Fear of the Unknown

Rattled by the advent of crypto, Australia has responded by imposing financial regulation on productivity infrastructure, pushing innovation offshore.

Sid Kalla had spent seven years building Roll, a New York startup that helped online creators issue their own cryptocurrencies, into the first widely used social-token protocol on Ethereum. In May 2024, he received a letter from JPMorganChase. Following “a recent review”, Roll’s business account would be closed. No explanation was given. There was no appeal process.

The banking relationship had lasted seven years. When Kalla pressed for answers, his banker had none. For several weeks, until Roll secured another bank, the company had no checking account. Payroll froze. Employees and contractors went unpaid.

Similar incidents played out across the United States. Coinbase employees lost personal bank accounts. Other crypto exchanges including Kraken and Gemini saw long-standing banking relationships severed overnight. When affected firms asked why, banks pointed to opaque internal assessments: “elevated risk profiles”, “business decisions”, “policy changes”.

Congress had passed no law barring crypto companies from the banking system. Instead, a regulatory whisper campaign took hold, as federal regulators signalled heightened concern and banks responded by cutting off crypto-related activity.

The crypto industry called it Operation Choke Point 2.0—a reference to the Obama-era program that used banking pressure to isolate fraudulent payday lenders. Those tactics soon extended beyond fraud, ensnaring legal but politically disfavoured businesses, from gun dealers to marijuana dispensaries and escort services—exclusion enforced through banks rather than law.

The crypto industry responded by outspending each of the gas, oil, and pharmaceutical lobbies to re-elect Donald Trump, who promised to make America “the crypto capital of the planet” and launch a strategic crypto reserve. The Securities and Exchange Commission began dropping its lawsuits.

Regulatory risk discouraged crypto intermediaries from developing

infrastructure—services to convert dollars to crypto, hold digital assets, or provide liquidity. This pushed applications to run directly on the underlying networks themselves, where transactions were slow and costly.

The result is an inversion of crypto’s anti-banking narrative.

But with Choke Point 2.0 lifted, the ecosystem did not pivot to decentralised money. It doubled down on the US dollar. The newly efficient rails moved stablecoins and tokenised traditional securities (digital representations of stocks and bonds) almost exclusively. This revealed the industry’s true opportunity: not an escape from the traditional financial system, but a more efficient backend for it.

Throughout technological history, utility precedes wealth creation. The steam engine made factories more productive before industrialists got rich. The internet enabled email and commerce before dot-com fortunes arrived. Penicillin saved lives before pharmaceutical companies profited.

Cryptocurrency inverted this sequence. Fortunes accumulated first—paper billionaires, retail speculation, institutional interest—and Bitcoin’s market cap reached US$2.5 trillion despite processing fewer than 2 per cent of PayPal’s daily transactions. The incentive was never solving real problems but running up token prices.

In 2017-18, thousands of projects raised billions through Initial Coin Offerings (ICOs), selling tokens directly to retail investors. ICOs promised to let ordinary people invest at inception prices rather than after Venture Capital companies had captured 100x returns. But the mechanism created perverse incentives: founders could raise millions by selling tokens before building anything, then profit by promoting price appreciation rather than product wins. Not surprisingly, most turned out to be vaporware or scams. Unlike equity, where value derives from future cash flows, token prices depend primarily on speculation.

The industry’s capitulation to traditional finance was near-total. When Coinbase went public in 2021 at a US$85 billion valuation, the company chose a conventional Nasdaq direct listing rather than tokenising its equity—after nearly a decade of rhetoric about replacing traditional capital markets.

Coinbase CEO Brian Armstrong framed the exchange as a temporary mechanism to bootstrap cryptocurrency adoption for everyday payments. Coinbase signed Dell, Expedia, and Overstock to accept Bitcoin, but continued to generate most revenue from trading fees. The goal was a new financial system; the result was a more efficient casino for the old one.

Today, the crypto industry’s only genuine killer app is Tether—or more precisely, its stablecoin USDT, a digital clone of the US dollar. USDT is designed to always equal one dollar, backed by reserves of cash and Treasury securities. While Bitcoin’s price swings wildly, stablecoins use decentralised blockchain technology to move dollars digitally without going through banks. That stability has made USDT the lubricant of the crypto economy. Markets have rejected volatile or decentralised currencies in favour of a token that simply mimics the dollar; when crypto users need actual money, they retreat to fiat.

The result is an inversion of crypto’s anti-banking narrative. To back USDT, Tether holds roughly $140 billion in US Treasury securities, making the crypto economy structurally dependent on the creditworthiness of the US government. In a textbook shadow-banking arbitrage, users hold a zero-yield token while the issuer captures the Treasury yield.

Tether processes billions in daily settlement because digital dollar rails are more efficient than traditional banking, but its dominance exposes the collapse of crypto’s ‘trustless’ ideal. Far from eliminating the need for trusted third parties, the system depends on confidence in a private issuer’s reserves and balance sheet, despite the absence of a full independent audit, with USDT functioning as essential infrastructure across major exchanges. Crypto didn’t eliminate intermediaries; it rebuilt them, less transparently.

If Tether showed the market preferred dollar stability to crypto innovation, El Salvador’s experiment tested whether a government could force the opposite outcome when President Nayib Bukele made Bitcoin legal tender.

Four years later, it has failed by any measure except Bitcoin price appreciation. Salvadorans have rejected Bitcoin for routine transactions, and the government-built digital wallet has been largely abandoned. Merchants legally required to accept Bitcoin have found workarounds or ignore the mandate entirely. Price volatility and reliance on internet connectivity make Bitcoin impractical for pricing goods or paying wages. Bukele has dropped the pretence of Bitcoin as currency while continuing to buy it for the treasury, gambling with public funds.

Yet for all of crypto’s failures—the ICO scams, Tether’s opacity, El Salvador’s debacle—certain infrastructure improvements had genuine value. Stablecoins facilitate cross-border payments more efficiently than traditional rails. Instant payment finality prevents chargeback fraud (customers reversing payments after delivery) and reduces merchant losses. Tokenised documents collapse weeks-long paper trails into hours.

These applications aren’t revolutionary, but they aren’t worthless either. They’re plumbing, not paradigm shifts. The distinction exposes the category error shared by crypto advocates and sceptical regulators—treating everything blockchain-based as either revolutionary salvation or speculative garbage, when most legitimate use cases are neither. The US learned that removing regulatory barriers doesn’t produce revolution—it reveals demand for efficient settlement rails for traditional assets.

Three years after the FTX crypto exchange collapsed, Australia had a choice: learn from crypto’s genuine infrastructure innovations or conflate them with speculation. Treasurer Jim Chalmers chose the latter, introducing legislation that imposes licensing and custody requirements on digital asset platforms. Labor addressed the most visible political risk—retail investors speculating through lightly regulated platforms—but misclassified the area where Treasury identifies up to $24 billion in annual productivity gains: the tokenisation of real-world assets, where physical assets are converted into digital tokens tradeable on blockchain networks. Rather than creating a bespoke framework for the digital economy, Labor applies the 25-year-old Corporations Act, treating tokenisation technology as financial services.

The legislation introduces a new category: the Tokenised Custody Platform. In practice, this means that businesses that hold real-world assets—wheat, gold, or energy credits—on behalf of clients, and issue digital tokens representing those holdings, are classified as financial services providers. A grain storage operator issuing tokenised receipts would be operating a regulated ‘financial product’. While exemptions exist for small operations, scaling requires an Australian Financial Services License (AFSL) and compliance with custody standards—treating agricultural infrastructure as financial intermediation.

The chaos runs deeper than the Corporations Act mismatch: the Treasurer’s legislation clashes with ASIC’s enforcement of existing laws. Weeks before the government introduced its ‘bespoke’ framework, ASIC released guidance demanding a legal assessment for every single token. While the EU and Singapore classify assets by category, Australia requires platforms to commission separate legal opinions for each asset to prove it isn’t a financial product. For an exchange listing 300 assets, that means 300 legal sign-offs. Worse, the guidance suggests even software wallets—apps that just provide a user interface—could be regulated as ‘payment facilities’, treating developers like banks. Faced with overlapping laws and double regulation, companies will continue to set up home offshore.

Instead of hard-coded rights, businesses are offered a ‘trust us, we’ll fix it later’ regime.

The proposed regime creates a bureaucratic trap of nested requirements. As the Digital Economy Council of Australia warns, the legislation forces platforms to obtain a new Digital Asset Platform license on top of existing financial services laws, creating a circular nightmare: to get the license, you need banking partners to prove capital adequacy; but to get banking partners, you need the license. The result is a regulatory deadlock where operators cannot start, banks won’t engage, and consumer safety doesn’t improve.

It fails on safety because the legislation misdiagnoses the risk. It imposes capital requirements designed for banks—ensuring enough cash to pay creditors during insolvency—rather than technical standards to prevent key theft or hacks. Forcing a software platform to hold idle capital does nothing to stop a cyberattack. It treats a security problem as a liquidity problem.

Even the government’s concession to innovation—the “low value exemption”—is structurally flawed. The caps are so low that a single commercial pilot, like one tokenised wheat shipment or small bond issuance, would likely breach the threshold. This renders the regulatory sandbox useless for real-world assets, ensuring only incumbents with massive balance sheets can afford to experiment.

While ASIC aggressively polices who holds the assets, the bill fails to establish the basic property rights that make them ownable. It regulates exchanges and custodians but doesn’t answer the questions that matter. Can super funds buy tokenised bonds? No APRA guidance. Do digital trade documents have legal force? No framework. Can you split ownership into tradeable fractions? Pushed back to old registry rules.

Compounding the uncertainty is how the law can be changed. The proposed legislation relies heavily on ‘Henry VIII clauses’—mechanisms that allow Ministers to rewrite the rules by decree after the law passes. Instead of hard-coded rights, businesses are offered a ‘trust us, we’ll fix it later’ regime where regulations can shift overnight without a vote. While the government justifies these powers as necessary to ‘future-proof’ the law against rapidly evolving technology, the Senate Scrutiny of Bills Committee rightly flagged this blank-cheque governance as an investment deterrent. In practice, this ‘flexibility’ creates the opposite of stability: a regime where the definitions of property and compliance can shift at a Minister’s discretion, leaving businesses to build on shifting sands.

The problem was predictable. Senior Liberals like Jane Hume and Andrew Bragg warned against ‘slotting crypto into a pre-digital regulatory world’ and using ‘old hooks for new ideas’. Yet when the legislation arrived, it was fighting the last war—targeting the post-FTX collapse 2022 headlines rather than the digital economy of 2026.

Crucially, the new rules fail to solve the very obstacles that stalled earlier innovation. ANZ piloted A$DC, a bank-issued Australian-dollar stablecoin, in 2022 but couldn’t scale it. The problem wasn’t custody or licensing—it was that no law confirmed a digital dollar payment was legally final. The new legislation lets platforms write their own rules, creating certainty within each platform but not across the economy. ANZ still can’t scale its payment rails because its digital dollar still isn’t legally a dollar.

The regulatory uncertainty has frozen innovation across the sector. In 2022, Block Earner, an Australian fintech offering crypto-backed yield products, launched services allowing Australians to earn yield on digital assets. ASIC did not argue the products were unsafe; it argued they had been misclassified under financial services law—putting their legality, rather than their risk profile, in question. That challenge forced the company to pause development while the issue was litigated, freezing its innovation roadmap for more than two years. When the Federal Court ruled in February 2024, the decision clarified the rules for Block Earner’s specific models, but only after years of delay and expense.

Payments and settlement show this pattern: even where tokenised systems work technically, banks cannot deploy them at scale without legal certainty that settlement extinguishes obligations with finality.

The ASX spent seven years and $250 million trying to replace its clearing system with blockchain before abandoning it in 2022. Vendor problems were part of it, but the real issue was simpler: when a share becomes a token, does the owner actually own it? Can they vote? Is settlement final? Without legal answers, every decision was a guess. The project collapsed under the weight of questions no one could answer.

Banks in Singapore trade tokenised bonds under clear legal frameworks. In Australia, superannuation funds cannot participate in similar markets because APRA has issued no guidance on tokenised assets, leaving trustees exposed to a regulatory regime that treats a tokenised bond as a novel custody risk rather than a standard security.

The pattern extends beyond finance. Powerledger, an Australian company, tokenises renewable energy credits to enable peer-to-peer trading. The technology operates in Thailand, Japan, Europe, and the United States, but deployment in Australia remains limited. Under the new legislation, tokenising energy credits likely constitutes operating a ‘Tokenised Custody Platform’—a financial product. This forces an energy technology company to comply with financial services laws designed for investment schemes. As a result, revenue is generated offshore because the domestic framework regulates the token rather than enabling the trade.

Trade finance illustrates the dysfunction. Australia exports hundreds of billions of dollars annually, yet bills of lading remain overwhelmingly paper-based, moving physically between banks, ports, and exporters despite electronic alternatives existing for decades. A shipment from Perth to Singapore can arrive days before its paperwork, forcing exporters to issue risky letters of indemnity to release goods or wait weeks for payment while documents travel by courier.

Electronic bills of lading exist, but without legal equivalence to paper, they’re just contracts between parties—not enforceable title. The new legislation doesn’t fix this. It just creates more contractual workarounds. Singapore solved this in 2021 by giving digital trade documents the same legal force as paper. Bills of lading became digital. Settlement collapsed from weeks to hours. The UK followed in 2023. Australia exports hundreds of billions annually. We still courier paperwork.

AgriDigital, founded in Dubbo, built a system to digitise grain receipts using blockchain, essentially replacing paper records with a shared digital ledger that multiple parties can trust without a central authority. A farmer in Moree delivers 500 tonnes of wheat. The paper receipt takes weeks before banks will lend against it. AgriDigital’s digital receipt proves ownership instantly. Under the new law, that’s a financial product. The grain storage provider needs an AFSL with asset-holding standards designed for financial custodians. The regulatory uncertainty is gone, but so is the business case. Banks still won’t lend—not because the status is unclear, but because compliance costs more than the paper system. AgriDigital now operates in Canada and Ukraine. Australian farmers are still waiting for paperwork.

Across finance, energy, agriculture and trade, the failure mode is the same: not prohibition, but hostile classification. Crypto advocates and their critics both treat cryptocurrency as a monolith, conflating Bitcoin speculation with tokenised settlement infrastructure. These require fundamentally different policy responses. One needs consumer protection. The other needs clear property rights. By treating all crypto as a financial product, Australia burdens tokenised bonds to regulate meme coins.

Tokenised securities should have the same legal status as registry-based shares.

Reserve Bank Governor Michele Bullock acknowledged the distinction in September 2025, noting “lots of potential” in distributed ledger technology for asset markets—tokenised bonds, fractionalised securities splitting shares into smaller tradable units, efficient settlement. Yet two months later, when Treasury introduced its digital assets legislation, it regulated custody platforms as financial services while leaving tokenised securities without property law equivalence. The gap between what the RBA recognises as viable and what regulators will enable reveals the core dysfunction: not scepticism toward speculation, but the misapplication of financial regulation to infrastructure that shares its technology.

A functional market requires enforceable property rights and contracts. At present, Australian digital assets have neither in statute. If a tokenised asset is stolen, is it property theft? If a smart contract, which automates transaction execution, fails, is it breach of contract? Without property law answers, markets do not become freer; they become riskier, favouring scale, incumbency, and legal budgets.

The Albanese government has moved on consumer protection—licensing exchanges and custody platforms—but entangles productivity infrastructure in the same net. When ANZ cannot scale payment rails, the ASX abandons a $250 million clearing system, and AgriDigital deploys technology offshore, the problem is no longer just consumer protection. It is regulatory mismatch preventing anyone from building.

The fixes are straightforward: separate the asset from the infrastructure. Tokenised securities should have the same legal status as registry-based shares, regardless of the database they live on. Super funds should be allowed to hold them. Electronic trade documents should have the same legal force as paper—as they do in Singapore and the UK. Crucially, software platforms should be regulated on technical security, not financial liquidity, ending the double-licensing trap that treats code as custody.

The US removed regulatory barriers expecting revolution, and discovered the market wanted plumbing. Australia classified the plumbing as speculation and is regulating it accordingly—pushing productivity improvements offshore, and awarding the future to everywhere else.

Ben Naparstek has held CEO and executive roles at several technology scale-ups.

This article from the Autumn 2026 edition of the IPA Review is written by tech executive Ben Naparstek.