Crypto Poses Insolvency Risk as Desperate Aussies Take On Risky Investments And Loans

Tim Beresford, the CEO of an Australian Government body focused on personal insolvency — the Australian Financial Security Authority (AFSA) — has said that while insolvencies are down compared to pre-pandemic levels, crypto is an emerging financial risk factor.

Speaking to Capital Brief, Beresford said crypto is increasingly being seen as a last ditch option for those facing financial stress. That can result in desperate people taking a punt on high risk cryptocurrencies without properly understanding the risks — leading to not being able to pay their debts or having to declare bankruptcy.

However, he doesn’t expect insolvencies to rise back to anywhere near the levels we saw before COVID, citing a “structural shift in the unemployment rate” and new rules around how creditors deal with unpaid debts as key factors driving down the insolvency rate.

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AFSA CEO Likens Crypto To “Tulip Mania”

Beresford says that while insolvencies are still very low by historical standards, he has seen an increase in people borrowing from what he refers to as “tier 3 and 4 lenders”, as opposed to the major banks:  

We’re seeing a shift from what was typically banked by tier one lenders to those that have not the same social license to operate — that’s probably the fairest way to put it.

Tim Beresford, CEO of Australian Financial Security Agency

Beresford didn’t clarify if he’s including crypto exchanges here as an example of a lower tier lender. The problem with borrowing from less established lenders, according to Beresford, is that they may not have the kinds of financial hardship schemes the big banks offer and may not have any “real desire to try and work this through with the debtor”.

Perhaps demonstrating a lack of familiarity with crypto (aside from attention-grabbing memecoins), Beresford likened the entire digital assets industry to the so-called ‘tulip mania’ that gripped Holland during the early 1630s, adding:

[With crypto] people see that speculation, and they see colleagues take advantage of that speculation, and sometimes some poor advice has led them to a conclusion that this is their way out. They don’t see the speculation.

Tim Beresford, CEO of Australian Financial Security Agency

Insolvencies Way Down, But Bad Advice Remains a Risk

Personal insolvencies in Australia are currently down significantly and the long-term trend is towards fewer insolvencies. Beresford says this improvement is largely due to the Hayne Royal Commission resulting in changes to the way debtors deal with creditors, now often seeking to resolve unpaid debts without going to insolvency court.

AFSA’s data showed a 7% increase in insolvencies in the December quarter, which Beresford described as a “modest” increase. The agency expects the total number of insolvencies for the 2024-25 financial year to hit around 12,500 — a far cry from the 10-year average of around 20,000 – 22,000.

Related: Loans Secured With Crypto Threaten Australia’s Economic Stability: ABC Report

Beyond the structural and regulatory factors impacting insolvency numbers, Beresford said often the primary driver of insolvency is bad financial advice and urged Aussies facing financial stress to seek out quality advice before investing.