The regulatory reform agenda in Australia in relation to digital assets remains somewhat slow. In February 2023, a “token mapping” consultation was undertaken by the Government in an attempt to characterise various categories of digital assets, which informed the design of the proposed regulatory framework for digital asset platforms that was introduced in October 2023 via a consultation paper and factsheet. This was the first substantive step in the current Government’s process to regulate this space, and considerably leveraged the existing Australian Financial Services Licence (AFSL) regime for the proposed licensing framework.
In addition to the regulatory developments specific to crypto assets, there have been a number of law reforms in other contexts, spanning from anti-money laundry and counter-terrorism financing (AML/CTF) requirements to Australian payment system and e-money regulation, that would have an implication on the regulatory framework for the crypto sector.
While most proposed framework and regulations are still at consultation stage, certain crypto assets may fall within the existing Australian financial services regulatory framework where they are considered a financial product. This will need to be considered on a case-by-case basis and many crypto assets and other digital assets are not commonly considered to be financial products.
Digital currency exchanges (that satisfy the “geographical link” requirements) are however subject to Australia's AML/CTF laws. In addition, the authorisations for collective investment vehicles (known as managed investment schemes) have been updated to include a new “type of scheme” authorisation, namely “crypto asset”, which facilitates the promotion of managed investment schemes which have crypto assets as their underlying assets or a significant part of their investment strategy.
In addition, the Australian company and financial services regulator, the Australian Securities and Investments Commission (ASIC), has been fairly active in the crypto space and stated that it is “not afraid to pursue cases where the law might be considered unclear”. For the last few years, ASIC has taken a number of enforcement actions against crypto asset businesses with the intention of clarifying what is a regulated product and when the provider needs a licence.
The updated exemptions are contained in Schedule 7 of the Bill (which amends the Corporations Act) and are summarised in Table A below. The exemptions are expected to commence on 1 April 2025, and will supplement the funds management relief (which is also scheduled to commence on 1 April 2025).
Token Mapping Exercise
On 3 February 2023, the Australian Treasury issued a consultation paper (CP) on token mapping, which sets out a number of key concepts to describe the crypto ecosystem, including:
- token: performs the record keeping role, comparable to a physical token or an entry in a registry. The CP includes a definition of a crypto token as a unit of digital information that can be ‘exclusively used or controlled’ by a person, despite that person not controlling the host hardware where that token is recorded. The authenticity of a crypto token is established using cryptography;
- token system: the system or arrangement to ensure or facilitate a function (i.e. the steps taken to perform a function in relation to crypto tokens); and
- function: the product or benefit provided by a token system.
The CP proposed distinguishing four main crypto-related product types (under two kinds of token systems) to help understand how crypto products might fit within existing regulatory frameworks. The product types are:
- intermediated token systems (where intermediaries or agents perform functions pursuant to promises or other arrangements):
- crypto asset services (e.g. lending and borrowing, fiat on/off ramping, crypto token trading, funds management, mining/staking-as-a-service, gambling and custody); and
- intermediated crypto assets (a crypto asset where the link between the crypto token and the token system is created by legal agreement or other arrangement (e.g. stablecoins or ICOs)). Examples of assets connected to crypto tokens include rights or licences in relation to event access or subscriptions, intellectual property, reward programs, consumer goods and services, fiat money, non-financial assets, government bond coupons, and units in a member-directed venture capital fund.
- public token systems (where functions are performed by crypto networks in the absence of promises, intermediaries and agents):
- network tokens (a type of crypto asset created on public crypto networks); and
- public smart contracts (smart contracts (and their associated crypto tokens) that are created for the purpose of enabling unknown parties to enter transactional relationships.
Consultation paper on regulating digital asset platforms
On 16 October 2023, the Treasury released a consultation paper (CP) on the introduction of a regulatory framework for digital asset platforms, which seeks to leverage existing Australian financial services laws to regulate such platforms. The approach focuses on digital asset service providers, rather than on tokens themselves.
Regulatory framework
The CP introduces:
- a proposed regulatory framework for digital asset facilities as a new type of financial product which relates to certain asset holding arrangements;
- licensing requirements and obligations applicable to service providers providing financial services in relation to digital asset facilities (including platform providers and other intermediaries (e.g. brokers, arrangers, agents, market makers and advisers));
- requirements for structuring a digital asset facility and minimum standards for facility contracts, including custody and reporting requirements; and
- requirements for “financialised functions”, for specific activities relating to underlying assets that are not financial products. Such activities would include token trading, token staking, asset tokenisation and funding tokenisation.
Licensing requirements
A platform provider will be required to hold an AFSL authorising it to issue and deal in digital asset facilities. An exemption is proposed to apply where:
- the total value of platform entitlements held by any one client of the platform provider does not exceed AUD 1,500 at any one time; and
- the total amount of assets held by the platform provider does not exceed AUD 5 million at any time.
The platform provider would need to comply with a number of obligations, including for example providing the financial service efficiently, honestly, and fairly, managing conflicts of interest, having a dispute resolution system, meeting solvency and cash reserve requirements, keeping and submitting financial records, producing “facility guide” and full disclosure on its website, and monitoring for and disrupting market misconduct.
A person who deals in, or arranges for another person to use, a digital asset facility (whether that facility is in Australia or elsewhere) would need to hold an AFSL for them to provide that service, subject to certain exceptions.
Existing requirements
The CP states that where digital assets are currently regulated as a financial product, these regulations will remain and the new regulatory framework may supplement existing frameworks where applicable. In addition, the proposed regulatory framework does not intend to address AML/CTF requirements. Businesses providing digital currency exchange services, as set out in the AML/CTF Act, will continue to be required to register with AUSTRAC.
The CP also does not cover the activity of providing a payment stablecoin (which is subject to a separate consultation paper on payments).
Next steps
The consultation paper was open for comments until 1 December 2023. Further consultation on draft legislation is expected this year. The Treasury is proposing a 12 month transitional period once the legislation has been made into law.
The CP also outlines in section 6 other activities that may be included in the regulatory framework in the future.
Consultation on proposed licensing framework for payment systems
On 8 December 2023, the Australian Treasury issued a consultation paper (CP) on payment systems modernisation and a licensing framework for payment services providers, which includes certain requirements relating to payment stablecoins (PSCs).
PSCs are defined in the CP as:
- a digital representation of monetary value intended or purported to maintain a stable value relative to a fiat currency;
- issued by a PSC issuer; and
- capable of being redeemed for: (i) Australian dollars; or (ii) another fiat currency only where there is active marketing or selling in Australia, at face value through a claim provided by a PSC issuer to a customer.
The CP recommends regulating PSCs under the proposed stored value facility (SVF) framework. Section 6 of the CP sets out detail on the regulatory requirements for SVFs as well as additional regulatory obligations applicable to PSCs, including in relation to client monies, disclosure obligations, reporting requirements and redemption, reserve and prudential requirements.
Further, the CP also proposes a bifurcated approach to regulating payment stablecoin facilities:
- the SVF framework will regulate the issuance and redemption functions facilitated by payment stablecoin facilities; and
- the digital asset facility framework will regulate the holding and transaction functions facilitated by third-party intermediaries.
The proposed reforms are intended to apply to overseas-based businesses that actively solicit business in Australia. This reflects the following practice:
- AFSL requirements apply to entities who ‘carry on a financial services business in Australia’. This includes conduct intended to induce people in Australia to use the financial services the entity provides.
- APRA’s general position that solicitation into Australia and/or to Australian-located customers by a foreign entity would trigger the need for a licence. Major PSC SVFs that wish to offer services in Australia should be a locally incorporated entity for authorisation by APRA (i.e. SVF branch operations will not be permissible).
Next steps
The consultation paper was open for comments until 2 February 2024. The Australian government is intending to introduce legislation for the payments licensing regime in 2024. There is a proposed transition period of 18 months after the legislation comes into force, although firms may need to apply for licences within the first 6 months of this period.
Legislative bill on payment systems
On 30 November 2023, the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 (Bill) was tabled in the House of Representatives. Among others, the Bill proposes to update the Payment Systems (Regulation) Act 1998 (Cth) (PSR Act) to:
- expand the definition of “payment system” to cover a broader set of payment arrangements, including payment systems that use non-monetary digital assets for payments or provide services that facilitate a payment being made;
- broaden the definition of “participant” to capture a greater number of entities involved in the payment value chain, including entities with or without a direct relationship to a payment system;
- grant the Minister/the Reserve Bank of Australia additional powers in relation to payment system regulation.
Next Steps
Second reading of the Bill was agreed to on 16 May 2024. The changes to the PSR Act will commence 6 months after the Bill receives the Royal Assent.
Consultation on AML/CTF regime for digital currency exchange providers
On 2 May 2024, the Australian government issued a series of consultation papers in relation to reform of the AML/CTF regime. This included paper 4 on further information on the changes relevant for digital currency exchange providers (DCEPs), remittance service providers and financial institutions.
The paper included proposals on expanding the list of services provided by DCEPs to be regulated under the AML/CTF regime. Currently, Australia’s AML/CTF regime only regulates exchanges between digital currency and fiat currency, and vice versa. It has been proposed to expand this to apply AML/CTF regulation and the registration with AUSTRAC requirements to all the digital asset-related services listed by the FATF in Recommendation 15, namely:
- exchanges between digital assets for fiat currency, and vice versa;
- exchanges between one or more forms of digital assets;
- transfers of digital assets;
- safekeeping and administration of digital assets; and
- participation in and provision of financial services related to an issuer’s offer and/or sale of a digital asset.
The paper sets out detailed proposals on how the proposed designated services are intended to apply.
The paper also considers:
- proposals to change the term “digital currency” to “digital asset”;
- how the scope of NFTs subject to AML/CTF regulation should be clarified;
- the new streamlined value transfer services;
- updates to the travel rule to apply to digital asset service providers and to align with FATF recommendations. The Paper includes discussion on the travel rule triggers, the information required as part of the travel rule, the application to digital asset transfers and any potential exemptions, thresholds and sunrise issues; and
- reforms to the international funds transfer instruction (IFTI) reports, including extending IFTI reporting to digital asset transfers.
If the proposed reforms become law, it is proposed that digital asset service providers, remittance service providers and financial institutions would be given time to make arrangements and prepare before being regulated under the AML/CTF regime.
Note that, more generally, the government also published paper 5, which covers broader reforms to simplify, clarify and modernise the AML/CTF regime, including in relation to AML/CTF obligations.
These reforms will apply to both existing and newly regulated entities.
Next steps
The consultation was open for comments until 13 June 2024.
