTX bankruptcy in November, the ASIC issued three notices to the exchange, and a briefing document written on Nov. 11, the very day of the bankruptcy filing, confirmed that FTX was under “surveillance activity” since March. According to that final briefing document, FTX was insisting to the ASIC that it remained “compliant with its financial requirements.”

Approximately 30,000 Australians are owed fiat or cryptocurrency by FTX, with some customers losing as much as AUD $1 million.

Even as the ASIC’s investigation of FTX played out, the Australian government was wrestling with various internal and external stakeholders over how to best regulate cryptocurrencies. In September, the government created a crypto-monitoring task force to rein in the crypto sector, and a draft bill was introduced by Liberal Party Senator Andrew Bragg to clamp down on the use of digital asset exchanges, stablecoins, and China’s central bank digital currency, the e-Yuan.

On Dec. 14, Australian Financial Services Minister Stephen Jones announced that the government planned to make crypto regulation a priority in 2023. Along with the goal of establishing a crypto regulation framework, the government also plans to “update and strengthen Australia’s payment system; strengthen its financial market infrastructure; and establish a regulatory framework for Buy Now Pay Later,” the report said.

Jones said the previous government “sat on its hands” when it came to keeping pace with changes in the market, especially as it relates to new digital products and services, and this would be a key goal of Prime Minister Albanese’s government moving forward.

Most recently, on Jan. 23, Jones reiterated his belief that cryptocurrencies should be regulated as financial products.

“I don’t want to pre-judge the outcomes of the consultation process we are about to embark on,” Jones said. “But I start from the position that if it looks like a duck, walks like a duck and sounds like a duck, then it should be treated like one.”

Jones said the government is focused on crypto assets that act like financial products but remain unregulated, and that the collapse of FTX “puts beyond doubt” the need for crypto regulation in the country.

The ASIC, along with Commonwealth Bank – one of the country’s largest banks – take the hardline position that legislation should classify all crypto assets as financial products.

At the opposite end of the spectrum, Blockchain Australia, a lobby group for the country’s crypto sector, told the federal Treasury last year that it was strongly against this approach, arguing that this would harm investment and lead to job losses.

There could be considerable upside if the country can get its regulations right. A report commissioned by the Tech Council of Australia and published on Nov. 30 claimed that the establishment of a proper regulatory framework around digital assets could add up to AUD$60 billion a year to the country’s national GDP by 2030.

“Australia has the opportunity to be a leader in responsible digital asset innovation and use,” the report said. “To do this, government and industry must work together to design a modernized regulatory framework, and a growth strategy for trusted digital assets recognizing the potential for this sector to drive innovation, investment and jobs.”

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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