Crypto investments keep making traction

Crypto investments CBA commonwealth bank APRA RBA Australia ATO
Commonwealth Bank chief executive officer Matt Comyn recently announced plans to give its customers access to Bitcoin and other cryptocurrencies, prompting super funds to take a closer look.

It has been a good couple of weeks for investors in cryptocurrencies as more mainstream investment companies cautiously embrace blockchain driven digital currencies such as Bitcoin.

Without doubt, Commonwealth Bank (ASX: CBA) chief executive officer Matt Comyn has been crypto’s biggest Australian advocate, not only announcing plans for Australia’s biggest bank to give 6.5 million of its customers access to bitcoin and nine other digital currencies but also defending his decision against concerned regulators.

His argument has been simple and direct – if people want to invest in something that is not banned, then why not allow it?

CBA already working on consumer warnings

As long as the potential risks and rewards have been explained to them, where is the harm, with CBA already working with Chainalysis and Gemini to ensure appropriate warnings are given in lieu of regulatory guidance.

“We believe we would rather have a seat at the table and be understanding, versus . . . many financial institutions [which] look at the space and hope it will be regulated out of existence.’’

“I think that is unlikely,” Mr Comyn said.

Some local and offshore regulators have warned that cryptocurrencies are a fad and have no issuer or ultimate store of value and have been largely driven upwards by a fear of missing out.

That same argument could be applied to a wide range of publicly available investments but crypto arguably comes with some innovative and highly applicable applications in payments and other uses – not to mention a more disciplined supply than many fiat currencies.

CBA would make money on transactions, not crypto valuations

From a purely business point of view, CBA would simply be acting as a more accessible broker for cryptocurrencies – potentially removing some of the barriers and “scams” that have dogged the industry so far.

As a broker, the bank makes money on transactions – something it is very skilled at doing already – and no doubt has done the research that found that the appetite for crypto investments from young investors that already use its banking and broking services would be large.

As a bank, it would have no direct financial exposure to crypto prices, with transactions and volatility being the profitability driver – something crypto has in spades.

Regulators wary but Federal Government on board

Importantly, CBA is in tune with the Federal Government which is working on a regulatory regime for crypto following recommendations from a Senate select committee, and is keen to push investments using blockchain technology.

As the Minister for Superannuation, Financial Services and the Digital Economy, Jane Hume, put it: “As an industry, and as a government, we need to acknowledge this is not a fad.”

The other area of crypto investment which is on the way but not quite here yet is through superannuation.

There was a lot of excitement around comments by Rest Super’s chief investment officer, Andrew Lill, who indicated the fund was having a very close look at investing in cryptocurrencies and that such investments could be a good hedge against rising inflation.

Will an APRA regulated super fund invest soon?

That initial excitement was hosed down a little with the caveat that the fund is still researching and is not ready to make an investment yet, although it is no doubt aware that many of its 1.8 million members – most belonging to the Millennial and Gen Z generations – would be keenly aware of the investment potential of cryptocurrencies.

What was less reported was that Mr Lill said that the $66 billion fund would invest “carefully and cautiously” in the emerging crypto market.

“It’s still a very volatile investment, so any allocation exposure we make to cryptocurrencies is likely to be part of our diversified portfolio as initially a fairly small allocation that may, over time, build,” he said.

That sounds like initial investment percentages well below 1% rather than a massive plunge but it is important that Mr Lill recognised that cryptocurrencies and the underlying blockchain technology could be “disruptive” and a potential “stable source of value” compared with fiat currencies controlled by the monetary policies of central banks.

Not only super funds having a look at crypto

At this stage it appears that no APRA-regulated super funds give members access to crypto markets, but many are debating the merits of including digital tokens as part of their small allocations to high risk / high reward alternative investments.

Should several decide to go that way, it would be likely to result in a trickle of money into crypto assets rather than a wall of cash.

Queensland Investment Corporation has also revealed that it is looking at making small investments in the crypto market but is wary of global government intervention in the rapidly growing, $3.6 trillion industry.

“Right now, there are a number of uncertainties, and the operational infrastructure for institutional investing remains immature,” said QIC head of currency Stuart Simmons.

He said institutions would have more interest if they were protected from asset theft and market manipulation but that investments are more likely to be gradual.

ATO digging proves crypto has arrived

Perhaps the surest sign that crypto investments have entered the mainstream though is the fact that the Australian Tax Office is all over the sector like a rash, seeking out any undeclared capital gains like an Exocet missile.

ATO commissioner Chris Jordan said many first-time investors were unaware of their tax obligations or how they were calculated and were failing to report trading in their tax returns.

However, he said the ATO was relying on data from exchanges and brokers so that it could “better analyse where someone needs a nudge in the right direction”.

This is important because Australians have been enthusiastic crypto investors, with Finder analysis showing that almost 18% of the population owned a stake in cryptocurrencies like Bitcoin, Ethereum, or Cardano in October, up from 13% in March.

“In a sector that is growing rapidly with new investors, we can’t rely on taxpayers knowing they need to keep records of their investment income and capital gains and disclose it on their tax returns,” said Mr Jordan.

“We’ve expanded our data matching protocols to get more data from third parties to assist with emerging investments like cryptocurrency,” Jordan said.

“Acquiring data from sources like cryptocurrency (demand-side platforms), share registries and brokers, and pre-filling this data to prompt clients when they lodge means we raise awareness of their responsibilities when it matters most,” he added.

This kind of system will “allow us to better analyse where someone needs a nudge in the right direction, or a firmer hand”.

In many ways, the fact that the ATO is so heavily involved in finding out about capital gains liabilities is the ultimate sign that a new investment class has arrived.

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