Playing Catchup – Australia’s Proposal to Regulate Digital Assets
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The Australian Treasury has been receiving submissions in response to its recently released “Regulating Digital Asset Platforms” proposal paper. The Australian Government proposes an expanded regulatory framework that will cover entities providing access to digital assets and holding them for Australians and Australian businesses – a new class of regulated entity to be known as a “digital asset platform”.
The objective of the reform is to address perceived consumer harms, while supporting innovation.
Structure of current vs proposed regulation
Currently, digital assets (e.g. cryptocurrency) and platforms are generally not subject to specific regulation in Australia. In particular, other than in the limited circumstance of where a digital asset is analogous to an existing recognised financial product (such as shares in a company), digital assets are not regulated by the Australian Financial Services regime under Chapter 7 of the Corporations Act 2001 (Cth).
The Government proposes that digital asset platforms and other intermediaries will be incorporated within the Australian Financial Services framework via the introduction of a new type of financial product – a “digital asset facility”. This approach is intended to be technology agnostic.
While the Government considered it would be possible to target digital asset activities by applying existing rules for the closest analogous activities, (e.g. the licensing framework for markets, and clearing and settlement), it was concluded that this could be detrimental to innovation.
Proposed framework
The proposal, in its current draft form, builds on the AFS regime, by requiring operators of digital asset platforms to hold an Australian Financial Services Licence (“AFSL”) and meet associated licence obligations, including:
- providing financial services efficiently, honestly and fairly;
- managing conflicts of interest;
- operating a dispute resolution system;
- meeting solvency / reserve requirements;
- conducting financial record keeping;
- producing product disclosure statements; and
- monitoring for market misconduct.
All arrangements involving digital asset facilities are also proposed to be required to be structured as ‘non-discretionary arrangements’ – i.e. disclosed and agreed written agreements between platform provider and customers via a facility contract which has certain minimum standards.
More limited obligations are also proposed to be imposed on other products offered by digital asset platforms – including activities such as trading, staking, tokenisation and fundraising. Accordingly, transactional functions performed by digital asset platforms in respect of ‘digital assets that are not financial products’, such as digital collectables which can be sold or traded, will need to meet these additional minimum standards. Those minimum standards will be specific to the particular product type, but for example could include requirements for disclosure documents and acting in an efficient, honest and fair manner.
‘Innovation and experimentation’ exemption
The proposal acknowledges that risk is correlated to the scale of assets held and therefore intends to implement a ‘low-value facility’ exemption, similar to the non-cash payment low value facility exemption, which would apply to digital asset facilities holding less than $1,500 per customer and less than $5 million in total. The exemption is intended to “allow for innovation and experimentation in the early stages of developing a novel service offering”.
Next steps
The consultation period closes on 1 December 2023, and draft legislation is expected to be proposed in 2024. If the new regime does pass the Parliament, it is expected to include a transitory period for industry participants to adjust their business processes to ensure compliance, and acquire an AFSL if required. The transitory period is currently proposed to be 12 months from the date the changes become law.
