Treasurer Josh Frydenberg has announced a comprehensive plan to regulate digital wallets, cryptocurrencies and buy now, pay later (BNPL) companies.
The giant asterisk over the entire plan is that by the time the changes are ready to be introduced late in 2022, there is at least a 50% chance that the current treasurer won’t be in his current office.
With none of the mooted reforms to be introduced before the next election, the chances are that the planned regulation revolution will either wither on the vine or be significantly changed by political pressures.
Which could be a great shame, because much of this reform is sorely needed – not just in Australia but other parts of the world that are struggling to rein in the power and reach of big technology companies, along with issues with the payments system and whether BNPL companies are a sneaky new form of credit that is dodging current regulation – an Uber among some banking taxis, if you will.
So, what are we actually talking about here – what are the likely reforms and how would they work?
Digital wallets have quietly overtaken the payments system
We’ll start with digital wallets because they are something most consumers are now using, whether they know it or not.
Like all of the best technological innovations, this one arrived without anyone really noticing but if you are paying for goods and services with your phone, chances are either Google or Apple are now supplying you with a digital wallet – an electronic version of the old leather variety that keeps your financial payment information safe from intruders.
The issue here is that those big technology companies don’t provide these services for no reason – they get to grab all of the data that provides a very solid picture of each consumer and what advertisements could be sold to tempt them.
That is not too different to the big banks – although at least they are heavily regulated and less adept at using and monetising data – but unlike the banks, the technology companies are getting a totally free ride on the payments system.
By cleverly inserting themselves between the customer and the bank they get all of the benefits of using the payments system but leave the banks and merchants to shoulder the cost of providing the electronic nuts and bolts to run the system.
That is a real problem when the payment system is evolving fast, with the old traditional ways of payment dying fast.
The number of personal cheques written has fallen by 95% over the past 20 years, while ATM cash withdrawals are down two-thirds since 2011.
Reform here would see the Treasurer taking regulatory control of the payments system and ensuring a level playing field on payment and regulation – something the banks have been lobbying hard for, although could see technological advances hindered in coming to market by excessive red tape.
Some limits on BNPL to save undisciplined spenders
It is a similar situation with Buy Now Pay Later (BNPL) companies such as Afterpay (ASX: APT) and Zip (ASX: Z1P), which have thrived due to strong consumer demand for a payment solution other than credit cards, with their hefty interest charges.
BNPL companies market themselves as providing budgeting tools that allow customers to buy goods in four or sometimes more instalments with no interest payments – as long as they pay on time.
Of course, we all know that not everything always works out and just like the banks offering credit cards, many BNPL customers end up forking out for fees after missing payments.
BNPL can be a fantastic tool if used properly but for those without discipline on their spending, they can be every bit as much of a trap as credit cards.
The unique thing about BNPL is that as long as you keep making the payments, you can keep spending so there are strong incentives to keep using BNPL to maintain a certain lifestyle, which may not be totally realistic.
Reform here is likely to see some more regulation on BNPL around checking the creditworthiness of customers and ensuring there are some controls to ensure customers don’t get too far out of their depth.
Keeping crypto under control is tough work
Regulating cryptocurrencies is perhaps the most complex of Treasurer Frydenberg’s aims but the recently completed parliamentary committee report led by Senator Andrew Bragg forms a template.
Measures would include a licencing regime for cryptocurrency exchanges, looking at the taxes on cryptocurrency assets and establishing a new company structure to accommodate Decentralised Autonomous Organisations (DAOs).
One contentious recommendation would be the need to safely store the billions of dollars of Bitcoin and other digital currencies here in Australia.
Such a custody regulatory regime for businesses that hold crypto assets is sorely needed, with the recent collapse of local exchange MyCryptoWallet just one example of what can happen when things go wrong.
Will offshore coin storage be allowed?
However, local crypto-exchanges say the issue is quite complex and there may need to be some allowance to store crypto assets securely with offshore custodians as an interim measure before moving to entirely local custody arrangements.
Like all of these reforms, the principles may be fairly clear but the implementation of regulation can be very complex to avoid unwanted consequences.
That is why there is a significant time period required to communicate with industry participants – all of which will have strong vested interests they will fight hard to protect.
Hopefully all of that effort won’t be wasted even if there is a change of government at the next election, as Australia needs better regulation in some of these areas.
And who knows, maybe the rest of the world takes notice of what we do as a sort of digital regulation test run.