In further recognition of Australia’s opportunity to enhance its digital asset ecosystem to drive economic activity, realise efficiency gains and play a leading role globally, the Government has announced three consultations:
- the Australian Treasury is consulting on market design and custody requirements for crypto asset service providers;
- the Board of Taxation is conducting a review of crypto assets (the terms of reference of the review are here); and
- the Council of Financial Regulators is conducting a review of de-banking.
1. Background
In December 2021 the Government published its response to both the recommendations of the Senate Select Committee on Australia as a Financial and Technology Centre’s Final Report published in October 2021 (“Final Report of the Senate Select Committee”) and Treasury’s report following its review into the regulation of payment systems, Payments system review - From system to ecosystem, released in August 2021 (“Payments System Report”). Entitled Transforming Australia’s Payments System, released on 8 December 2021, this report agreed with all but 1 of the 15 Recommendations of the Payments System Report and agreed in principle to 5 of the 12 recommendations (noting 5 others).
In her speech at Blockchain Week on 21 March 2022, Senator Hume noted that the regulatory framework for crypto assets should consider the following principles:
(a) the private sector should lead;
(b) governments should avoid undue restrictions;
(c) where governmental involvement is needed, its aim should be to support and enforce a predictable, minimalist, consistent and simple legal environment; and
(d) governments should recognise the unique qualities of crypto assets.
2. Treasury consultation on crypto asset service providers, market design and custody
2.1 Proposal
The consultation paper, Crypto asset secondary service providers: Licensing and custody requirements (“Consultation Paper”) published by Treasury is seeking feedback on the approach to licensing crypto asset secondary service providers (“CASSPrs”) and crypto asset custody requirements. As announced by Senator Hume, this is intended to provide a “predictable, minimalist, consistent and simple” technology neutral, risk focussed and fit for purpose framework for regulation.
The proposals are intended to:
(a) recognise the growing importance of the crypto asset ecosystem to both the Australian and global economy;
(b) reflect the need for regulatory certainty to encourage innovation and competition; and
(c) seek to give consumers greater confidence in their dealings with CASSPrs.
The Consultation Paper appears to be balancing a desire to harness the economic benefits from the technological innovations arising from the crypto ecosystem for Australia while managing the risks crypto assets could present to consumers, the financial system, and the economy.
2.2 What is a CASSPr?
Intermediaries providing custody, storage, exchange, brokerage and dealing services, and market operators, are identified in the Consultation Paper as crypto asset secondary service providers, or CASSPRs. This includes those provide services to retail clients. It is not intended to cover decentralised protocols or platforms.
Treasury is seeking feedback on the proposed definition of CASSPrs, as well as the proposed regime itself (see 2.[6] below).
2.3 Crypto asset or financial product?
A crypto asset is defined in the paper as:
“a digital representation of value or contractual rights that can be transferred, stored or traded electronically, and whose ownership is either determined or otherwise substantially affected by a cryptographic proof.”
Treasury is seeking feedback on this definition, including whether it should be applied across all Australian regulatory frameworks, including the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (“AML/CTF Act”), tax and other regulation. A consistent definition across regulatory frameworks would be clearly desirable except to the extent the context requires otherwise.
Treasury is also seeking feedback as to how activities involving crypto assets which are financial products, may be regulated, including ways to minimise regulatory duplication.
2.4 AML/CTF
The Consultation Paper proposes that AUSTRAC will remain the regulator of crypto assets for the purposes of Australia’s anti-money laundering and counter-terrorism financing (“AML/CTF”) regime. However, it notes that the requirement for digital currency exchanges to be ‘registered’ may be integrated with a new regulatory model which could fulfil the same purpose as current registration requirements.
2.5 Regulatory options
The Consultation Paper highlights risks posed by centralised CASSPrs providing services to retail investors and consumers. It proposes three options:
(a) CASSPr regulation
Under this option CASSPrs who facilitate the buying and selling of crypto assets, and custody of crypto assets would be subject to a new licensing regime. This regime would be separate from the Australian Financial Services Licensing (“AFSL”) requirements although many of the proposed obligations are similar to those which apply to AFSL holders.
These obligations would be graduated depending on the number and type of services offered by the CASSPr. This regime is intended to minimise the risks to consumers, provide regulatory certainty and support the AML/CTF regime.
ASIC would have oversight with powers to grant relief from some or all of the obligations.
(b) Corporations Act
Under this option, all crypto assets could be brought into the existing financial services regime by defining crypto assets as financial products under section 764A of the Corporations Act. The financial services (and markets) regime may be tailored to achieve the appropriate outcomes for crypto assets.
The Government (or the regulator) could be provided with powers to exempt or “carve out” particular crypto assets which do not warrant regulation under the financial services regime in a risk-based manner.
(c) Self regulation
Under this option, industry would develop a code of conduct for crypto asset services. This could be approved by a regulator and meet minimum regulatory policy goals, such as in respect of consumer protection and AML/CTF.
2.6 Custody obligations to safeguard private keys
In addition, the Consultation Paper proposes principles based obligations for CASSPrs who store or hold private keys on behalf of, or for consumers. These are similar to the requirements for a custodian. They include:
(a) that crypto assets must be segregated and held on trust for the consumer;
(b) that the CASSPr would need to meet organisational competence requirements, and have systems to meet its obligations including to receive and fulfil orders in relation to the crypto assets;
(c) capital requirements;
(d) obligations relating to cybersecurity and private key management; and
(e) processes for redress and compensation in the event of loss.
2.7 Token mapping
The Consultation Paper also seeks early views on how to categorise crypto assets. Treasury is seeking feedback on a non-exhaustive list of some of the types of crypto assets. This is likely to inform a token mapping exercise intended to be finalised by the end of the year. It is also seeking feedback regarding whether certain crypto assets “ought to be banned in Australia”.
3. Taxation
The Board of Taxation (Board) will undertake a broad review of taxation of crypto assets and their transactions in Australia. The Terms of Reference provide that the Board will:
(a) consider the current Australian taxation treatment of digital assets and transactions and emerging tax policy issues;
(b) consider the awareness of the taxation treatment by both retail and wholesale investors and those transacting in digital assets as part of their business;
(c) consider the characteristics and features of digital assets and transactions in the market, including the rapid evolution of technology supporting the broader digital asset ecosystem;
(d) analyse the taxation of digital assets and transactions in comparative jurisdictions and consider how international experience may inform the taxation of digital assets and transactions in Australia; and
(e) consider whether or not any changes to Australia’s taxation laws and/or their administration are warranted in the context of digital assets and transactions, both for retail and wholesale investors.
4. De-banking
The Council of Financial Regulators (“COFR”) is considering various policy options for addressing de-banking, including in the crypto asset sector. This follows recommendations from both the Final Report of the Senate Select Committee and the Payments System Report, which were endorsed by the Government. Although the terms of reference for this review are yet to be released, the COFR’s March Quarterly Report published on 30 March noted that the COFR agencies. The ACCC, AUSTRAC and the Department of Home Affairs are preparing options by June 2022 for the Government to consider.
5. Stablecoins
The COFR is also considering options for incorporating stablecoins into the proposed regulatory framework for stored value facilities (“SVFs”). The SVF framework was published by the COFR in November 2020 and is being implemented as part of the Government's reforms to the payments licensing framework announced in December 2021. APRA Chair Wayne Byres noted in a speech to the American Chamber of Commerce in Australia that this work is “a high priority issue”.
6. What’s next?
Responses to the Consultation Paper published by Treasury are due by 27 May 2022.
The Board of Taxation is due to report to the Government by the end of 2022 but has not set a date by which consultations will close.
More broadly in relation to crypto assets, APRA Chair Wayne Byres noted that APRA is “in the process of finalising a letter to regulated firms on how [APRA] expects them to manage their dealings with digital assets, including stablecoins and crypto-assets. The letter will not introduce new regulatory requirements.”
If you would like to discuss the latest consultations or have any questions around the current requirements, please contact a legal practitioner in the team at KWM.
