Regulation of digital and crypto assets in Australia

Background

The Australian government is taking preliminary steps to regulate crypto and digital assets, with Minister for Financial Services, The Hon Stephen Jones MP, announcing proposals to make crypto exchanges and digital asset platforms subject to existing Australian financial services laws and requiring platform operators to obtain an Australian Financial Services Licence (AFSL).[1]

The announcement came at the Australian Financial Review’s Crypto Summit in Sydney, part of a wider conference on the future of crypto and other digital assets in Australia. 

The Minister was clear in his speech that he was proposing legislation that, in the Government’s view, protects consumers, supports innovation and provides industry certainty.[2]

In a departure from what we are seeing in some jurisdictions globally, the Government has decided, at this time, to focus on exchanges, rather than specific ‘tokens’, and will do so under existing legislation, rather than creating a bespoke regime.

In addition, digital asset platforms will need to meet specific obligations, including minimum standards for holding tokens, standards for custody software, and standards when transacting in tokens.

The regulations will apply to Exchanges holding more than $5 million in aggregate, or more than AU$1,500 for any individual.

The regulation was mostly supported by companies at the conference, with Ryan McCall from local crypto fund Zerocap saying “In terms of how it compares to what we’re seeing outside Australia, it seems to be a fairly typical approach to more or less mimic what the existing financial services regulations are.”

Minister Jones specifically called for the sector’s assistance: “We need your views because those at the front line of innovation will have particular insights on how this regulation will work best for industry.”[3].”

The Australian Treasury is running a consultation on the proposed legislation, which will close on 1 December. Further consultation will then occur for the specific legislation and companies will have 12 months to transition to the new regime, once the legislation is in place (expected in Q2 2024).

Views of the Regulator

The Chair of the Australian Securities and Investment Commission (ASIC), Joe Longo, also attended the Summit. In his speech[4], he noted:

• Crypto must be held accountable to the same high standards of everyone else. Offering services that involve new and innovative technologies, does not afford service providers a regulatory exemption.
• Crypto relies on unregulated trust, and there is a need for regulation to mitigate the risk of consumer harm. Regulation must include enforcement.
• Crypto-assets are still risky and buying them remains highly speculative.

ASIC is the government regulator that will be responsible for implementing the changes to the legislation.

Regulating digital asset platforms – Proposal paper

The Government is working to introduce a regulatory framework for digital asset service providers that present similar risks to entities that operate in the traditional financial system. It is looking to leverage the AFSL framework to regulate digital asset service providers.

Licensing

• The existing AFSL framework would apply to any person ‘carrying on a financial services business in Australia’ in relation to a digital asset facility.
• Platform providers and other intermediaries performing financial services in relation to digital asset facilities would be required to hold an AFSL.

Facility contracts

Platform providers and customers would need to sign non-discretionary arrangements (‘facility contracts’) which would need to meet:

• minimum standards for holding assets
• minimum standards for intermediating platform entitlements
• minimum standards for transactional functions.

Financialised functions

Digital assets that are not ‘financial products’ would need to meet additional minimum standards. These functions (‘financialised functions’) include:

• intermediating the exchange of platform entitlements between account holders (token trading).
• intermediating an account holder’s participation in validating transactions on a public network (token staking).
• intermediating the creation and exchange of platform entitlements backed by tangible and intangible non-financial product assets (asset tokenisation).
• intermediating the sale of platform entitlements to fund the development of non-financial products and services (funding tokenisation).

Recommendations

Realistically, these modest changes are the first wave of regulation the Australian government is likely to introduce for digital assets. They will provide the foundation for future legislation that will target different elements of the digital assets environment.

Businesses that will be directly and indirectly affected by these laws should, in our view, take the opportunity provided by the consultation to:

• Make a submission to the consultation
• Leverage the submission to develop relationships with the relevant Minister and regulators
• Leverage the submission to gain media attention and raise your profile
• Monitor this and future legislation / regulations
• Where useful, propose or work with the government to develop new policy proposals that will benefit the sector.

FTI Consulting has significant local and global experience in helping crypto and digital asset companies navigate new and emerging policy and regulatory challenges. Please email [email protected] or call on 0414 694 476 to discuss these issues further.