ASIC consults on updated digital asset guidance: More than a token gesture

Summary

ASIC has released Consultation Paper CP 381: Updates to INFO 225: Digital assets: Financial products and services (CP 381) seeking feedback on its proposed updated version of Information Sheet INFO 225: Digital assets: Financial products and services (Draft INFO 225) and proposed approach for the industry, including its temporary no-action position.

The much anticipated update to the existing information sheet is designed to account for the evolution in digital asset markets with new products and services being offered, and provide greater clarity about the current law. To do so, ASIC is seeking feedback on:

• the 13 hypothetical worked examples for digital assets which are and are not likely to be financial products, and other relevant facilities;
• whether other examples, such as 'wrapped tokens' or non-interest bearing 'stablecoins', should be included;
• the application of regulatory obligations and what aspects of ASIC's guidance require tailoring, as well as its good practice guidance regarding custody; and
• the proposed no action position for digital asset businesses that are in the process of applying for or applying to vary a AFS licence, market licence or CS facility licence.

As noted by ASIC Commissioner Alan Kirkland, "Australia's financial services regulatory regime is broad and technology neutral. Many digital assets and related products are financial products under the current law".

These proposals are intended to strike a balance between protecting consumers, and promoting integrity in markets for digital assets that are financial products whilst being pragmatic and ensuring digital asset service providers are appropriately regulated under the existing financial services regime.

Feedback is due to ASIC by 28 February 2025 so now is the time to engage with the proposals. If you would like to understand what this might mean for your business, we would be happy to assist with any aspect of this.

Further details regarding INFO 225, including its history, the proposed guidance and proposed no action position are set out below.

Background to INFO 225

First published in October 2017, and most recently reissued in October 2021, INFO 225 provides ASIC's view regarding when Australia's financial services laws apply to crypto assets. Since its first iteration, INFO 225 has set out that crypto assets may be financial products, including interests in managed investment schemes, derivatives, non-cash payment facilities, or shares. Accordingly, those providing financial services in relation to those products are likely to be required to meet the relevant obligations under Australia's financial services laws.

It also follows action by ASIC regarding breaches of financial services laws by some entities in the digital asset industry, including against Finder Wallet, and Block Earner.

What is new in Draft INFO 225?

ASIC's Draft INFO 225 provide further guidance regarding how the current law applies to digital assets and associated facilities. Draft INFO 225 includes, amongst other things:

• 13 hypothetical worked examples regarding how the current financial product definitions apply to digital assets and related products;
• additional guidance on a facility for making a financial investment (s763B of the Corporations Act); 
• further discussion of the typical financial services ASIC expects an entity would apply for when applying for or applying to vary an Australian financial services licence (AFSL);
• good practice guidance for providers of custodial and depository services; 
• a section to address applications for relief and granting no-action letters; and
• consideration of the design and distribution obligations.

What do I need to know?

The proposals in CP 381 and information in Draft INFO 225 will be relevant to all those who engage with digital assets and distributed ledger technology, including those who are looking to experiment with tokenised forms of traditional financial products.

We set out some of the aspects in CP 381 and Draft INFO 225 below.

INFO 225 does not change the law. 

Rather it is a statement to assist in understanding how Australia's existing financial services laws apply to digital assets. In particular CP381 provides that the existing regulatory regime is principles-based and provides sufficient flexibility to regulate digital assets that are financial products.

ASIC "considers that many digital assets … are financial products". 

To assist in considering whether a digital asset is a financial product, CP 381 provides the following general principles:

• some digital asset products may meet the definition of more than one financial product; 
• even where a digital asset, when sold by itself, may not be a financial product, when it is bundled together with one or more other products or services, the overall arrangement may amount to a financial product; and
• when analysing whether a financial product exists, it is important to consider not just the digital asset token, but all of the rights, benefits, expectations and product features inherent to, attaching to, and being offered together with the token.

In general, tokenised financial products are treated consistently with the non-tokenised version of the financial product. 

CP 381 provides the view that, generally, entities that have an AFSL will be authorised to undertake those financial services in relation to both traditional and digital asset versions of the financial products. Feedback is sought regarding whether the same regulatory obligations should apply to digital asset and traditional financial products of the same category and what aspects of ASIC's guidance, if any, require tailoring for digital assets that are financial products particularly in light of the International Organization of Securities Commissions (IOSCO)’s recommendations that crypto and digital assets apply a principle of ‘same activity, same risk, same regulation/regulatory outcome’.

The 13 hypothetical worked examples include both assets which are and are not likely to be financial products, and other facilities. 

This includes exchange tokens, native token staking services, in-game non-fungible tokens (NFTs), yield bearing stablecoins, gold asset referenced tokens, membership NFTs, tokens representing a claim for pre-paid services, fundraising for a new blockchain, meme coins, tokenised concert tickets, tokenised securities, contracts for difference over digital assets, and digital asset wallets. CP 381 is also seeking feedback regarding whether other examples, such as 'wrapped tokens' or non-interest bearing 'stablecoins', should be included. 

Proposals to reform the law for digital asset platforms and payment stablecoins remain. 

Feedback will help inform exposure draft legislation for the Government’s ‘digital asset platform’ and ‘payment stablecoin’ reforms, which will be released in 2025, according to the media release from the Treasurer, Dr Jim Chalmers and Assistant Treasurer and Minister for Financial Services, Stephen Jones. These reforms will create a licencing regime for businesses offering customers digital assets and holding them for Australians, and clarify the appropriate regulatory framework for stablecoins. 

This follows Treasury's consultation Regulating digital asset platforms - Proposal Paper in October 2023 (DAP Proposal Paper) and the proposed reforms to modernise Australia's payments systems which include proposals to regulate payment stablecoins (see Payments System Modernisation: Regulation of payment service providers Consultation Paper December 2023). 

The revised guidance will coexist with any new laws. 

The regulatory framework for entities providing access to, and holding, digital assets, or other assets proposed in the DAP Proposal Paper was not intended to displace existing financial services laws. Accordingly, clarifying what constitutes a financial product under existing financial services laws remains "essential". However law reforms regarding payment stablecoins may impact the final revised version of Draft INFO 225. For details regarding the proposed licensing regime for payment services providers, see our alert here.

In addition, other legislative reforms, such as the new AML/CTF reforms should also be considered.

Digital assets raise some unique custody issues. 

Draft INFO 225 provides further guidance on good practice guidance on custody of digital assets. CP 381 is seeking feedback regarding this approach, including whether omnibus accounts supported by record keeping requirements should be extended to any digital asset that is a financial product. 

Conflicts of interest may be more acute with digital asset firms because of the structure of these businesses.

Additional conflicts of interest may apply when an entity is a participant in, or an operator of, a licenced financial market.

A market licence or CS facility licence may be required. 

Draft INFO 225 provides that where a digital asset is a financial product, then any platform that enables people to make or accept offers to buy (or be issued) or sell these digital assets may involve operating a financial market. Depending on how transactions are cleared and/or settled a person may also be operating a CS facility. ASIC expresses the view that the legislative regime for financial markets and CS facilities is sufficiently flexible to cover markets relating to digital assets that are financial products. ASIC states that it has "high expectations of entities operating a market and CS facilities with retail client participation" that it will consider applications on a case-by-case basis, as well as whether further guidance is needed.

Proposed no action position

ASIC is seeking feedback on a proposed 'no action' position for those who are actively and in good faith applying for, or applying to vary, a AFS licence, market licence or CS facility licence. This recognises that people involved with digital assets and related services will need time to comply with the law. 

The proposal is as follows:

It goes without saying that the adoption of a no-action position by ASIC does not impact the position as between the service provider and its customers or counterparties. Nor does it impact the requirement to comply with other legal and regulatory obligations.

Next Steps

ASIC is seeking feedback on its consultation paper by 5pm on 28 February 2025 with the revised INFO 225 to be published in the second quarter of 2025.

For those undertaking activities relating to digital assets, including tokenised financial products, we recommend considering both CP 381 and INFO 225 in full. In particular, for those interested in tokenisation of traditional financial products, engaging with the consultation will be key to the future of those initiatives. Beyond digital assets, CP 381 and Draft INFO 225 provide interesting guidance regarding the flexibility of Australia's financial regulatory regime.

For those in the digital asset industry who do not have licences or may need to vary licences, now is the time to engage with the regulatory process. This includes considering the nature of digital assets and other facilities you make available, what licences may be required, and how you can comply with obligations imposed under those licences. Where relevant, you should also consider if you may be able to take advantage of the no-action position.

If you would like to discuss what this means for your business, our team would be delighted to speak with you.