Implosion of online trading hubs highlights pitfalls of what one legal expert describes as ‘tulipmania’ investments
Last modified on Sat 11 Dec 2021 16.16 EST
Andrew Yeo doesn’t know what’s happened to tens of millions of dollars worth of cryptocurrency belonging to hundreds of clients of the collapsed exchange ACX, but he aims to find out.
In mid-October the veteran insolvency practitioner was appointed administrator of Blockchain Global, the company that used to run ACX, and since then he’s been getting a crash course in all things crypto from the tech experts at the firm where he’s a partner, Pitcher Partners.
“There’s always stuff that’s different – you have that on every job,” he says.
“Its always about finding out what’s different about this industry and how you can use it.”
A cryptocurrency exchange is digital marketplace that enables customers to buy, sell and hold cryptocurrencies. It makes money through set fees or by taking a percentage of transactions. No mainstream banks in Australia allow customers to buy and sell cryptocurrencies, although the Commonwealth bank has a pilot in the works, so exchanges are currently the only means to do this.
To get to the bottom of what has happened to the cash and coins held in the accounts of ACX customers, Yeo will need to cut through a jungle of claims and counter-claims that have been playing out in court since last year.
“It’s clear that there’s a number of channels of investigation which we may have available and determining which ones are best to follow first is not a simple task,” he says.
There’s plenty at stake. Since Yeo’s appointment, creditors, including ACX clients and Blockchain Global’s directors and management, have come forward with claims they are owed close to $50m.
ACX is not the only Australian exchange to run into trouble in what is – for now – a completely unregulated industry.
Last week, the smaller exchange Mycryptowallet also fell into administration, reportedly owing clients hundreds of thousands of dollars.
Globally, exchanges have proven vulnerable to failure and theft; Japanese operation Mt Gox collapsed in 2014 after someone stole 850,000 bitcoins from it and in 2016 hackers stole almost 120,000 bitcoins from the British Virgin Islands group Bitfinex, which managed to survive and still exists today. It’s not suggested that ACX’s assets have been stolen.
This week, the Morrison government announced plans to regulate exchanges – some time in the future.
In a speech on Thursday to the Australia-Israel Chamber of Commerce, the treasurer, Josh Frydenberg, said the government would consult on establishing a licensing system for digital currency exchanges, together with regulation of businesses that hold custody of crypto on behalf of customers.
The consultation process is due to be finished by the middle of next year, after an election that must be held by 21 May 2022.
Experts say licensing exchanges is a good idea, but it needs to be backed up by enforcement.
“With regulation comes a halo, businesses can say they’ve got a stamp of approval, and represent that people should have trust and confidence in them,” says the chief executive of the Consumer Action Law Centre, Gerard Brody.
“The regulatory regime itself has got to be robust. It’s no good having a licence given to a business if the standards it’s got to meet under that licence result in consumer detriment.”
Pamela Hanrahan, a professor of commercial law and regulation at the University of New South Wales, says licensing creates a “moral hazard”.
“It does carry some kind of colour to it that people are properly regulated, but that’s true of every form of occupational licensing, from hairdressing to whatever,” she says.
She points to failures such as the financial planning scandals that rocked the banking industry in the mid-2010s, and the 2009 Trio Capital failure, which deprived retirement savers of $176m and was the biggest superannuation collapse in Australian history, as examples of where licensing regimes have failed to safeguard consumers.
“You do have to enforce it properly,” she says.
Victims of ACX’s collapse certainly feel they’ve been neglected by regulators including the Australian Securities and Investments Commission.
In a lawsuit filed in the Victorian supreme court, 94 of them claim Blockchain Global, as operator of the exchange, owes them $13m worth of tokens including bitcoin, ethereum and ripple, as well as cash held in their ACX accounts.
“The biggest thing I’m angry about is that we’re not getting any help from Asic,” one ACX client says.
“These companies are registered with Asic but … we have to sue the company.”
Not all of ACX’s clients are participating in the lawsuit and all up there are estimated to be more than 200 who claim to have lost access to crypto and cash held at the exchange.
On Thursday afternoon, judge Richard Attiwill stayed the proceeding against Blockchain Global due to Yeo’s appointment as administrator.
However, he allowed it to continue against the other defendants in the case, including Blockchain Global chief executive, Allan Guo, and the company’s chief financial officer, Samuel Lee.
Guo and Lee did not respond to questions from Guardian Australia and they are yet to file defences in the matter.
Meanwhile, in another dispute also before the Victorian supreme court, Blockchain Global and Guo are fighting a former company employee, Jin Chen, over control of 117 bitcoins. Chen claims that he is owed the crypto for work developing software to run the ACX exchange, but the company and Guo say Chen has failed to comply with a deal that was supposed to end the stoush, because he did not make the source code of the software accessible. Chen denies this.
On Thursday afternoon Attiwill also stayed Chen’s claim against the company in light of the appointment of the administrator, but allowed the contest between Chen and Guo to go ahead.
The issues are less clear at the smaller Mycryptowallet, which is in the hands of liquidator Terry van der Velde of SV Partners.
SV Partners says little information is available because the appointment is “at very early stages” but van der Velde aims to sell the business.
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Hanrahan says the collapses make government regulation of exchanges an urgent need.
“They need to act reasonably quickly,” she says – but not so quickly that the laws fail in the same way as ones covering financial services have.
“It’s one thing to announce it, but you know, they’re going to have to deliver it and hopefully not make quite the mess of it that they’ve made of chapter seven of the Corporations Act [which regulates financial services],” she says.
In the meantime, people who buy and sell crypto should realise that “they don’t have any inherent worth”.
She believes cryptocurrencies are worse investments than the tulip bulbs that changed hands for fortunes during the tulipmania that gripped the Dutch in the 17th century, an episode in history that’s regarded as a classic example of a speculative bubble.
“At least if you bought a tulip bulb you can plant it and grow a tulip,” she says.
“These things don’t do anything.”