Following its commitment to stipulate a regulatory framework for the crypto-asset sector, Australia’s Treasury Department has published a new consultation on the matter.
Australia’s government, led by the centre-right Liberal Party, has given market participants until May 27 to offer their opinions on its plans to regulate the crypto sector.
“We want to encourage innovation in crypto-assets, innovation creates jobs and growth,” said Jane Hume, digital economy minister, during a keynote address to the country’s Blockchain Week.
There are many innovative use cases for crypto-assets, many of which are not far away from becoming mainstream, she suggested, listing examples that varied from payments to non-fungible tokens.
Hume also played down the prospect of the government being heavy-handed in its approach during this speech, which coincided with the publishing of the consultation. “The private sector should lead. Governments should avoid undue restrictions."
In a statement on its consultation webpage, the government said: “We seek feedback on the proposals and options outlined in this consultation paper to support minimum standards of conduct by crypto-asset secondary service providers and safeguards for consumers.”
Josh Frydenberg, the country’s finance minister, committed the government in December to completing a consultation on the establishment of a licensing framework for digital currency exchanges to provide greater confidence in the trading of crypto-assets.
The prospect of a regulatory framework is welcoming, said Jason Allen, a partner at Stirling and Rose, who works closely with the crypto industry. "Senator Hume’s announcement of a market licence for crypto exchanges was the most lauded note in her speech."
Yet, the prospect of lax regulation, which was also hinted at by Hume in her speech, is "less appealing".
"Senator Hume spoke of a strong hands-off approach to government involvement in frontier economies, but her tone was somewhat out of step with many in the industry itself," Allen said said, pointing out that demand by the crypto market for a laissez-faire approach is not the message from either clients nor respected industry participants.
"Our clients are saying that they are underregulated or require additional clarity in respect of how the goods and services they provide are regulated."
Commenting on Australia's work so far, he continued: "As I read the mood from industry, the Australian government has been moving in the right direction and there is a balance to be found between government developing a position on the industry in advance of versus in response to market developments."
With initiatives such as the Bragg Report, a cross-party report that recommended how Australia should regulate crypto, the government is not at the very vanguard but it is towards the front of the pack, said Allen. "I think that is appropriate for a regional player of our profile. The challenge now will be to maintain the momentum and ensure that we remain a leading jurisdiction for responsible crypto-asset businesses with robust consumer and financial system protection."
Australian crypto engagement
According to the consultation paper, more than 800,000 Australian taxpayers have transacted in digital assets in the last three years, with a 63 percent increase in 2021 compared with 2020.
In December 2021, the Australian crypto exchange Independent Reserve found that more than 28 percent of residents in the country that were surveyed own crypto-assets.
“This surge in retail consumer exposure to crypto-assets has led to calls, including from some service providers, for additional regulation in Australia,” the government said. “Regulation would support consumer confidence and trust in the crypto-asset ecosystem and provide regulatory certainty to support crypto businesses’ investment decisions.”
Outlining the framework, the consultation states that how crypto-assets are regulated should be considered in light of any potential risks, or lack thereof.
“In particular, crypto-assets are distinct in character from financial products and are affected by different market dynamics, with features that create different risks and market failures.”
Of the suggestions made in the paper, the government has called for a terminology change that would introduce the term "Crypto Asset Secondary Service Provider (CASSPr)" as opposed to digital currency exchange.
Should the government go through with this plan, then CASSPrs would define any natural or legal person who, as a business, conducts one or more of the following activities or operations for or on behalf of another natural or legal person:
- Exchange between crypto-assets and fiat currencies.
- Exchange between one or more forms of crypto-assets.
- Transfer of crypto-assets.
- Safekeeping and/or administration of virtual assets or instruments enabling control over crypto-assets.
- Participation in and provision of financial services related to an issuer’s offer and/or sale of a crypto-asset.
The paper proposes to regulate CASSPrs who: provide retail consumers access to non-financial product crypto-assets; provide safekeeping, custody, or storage of all crypto-assets on behalf of a consumer; and are captured by the Financial Action Task Force's definition of a virtual asset service provider for anti-money laundering and counter-terrorist financing (AML/CTF) reasons.
Meanwhile, it suggests policy objectives to underpin the licensing regime for CASSPrs, including minimising the risks to consumers from the operational, custodial and financial risks facing the use of CASSPrs.
This will be achieved through mandating minimum standards of conduct for business operations and for dealing with retail consumers to act as policy guardrails.
The licensing regime will also support the AML/CTF regime and protect consumers who are engaged in the sector from the harms arising from criminals and their associates owning or controlling CASSPrs, while also providing regulatory certainty about the policy treatment of crypto-assets and CASSPrs, and providing a signal to consumers to differentiate between high quality, operationally sound businesses, and those who are not.
In addition to this, the government has opted to remain with the Australian Securities and Investments Commission (ASIC) definition of a crypto-asset, which is: “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.”
It is proposed that one definition of crypto-assets would be applied across all Australian regulatory frameworks.
This definition will capture all possible crypto-assets that may be subject to the AML/CTF, tax, financial and other regulations in Australia.
"The consultation ticks many of the right boxes," said Allen.
However, there are some issues with the proposed principles, scope and policy objectives of the new regime. "My assessment is they lack understanding of the on-the-ground nuance."
For example, on risk-based regulation. "The consultation paper makes a worrying assumption that 'crypto-assets are distinct in character from financial products and are affected by different market dynamics, with features that create different risks and market failures.
"This pre-supposes a clear and mutually exclusive definition of 'financial products' and 'crypto-assets' that may not yet exist in Australian law or at all," he cautioned.
In terms of scope, Allen was more positive, pointing out that it bears noting that the consultation focuses on secondary service providers, including not only exchanges but brokers, dealers and custody businesses, under the proposed terminology of CASSPr.
"This broader net is a positive development. The focus, however, remains squarely on centralised service providers and leaves the burgeoning field of decentralised finance unaffected," he said.