Many consumers who use digital payment platforms, such as cryptocurrency or Afterpay, could be better protected under a federal government plan to overhaul Australia’s payments system and regulate financial technology organisations. Attwood Marshall Lawyers Commercial Litigation Senior Associate, Jade Carlson discusses the current risks to consumers using digital payment systems and cryptocurrency.
Background
Earlier this year, the government released reviews that examined digital payment methods like cryptocurrency, mobile wallets, and buy now, pay later, and concluded that they weren’t properly addressed by the current regulatory framework. As part of these reviews, there were recommendations made for the government to enact more comprehensive policies, licensing requirements for cryptocurrency exchanges, and tighter oversight on major payment providers. Some of the major payment providers that these changes will impact include Apple Pay, PayPal, Afterpay, Zip, Stripe, and eWay Australia.
A general distrust of banks as a result of the Royal Commission into the Misconduct in the Banking, Superannuation and Financial Services Industry, has seen more than 800,000 Australian investors put their money into cryptocurrency and other platforms over the past three years.
Approximately 55 million non-cash payments, worth about $650 billion, are made in Australia every day, according to Treasury, with almost half of Australians making payments using their mobile phone.
The Treasurer’s regulatory proposals
Proposals unveiled by Treasurer Josh Frydenberg would seek to give him more powers to regulate the growing areas around digital wallets, cryptocurrencies, and blockchain fintech companies.
Australians who buy cryptocurrencies and use buy now, pay later services will have stronger consumer protections from 2022 under world-first changes to alternative finance.
The Morrison government will land on its financial system reforms within 12 months, implementing new protections for consumers and workable regulations to tap into the $2 trillion cryptocurrency global market and drive domestic crypto trading. The reforms are set to:
- Set licensing requirements for cryptocurrency trading platforms
- Create a central bank digital currency
- Regulate fees charged by “Buy now, pay later” apps.
These changes are the biggest we have seen in 25 years. These changes are being made to reduce the risk of Australian businesses and consumers making transactions in spaces beyond the full reach of Australian law.
The big banks have been vocal about their dislike of big tech companies, such as Apple and Google, muscling in on their turf and denying them enough access to their platforms.
Cryptocurrency protections for investors
On crypto exchanges, Australia will begin consultation early in 2022 to establish a licensing framework and regulations for businesses that hold crypto assets on behalf of consumers.
2021 has seen Bitcoin surge in value, climbing from less than $25,000 a year ago to $71,200 today. Despite the steady increase in its value, the crypto market is still quite fickle, with Bitcoin valued at more than $91,000 only one month ago.
In May, Bitcoin lost a third of its value within a week, plunging from $74,000 to $50,000, after billionaire Tesla founder Elon Musk changed his mind on accepting Bitcoin as a method of payment for Tesla cars.
The Commonwealth Bank in November announced it would allow cryptocurrency to be traded on its banking app, making it the first bank in Australia to allow this.
The 6.5million customers of Australia’s biggest bank will be able to buy and sell digital currencies in the same way they can make share transactions on a CommSec app.
On cryptocurrency, the government plans to investigate a custody regime that would protect consumers who trade on exchanges. It comes as two cryptocurrency exchanges have collapsed in recent months, with some customers facing the possibility of losing all their crypto investments.
The Board of Taxation will also be asked to investigate how best to tax these types of digital assets. The government had been missing out on tax revenue by not regulating the crypto space.
Central bank digital currency
Australia will consult on the feasibility of a central bank digital currency.
Treasurer Josh Frydenberg confirmed the Commonwealth and Reserve Bank were now working on the feasibility of a central cryptocurrency in Australia to take cryptocurrencies like Bitcoin out from the shadows. The Council of Financial Regulators – comprising Treasury, the Reserve Bank of Australia, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission – are expected to provide their recommendations by mid-2022.
There are various legal, policy and technological issues that will need to be explored. The goal is to protect consumers, ease pressures for small businesses, make the rules and regulations clear and support investment and innovation into the future.
Fees to be regulated for ‘Buy now, pay later’ apps
For the first time, online transaction providers and buy-now-pay later providers will effectively see the end of the unregulated business. Australia is set to broaden its payment laws to now cover these big payment providers.
“Buy Now Pay Later” is a misnomer. These are short-term loans paid back in instalments, with terms that can vary dramatically. Some include late fees but not interest; others charge interest. Some report to credit bureaus and some do not. Consumer advocates say the variety of offerings can be especially confusing for younger users with little credit history or financial literacy.
Afterpay, for example, doesn’t charge interest on BNPL services, but it collected A$87 million ($64 million) in late fees from users in the 12 months ended June 30. Affirm doesn’t charge late fees but collected $200 million in interest payments from consumers in the same 12-month period.
The convenience of these payment options can itself be a trap. Most BNPL apps run only a “soft” credit check. These have easier standards for approval and don’t appear in any report, which means one shopper can have multiple BNPL lines. While apps like Klarna and Afterpay lock users’ accounts when they fall behind on payments, Tayne notes they can always just try another service.
Because BNPL providers don’t charge interest, they aren’t regulated under the National Credit Code as credit cards and payday loans are.
New rules covering fees and allowing other players into the market will be considered.
The risks associated with digital payments and cryptocurrency
Cryptocurrency and digital assets are largely unregulated in Australia. To bring Australia into the digital world, a senate committee was set up to investigate ways to better regulate this space.
As part of an inquiry, the committee made 12 recommendations that included new regimes for market licensing for digital currency exchanges (DCEs), custodial and depository services, and changes to anti-money laundering and counter-terrorism financing guidelines so they were “fit for purpose”.
Currently, the only requirement to operate a digital currency exchange (DCE) is to register with the anti-money laundering regulator AUSTRAC. AUSTRAC does not deal with investor protections.
Cryptocurrency is not a productive asset. It doesn’t produce earnings or cash flow like a business or rental property. It’s simply a token that trades at whatever price people are willing to pay at the time.
Cryptocurrency interest is not the same as bank interest, some companies pay interest on cryptocurrency, but these arrangements are nothing like a typical savings account.
These interest payments are often generated by lending out holdings to other investors and traders. This introduces counterparty risk: if your company lending your Bitcoin goes bust, you may lose all your money.
It’s far riskier than a bank savings account where cash deposits of under $250,000 are guaranteed by the Government under the Financial Claims Scheme. This means deposit-holders with Australian banks and building societies are protected in the unlikely event that one of these financial institutions fails. The same does not apply to digital currency exchanges.
Cryptocurrency is highly speculative, for example, in late 2016, you could buy a single bitcoin for around $1,000. Today, a bitcoin is worth more than 70 times that. It’s great news for people who invested early and held on, but there’s no guarantee the trend will continue.
Another risk to consider is cryptocurrency’s volatility. In December 2017, bitcoin briefly sold for more than $25,000. Shortly afterwards, the price crashed more than 30 per cent. The price continued to decline, falling to less than $5,000 by early 2019. Even if you were a fervent believer in Bitcoin, it would have been extremely hard to hold on through that period.
There are also issues around security that need to be considered. The exchanges where people trade their cash for cryptocurrency are often targeted by hackers and thieves.
Security firm CipherTrace estimates that nearly $US2 billion was lost in cryptocurrency theft, hacks, and fraud in 2020.
Crypto scams are very common. The Australian Competition and Consumer Commission (ACCC) received more than 3,000 reports of crypto-currency scams in 2020 with losses estimating $28 million.
For the first half of 2021, it has been reported that more than half of the $70 million lost to bogus investment opportunities was attributed to cryptocurrency scams.
Digital payments and Cryptocurrency consumer rights – The National Consumer Credit Card Protection Act 2009, explained
The proposed regulations will hopefully give consumers protection under the National Consumer Credit Card Protection Act 2009 (Cth) (NCCPA Act) and National Credit Code (Code), which is found under Schedule 1 of the NCCPA Act
The NCCPA Act:
- provides important consumer safeguards such as the licensing of lenders, and laws to ensure credit is suitable and contains the Code, which regulates credit lending conduct.
- governs those who provide credit, as well as contracts and transactions, and aims to ensure responsible lending
- is administered solely by the Australian Securities & Investment Commission (ASIC)
- applies to everyday banking products such as car loans, personal loans, home loans, credit cards and consumer leases
Under the NCCPA Act, those who engage in “credit activity” require a licence or authorisation from a licensee. Credit activity includes activity relates to credit contracts, consumer leases, mortgages, and guarantees.
An Australian Credit Licence has conditions that the licensee is a member of an external dispute resolution scheme and that they abide by laws that ensure responsible lending.
The NCCPA Act sets out obligations for responsible lending. They include assessing whether a credit product or credit limit increase is unsuitable, via gathering information about the consumer and taking reasonable steps to verify that information.
Section 118 of the Act prescribes a test for unsuitability:
- the consumer will be unable to comply with their financial obligations
- the consumer will only be able to apply with their financial obligations with substantial hardship
- the product will not meet the consumer’s requirements or objectives
The Code covers almost all credit contracts and applies when:
- the debtor is a natural person or business
- the credit is provided wholly or predominantly for personal, domestic, or household purposes; or to buy, renovate or improve residential investment property, or to refinance credit provided for this
- a charge is made for providing credit
- the credit is provided by a business
The Code does not apply to loans including low-cost, short-term credit (less than 62 days), pawnbroker loans, margin loans, bill facilities, insurance premiums paid by instalments, and staff loans.
Under Section 17 of the Code, credit contracts for loans must contain:
- the amount of the loan
- the credit provider and the amount payable
- the interest rate and how it is calculated
- the amount, frequency, and total number of repayments
- the frequency of statements of account
- details of any mortgage or guarantee taken
- details of any commission payable
- details of action to be taken if the borrower is in default.
Under Section 33 of the Code, a credit provider must provide a borrower with periodic statements of account. The maximum period for most statements of account is 40 days but can be up to 12 months in the case of a reverse mortgage.
For small credit loans of less than $2,000 under a contract of at least 16 days but no longer than one year, under Section 31A of the Code, credit providers can charge an interest rate of no more than 48%, an establishment fee of no more than 20% of the loan amount, and a monthly fee of no more than 4% of the loan amount.
ASIC can prosecute a credit provider for non-compliance with the NCCPA Act. The credit provider could be liable to pay damages to a consumer upon the consumer commencing proceedings against the creditor provider.
Attwood Marshall Lawyers can help you understand your rights and obligations if a dispute arises over digital transactions
If you are involved in a dispute with an online payment provider or financial services institution, or are involved in a dispute relating to cryptocurrency, our team can help you understand your rights and the best path to take to resolve your matter.
Our experienced Commercial Litigation lawyers can help determine if you may be eligible for compensation for any financial loss you have suffered. To find out your prospects of successfully claiming compensation for your losses, contact Commercial Litigation Department Manager, Amanda Heather, on direct line 07 5506 8245, email aheather@attwoodmarshall.com.au or free call 1800 621 071 at any time.
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