ASIC

Some questions remain with Canberra’s uniquely Australian approach to digital asset reform, says Rahul Advani.

 The move to reform digital assets in Australia is akin to Vegemite for foreigners – polarising and may simply require a bit of time to become palatable.

Since the issue of a regulatory framework for digital assets was first raised in 2021, efforts have culminated in the form of Treasury’s proposal paper on regulating digital asset platforms released at the end of 2023 with the expectation of an Exposure Draft to be released later this year.

Treasury has proposed a uniquely Australian approach to regulating digital assets, utilising the existing Australian Financial Services License (AFSL) framework regulated by the Australian Securities and Investments Commission (ASIC). This will apply to any person “carrying on a financial services business in Australia” in relation to digital assets. However, custody of assets will be the nexus by which the regulatory perimeter is determined, with the asset holding arrangements used by digital asset platforms being regulated as a new “digital asset facility” – a new type of financial product. When combined with related services such as trading, it becomes a regulated “digital asset platform”.

Treasury’s proposal, therefore, nimbly sidesteps the debate prevalent in most jurisdictions around the globe, namely around what a token taxonomy should look like. Treasury essentially signals that it doesn’t matter; what matters is the activity undertaken. This can be for either a financial product or non-financial product, and the determinant of a financial product will be whether there is any asset holding. As a result, digital asset service providers that present similar risks to entities that operate in the traditional financial system will be regulated as such, ensuring consistent oversight and safeguards for consumers.

Under Treasury’s proposal, a simple exchange of a token (for another token or for fiat currency) where there is no asset holding involved will not be within the regulatory perimeter. However, if the same token is traded on a platform that offers custody and other entitlements, it will fall within the regulatory perimeter.

Without doubt, this construct is only possible due to the unique nature of the AFSL, which applies to a range of activities and services for financial products. While it’s an elegant solution to the challenge of regulating digital assets in Australia, the proposed framework raises some questions:

• Firstly, it is unclear whether an entity that already holds an AFSL for financial products will need a new AFSL for digital asset facilities. To truly be consistent, entities who already hold an AFSL should be able to use their existing licence for an equivalent function for digital asset facilities, and should also be able to update their existing licence to address any incremental requirements to provide digital asset facilities that aren’t already covered.
• Secondly, Treasury has proposed thresholds to allow platform providers to benefit from an exemption from holding an AFSL, presumably to support innovation in the early stages of a new service. However, such de minimis thresholds are a blunt tool, and may not help in practice. This is because platform providers could be exposed to cliff-edge effects, where they could be within scope for an AFSL with little or no time for preparation.Additionally, the thresholds proposed are not risk-sensitive, which could have the unintended consequence of inhibiting innovation and consumer demand by encouraging platform providers to remain under the thresholds so as not to be within scope for an AFSL. Instead, Treasury could consider exemption thresholds based on the amount of investment undertaken by the platform provider over a period of time. Firms will not continue to invest in a service unless the service is successful, and hence such a measure will be a better indicator of innovation and consumer demand, while also meeting the policy goal of consumer protection.
• Lastly, in order to allow an appropriate amount of time for industry participants to plan and make changes to ensure compliance and obtain a licence where required, Treasury has proposed a transition period of 12 months. While such a transition period is important, an exemption regime should also be considered, and such exemption should be valid until the AFSL application is approved, rejected, or withdrawn. An exemption regime will ensure minimal disruption to digital asset services while licence applications are being processed during the transition to a licensing regime.

While Treasury has proposed a strong reform agenda, the devil is in the details, and a few tweaks are required to make the proposed framework fit for purpose.

Moreover, it’s important to look at the proposed framework in the context of the broader digital asset reform agenda in Australia. This includes Treasury’s recent consultations, as of May this year, on payments system modernisation – defining payment functions and regulation of payment service providers – which proposes to regulate payment stablecoins as a type of stored value facility (SVF). There is a natural interaction with digital asset platforms, as secondary market operators for payments stablecoins will be regulated through the digital asset platform framework, rather than the SVF framework. However, a digital asset platform that automatically redeems any payment stablecoin deposited by customers would need to be licensed under the SVF framework.

Additionally, the Attorney-General’s Department is currently undertaking a review of Australia’s anti-money laundering and counter-terrorism financing regime, which expands the scope of regulated services concerning digital assets. Specifically, the proposals include adopting the terminology of ‘digital asset’ to replace the current term ‘digital currency’, potentially bringing a broader range of digital assets within the regime, and new designated services relating to digital assets, including businesses involving an exchange between digital assets, digital asset custody, and digital asset transfers.

It’s clear that digital asset reform is an important part of the policy agenda, with the recent Federal Budget allocating AUD 7.5 million over the next four years to update regulatory frameworks. Many will have their own views on the calibration of these reforms, but one thing is certain – the industry is anxiously awaiting the consultation conclusions and resulting Exposure Drafts to determine where Australia will measure up against the rest of the world on digital asset reform.