For the purpose of the assignment, you are the most senior risk officer at National Australia
Bank Ltd and has responsibility for risk assessment and evaluation.
In an advisory capacity, you have been requested by the Board to submit a business report on cryptocurrencies as an alternative asset class. Your report should contain insightful data analyses. It should identify clearly opportunities and threats created by cryptocurrencies for Australian banks and regulatory impediments/concerns affecting investments in this alternative asset class. The report should conclude with specific recommendations to the Board based on your analyses.
Being a senior risk officer at National Australia Bank Ltd., analysis of the various alternative asset class is the prime duty as before implementation of any such asset class it is a must to understand the threats and opportunities created by it. One such alternative asset class that is being examined in this report is cryptocurrencies for the Australian Banks and the various regulatory impediments affecting investments in the particular asset class. Thus the main aim behind conducting the said study is to analyse the risk of cryptocurrencies, as an alternative investment.
The report defines what is meant by cryptocurrencies along with the need to introduce the said asset. It also details about the benefits as well as the threats posed by the same for the Australian banks and what are the regulatory issues which have an impact on the investments in cryptocurrencies. Lastly it would also detail the recommendations as to whether the same should be used as an alternative investment class or not stating adequate reasons.
Cryptocurrency has been the most talked about subject off-lately and has become a worldwide phenomena. It is a type of digital money that is formulated to be safe and in various cases unidentified. Thus it can be said that it is a currency related with the internet that employs cryptography, the procedure of translating decipherable data into such a code which is impossible to crack, to trace purchases and transmits. The money one owns is kept in a digital wallet which is kept in the cloud or offline in the laptop and can be transmitted to anyone with the help of a computer or a mobile phone (Rutnik. 2018). It has various advantages and disadvantages attached to it. The Australian banks are found to be suddenly very much interested into cryptocurrencies as an alternative asset class. However the viewpoint is divided in this case, wherein Westpac and ANZ are pro cryptocurrencies as an alternative asset class and National Bank of Australia and Commonwealth Bank of Australia confine customer admission to cryptocurrencies (Haig. 2018).
Some of the largest banks of Australia have confirmed that they have no intentions in the near future to create a hurdle for their customers from buying Bitcoin and other cryptocurrencies. Various banks have varying viewpoints on the said topic. The Reserve Bank of Australia (RBA) has been asked by new banking concerns to launch a new digital currency known as DAD – Digital Australian Dollar. The same would be a better Cryptocurrency as compared to others as it would be state-backed digital currency which has the further benefit of being supported by the government as in fiat currency. It also has the technological benefits which is shared by similar other Cryptocurrency as well.
One of the biggest advantage of introducing a Digital Australian Dollar would be that the brokers and the middlemen would be totally swiped off and would ensure to develop a less costlier electronic clearing system and at the same time it would ensure that the government is being able to monitor the system and the currency stringently.
Further to this, investment in this alternative asset class would be beneficial as cryptocurrencies would ensure that the transactional lead time is reduced considerably from several hours and days to few minutes and hours only. This would be mostly useful where international payments are involved. With regards present cryptocurrencies, it is the community that is running the entire system and controlling the prices also and thereby seem to be not a good opportunity for the Australian banks , but if the DAD is introduced which would also be termed as a Cryptocurrency and at the same time would be government regulated, then the price stability would also be established.
Most of the cryptocurrencies are clones of Bitcoin and thus differ on the basis of varying parameter values. The below mentioned graph depicts the total market capitalisation of all the cryptocurrencies has enhanced more than three times from 2016 onwards and in the month of April 2017 the same had reached $27 billion
The total cyrptocurrency market capitalisation has increased more than 3x since early 2016 reaching nearly $25 billion in March 2017
The orange graph represents Bitcoin and the yellow represents other cryptocurrencies
Source: https://www.jbs.cam.ac.uk/fileadmin/user_upload/research/centres/alternative-finance/downloads/2017-global-cryptocurrency-benchmarking-study.pdf
If Cryptocurrency is introduced as an alternative asset class by the Australian banks, then it would also be able to procure the benefits of technology like the blockchain but with better stability in comparison to other cryptocurrencies such as Bitcoin. The said technology helps to minimise the charges for each transaction incurred (Wijaya. 2017). Thus these advantages do make it a lucrative investment opportunity as an alternative asset class for the banks. However, cryptocurrencies also invite certain threats too which are being enumerated in the succeeding section.
Even though cryptocurrencies seem to be a good alternative option for investment asset class, yet the banks have yet not adopted the same in totality due to various threats it poses. The National Australia Bank Ltd. had even gone to the extent of stating that it may not permit some of the Cryptocurrency transactions to advance if safety issues occur. Thus the biggest threat that should be encountered and considered should be related to the safety and security of the customers data and their accounts, thereby even if some transactions are required to be blocked or stopped, the same should be done.
The currencies have been blocked in many cases such as that if Bitcoin and Etherium because there are concerns about the capability of the industry to work and perform in a self-regulated surrounding. Thus non-availability of regulation from the state has led to the creation of one of the most defined threats for the Australian Banks. Another very striking reason for defining cryptocurrencies as a threat for the Australian Banks is its characteristic itself which may restrict its usage to everyday transactions. Such as Bitcoin was developed so as to form a system for payments but the users derive benefits by saving their Cryptocurrency and not utilising it for buying goods and services. Threats are available to the fact that these cryptocurrencies may be of no value at all in the future and also lead to jeopardising the accounts of the customers. The intensity of fraudulent activities would also increase as the cryptocurrencies may be of no value. The privacy characteristics of the digital currency is such that it makes it nearly impossible for the law enforcing agencies to determine who are the culprits behind such illegal acts (Sami. 2015). The Cryptocurrency transactions are formed very easily and in such a manner that it would be difficult for the banking authorities or the government officials to detect.
Lastly, it is the prime duty of the bankers to ensure protection and safeguarding of customers and the same is a matter of threat in this case as all the transactions which occur in the blockchain are permanent without the option of it being reversed. Thereby, until and unless proper solutions to these issues are found, the digital Australian dollar will not be able to cater all the needs to be the next asset class for investment. Thus, introducing cryptocurrencies is not a bad option for the Australian Banks but the threats it has specifically because of lack of legal bindings make it a little less lucrative option (Wijaya,2017).
It is true that the world is standing in the midst of Cryptocurrency boon. Sarcastically, yet the truth lies in the fact that the success of the digital money is due to the fact that it operates outside the control of government and imposition of regulation would mean curbing onto the freedom of the cryptocurrencies. There are various regulatory obstructions as well which needs to be understood before offering the said asset as an alternative to investment as in the world of Cryptocurrency, manoeuvring of price is commonplace. Even if regulations are well in line, yet more inflow of cryptocurrencies would mean more headaches.
Even though Australia have supporters of cryptocurrencies in government itself, since August 2017, it viewed senators from both major parties (Labor and Coalition) coming ahead to call on the Research Bank of Australia (RBA) to adhere to cryptocurrencies as an official form of currency. Thus the future of further Cryptocurrency regulation is still in the dark full of uncertainties but apparently it is industry-friendly in the land down under (Nelson. 2018).
From the banking perspective, it is very unsafe to support the Cryptocurrency transaction as they may be illegal also. However the regulatory obstructions are such wherein the support of the Federal Government was also viewed in favour of cryptocurrencies. For example, one of the biggest area of concern with regards the regulatory issues is the removal by the Fed Government of the double taxation for consumers who make payments via digital currencies, wherein they were paying GST at the time of buying of the currency and also at the time of exchange of the currency for such other goods and services to GST. Due to this ease, it is clear that the Australian Government is in support of digital money which is a matter of concern from the banking point of view (McLachlan, 2017).
The regulatory challenges are manifolds which makes this investment strategy a little difficult from the banks perspective. Banking industry does not flourish in volatile market conditions and issuing such a volatile investment plan would be risky. Further to this, ASIC’s 2014 submission to the Senate Economic References Committee investigation into digital monies, wherein it evaluated the application of financial services regime to digital money and challenged that normally digital monies are not fitted with the legal regimes of financial product under the Corporations Act or the ASIC Act (Croft, 2017).
Lastly, since July 2017, Australia has also joined the league with other countries in categorizing Bitcoins as a currency to stay acquiescent with double taxation. A draft of the Anti-Money Laundering and Counter Terrorism Financing Amendment Bill 2017, released on the Australian Parliament website needs all digital currency exchange service providers to register with Australian Transaction and Reports Analysis Centre (AUSTRAC) (Chau. 2017). Although still not sure but this kind of amalgamation with amongst countries on digital money and cryptocurrencies regulation will tentatively help fight terrorism financing and help uphold the integrity of their financial systems. Due to these upcoming regulations, investing in cryptocurrencies would also become a hassle process. Specifically from banking point of view, it is still at its nascent stage and from an investors point of view the level of regulations is making them think twice before entering into any kind of fraudulent acts (O’Leary.2017).
Recommendations And Conclusion
As the usage of cryptocurrencies enhances and becomes more prevalent, regulators across the globe are beginning to recognize and appreciate Cryptocurrency as an asset and a mode of payment as well. Along with the same, one can expect for more stringent regulatory announcements which would enable protection of both the customer as well as the business authorities who are dealing with cryptocurrencies in the near future (Step, 2017). However, how these regulations would react and outplay general Cryptocurrency prices is yet to be decided.
Cryptocurrencies do ensure a promising alternative asset class for the purpose of transacting, exchanging values and raising capital. But at the same time the speed at which they have emerged and has become as one of the most wanted options of investment, it has given birth to new regulatory challenges and impediments too. Situations wherein money is being heaved outside the tacit submission of current regulatory norms and rules, perils are prevalent, that investors may not be able to obtain the fortification and shield the law proposes to endow with to them (Croft,2017).
As per the recommendations to the National Australia Bank Ltd., although cryptocurrencies at its present stage may not be a good option as an alternative asset class being offered to its investors due to its volatile nature, yet the way regulatory authorities are working towards tightening the same, in the future it may be a lucrative option. Lastly, the blockchain technology which the digital money world offers will go a long way in the future, having an implication on the economy in the positive manner even if Bitcoin and such other cryptocurrencies exist or not. Its a new area to be ventured by all, even the banking sector, thus offering something which is yet not understood by the developers itself would be cheating with the customers (Cooper,2017). Thus without understanding the sensitivity of the asset class, introducing the same to the customers would be worthless.
Thus on a concluding note, even though Cryptocurrency is a very much hyped concept in the world market, even then the same should be ventured into after adequate research and regulations are in place. Banking segment is a more regulated regime wherein people keep their money, transact businesses, trusting it to be the most secure place for their hard earned money. If a bank introduces any investment asset class, then the level of trust with regards the same would be very high even before understanding the details of the same. Thus on analysing the threats and opportunities of cryptocurrencies along with understanding the regulatory impediments, it would be wise to wait till the said asset class become mature enough to be released as an asset class officially. Till then the banks should keep a close watch on its developments and obstruct any such fraudulent acts.
References:
Chau,D. (2017). Bitcoin one step closer to being regulated in Australia under new anti-money laundering laws. Retrieved from https://www.abc.net.au/news/2017-10-23/bitcoin-one-step-closer-to-being-regulated-in-australia/9058582
Cooper,L. (2017). Cryptocurrency Trading Explained: What You Need To Know. Retrieved from https://www.huffingtonpost.com.au/2017/11/19/cryptocurrency-trading-explained-what-you-need-to-know_a_23249707/
Croft,H. (2017). Cryptocurrencies and ICOs – the new legal challenges. Retrieved from https://hallandwilcox.com.au/cryptocurrencies-and-icos-the-new-legal-challenges/
Haig,S. (2018). Leading Australian Banks Allow Customers to Purchase Cryptocurrencies. Retrieved from https://news.bitcoin.com/leading-australian-banks-allow-customers-purchase-cryptocurrencies/
McLachlan,E. (2017). Government regulation of Cryptocurrency “absolutely needed” in Australia. Retrieved from https://www.canstar.com.au/investor-hub/government-regulation-cryptocurrency-absolutely-needed-australia/
Nelson,A. (2018). Cryptocurrency Regulation in 2018: Where the World Stands Right Now. Retrieved from https://bitcoinmagazine.com/articles/cryptocurrency-regulation-2018-where-world-stands-right-now/
O’Leary,R.R. (2017). Australia’s Securities Regulator Issues Formal Guidance for ICOs. Retrieved from https://www.coindesk.com/australias-securities-regulator-issues-formal-guidance-for-icos/
Rutnik,M. (2018). What is Cryptocurrency. Retrieved from https://www.androidauthority.com/what-is-cryptocurrency-805162/
Sami,M. (2015). Bitcoin traders accuse Australia’s biggest banks of declaring war on cryptocurrencies. Retrieved from https://www.abc.net.au/news/2015-09-22/bitcoin-traders-claim-discrimination-by-australias-banks/6795782
Step,A. (2017). Cryptocurrency Regulations: Will It Affect Soaring Market Price? Retrieved from https://tfageeks.com/2017/08/31/cryptocurrency-market-regulation-will-it-affect-soaring-market-price/
Wijaya,D. (2017). Why the RBA would want to create a digital Australian dollar. Retrieved from https://theconversation.com/why-the-rba-would-want-to-create-a-digital-australian-dollar-86621
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