Legal development

Australian regulation of crypto currency and digital assets

27 October 2021

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    On 20 October 2021, the Senate released its Select Committee on Australia as a Technology and Financial Centre report. The final report follows the release of its two interim reports in September 2020 and April 2021.

    The final report focusses on the regulation of cryptocurrencies and digital assets, issues relating to de-banking of Australian FinTechs and other companies, the policy for neobanks in Australia, and options to replace the Offshore Banking Unit.

    Regulatory and licensing framework to enable innovation

    The review undertaken, and the recommendations made, send a clear signal that there is a real opportunity for Australia to develop a regulatory and licensing framework for digital asset exchanges and providers that drive innovation and enhance competitiveness, and ensure that the application of various regulatory regimes (including AML and tax) are appropriate.

    The key recommendations include:

    1. Establishing a financial markets licensing regime for digital currency exchange providers and implementing rules for custody of such digital assets.
    2. Undertaking a token mapping exercise to classify the various types of crypto-asset token and other digital assets, which may result in such tokens being characterised as financial products and therefore subject to the Australian financial services licensing regime.

    The recommendations

    The recommendations in the Final Report (set out below) are extensive and bold. Only time will tell whether how many of those recommendations are implemented and, as always, the devil will be in the detail. Of course, what is clear is that the Government intends to regulate a digital asset market that has been largely unregulated.

     

    		Things to note
    Recommendation 1: Establish a market licensing regime for Digital Currency Exchanges (DCE), including capital adequacy, auditing and responsible person tests under the Treasury portfolio.
    • Aimed at enabling DCEs to demonstrate a high level of commitment to consumer protection and operational integrity, without imposing obligations that are so onerous as to drive local operators out of the market.
    • Requirements to be scaleable with the size of the business, so that newer operators are still able to function in accordance with licence requirements as they scale up their operations.
    Recommendation 2: Establish a custody or depository regime for digital assets with minimum standards under the Treasury portfolio.
    • Developing a custodial industry for digital assets may lead to significant economic opportunities if Australia can become a leading jurisdiction.
    • The bespoke regime will be aligned with the general principles for custody of traditional assets while dealing with the unique features of digital assets.
    Recommendation 3: The Australian Government, through Treasury and with input from other relevant regulators and experts, conduct a token mapping exercise to determine the best way to characterise the various types of digital asset tokens in Australia.
    • Few digital assets fall within the definition of a "financial product" for the purposes of the Australian financial services licensing regime.
    • The token mapping exercise should take account of the emerging approaches worldwide (which have been wide ranging) and lead to a clear typology of digital assets for the purposes of financial regulation in Australia, with the view of ensuring that it is flexible enough to account for changing technologies and is able to be refined as developments continue into the future.
    Recommendation 4: Establish a new Decentralised Autonomous Organisation (DAO) company structure.
    •  This new legal structure will give DAOs separate legal identity, with DAO token holders given limited liability.
    Recommendation 5: The Anti-Money Laundering and Counter-Terrorism Financing regulations be clarified to ensure they are fit for purpose, do not undermine innovation and give consideration to the driver of the Financial Action Task Force 'travel rule'.
    •  The FATF travel rule (FATF recommendation 16) requires businesses to collect and share the personal data of participants in a transaction.
    • It initially applied to banks only but in 2019 was extended to crypto companies.
    • As of 2020, the G20 and many other jurisdictions began to incorporate the travel rule into their local AML laws.
    Recommendation 6: The Capital Gains Tax (CGT) regime be amended so that digital asset transactions only create a CGT event when they genuinely result in a clearly definable capital gain or loss.
    • This is aimed to address the difficulties associated with the lack of clarity about how digital asset transactions should be assessed from a CGT perspective, which has been compounded for newer decentralised finance digital assets.
    Recommendation 7: Amend relevant legislation so that businesses undertaking digital asset 'mining' and related activities in Australia receive a company tax discount of 10 per cent if they source their own renewable energy for these activities.
    • This recommendation reflects the desire to ensure that such cryptocurrency mining and related activities (which are energy intensive) do not undermine Australia's net zero emissions obligations.
    Recommendation 8: The committee recommends that the Treasury lead a policy review of the viability of a retail Central Bank Digital Currency in Australia.
    • The proposal is that this is aligned with the Payments System Review recommendation that Treasury’s payments policy function be enhanced, including in relation to implementing a strategic plan for the payments ecosystem.
    Recommendation 9: The Australian Government, through the Council of Financial Regulators, enact the recommendation from the 2019 ACCC inquiry into the supply of foreign currency conversion services in Australia that a scheme to address the due diligence requirements of banks be put in place, and that this occur by June 2022.
    • The lack of banking options for digital assets companies in particular is not only hampering innovation and investment in Australia but is potentially creating a single point of failure for the industry (with only a small number of ADIs willing to bank these businesses) and also leading to ineffective competition and a concentration of risk.
    Recommendation 10: In order to increase certainty and transparency around de-banking, the Australian Government develop a clear process for businesses that have been de-banked. This should be anchored around the Australian Financial Complaints Authority which services licensed entities.
    • De-banking decisions have been somewhat opaque (including to tipping off restrictions under AML laws) which makes it difficult to determine the validity of debanking decisions and/or for customers to take corrective action.
    • De-banking may also push businesses and consumers to engage with less regulated or unregulated channels which are not subject to AML laws.
    Recommendation 11: In accordance with the findings of Mr Scott Farrell's recent Payments system review, common access requirements for the New Payments Platform should be developed by the Reserve Bank of Australia, in order to reduce the reliance of payments businesses on the major banks for the provision of banking services. 
    Recommendation 12: Establish a Global Markets Incentive to replace the Offshore Banking Unit regime by the end of 2022. 

     

    Author: Hong-Viet Nguyen, Partner.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.

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