Crypto travel rule consultation among reforms to Australia’s AML/CTF regime for digital currency exchanges

Insights4 May 2023

Which crypto-specific amendments are proposed in the recently released consultation paper from the Attorney-General’s Department? We highlight what the digital currency sector needs to know.

By John Bassilios and Max Ding

Which crypto-specific amendments are proposed in the recently released consultation paper from the Attorney-General’s Department? The Department is seeking feedback on far-reaching changes to Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime, as we outlined in our previous article. Two of these changes are of particular importance for the digital currency sector. These involve the application of AML/CTF obligations to an expanded list of digital asset services, and the imposition of the ‘travel rule’ on digital currency service providers.

Expanding the application of AML/CTF obligations to new digital asset services

Under the current AML/CTF regime, digital currency service providers are subject to AML/CTF obligations when they engage in the exchange of digital currencies with fiat currencies, and vice versa, also known as fiat-crypto on/off ramping.

The Financial Action Task Force (FATF), an international body that sets standards for AML/CTF, has published guidance that requires countries to impose AML/CTF obligations on digital asset service providers engaging in activities beyond fiat-crypto on/off ramping. In order to reflect this guidance, the Department proposes to expand the activities under which a digital currency service provider will be subject to AML/CTF obligations in Australia. These activities include:

exchanges between one or more forms of digital currency;
transfers of digital currency on behalf of a customer;
safekeeping or administration of digital currency; and
provision of financial services related to an issuer’s offer and/or sale of digital currency (eg Initial Coin Offerings where startup companies sell investors a new digital token or cryptocurrency to raise money for projects).

The proposal would include imposing the generally applicable obligations under the AML/CTF regime onto entities engaging in those activities, being:

customer due diligence – to verify a customer’s identity before providing a designated service;
ongoing customer due diligence – throughout the course of the business relationship;
reporting – particularly of ‘suspicious matters’;
having an AML/CTF Program – with systems and controls to mitigate and manage ML/TF risks;
record keeping – for seven years, available to law enforcement; and
enrolment with AUSTRAC.

The Department notes that these reforms would be aligned with future reforms in the crypto-assets sector being undertaken by Treasury to avoid duplication. This would include reforms resulting from Treasury’s ‘Token Mapping’ consultation paper, which we wrote about earlier this year. The paper outlines Treasury’s broad approach to future crypto-assets reform.

Imposition of new travel rule obligations on digital asset services

The travel rule is a FATF standard that requires AML/CTF-regulated entities to obtain and share payer and payee information alongside a transfer of value as it is transmitted from one entity to another.

Under the current AML/CTF regime in Australia, the travel rule is implemented in a limited way, where only traditional financial institutions like banks are required to include payer information, and not payee information, for electronic transfers of fiat currency. The payer information also does not need to be verified.

The Department proposes to expand the operation of the travel rule in line with FATF standards, by requiring the verification of payer information and the inclusion of payee information, and imposing the travel rule on a broader range of regulated entities, including digital currency service providers.

In line with the proposed change to expand the application of all AML/CTF obligations to new digital asset services as outlined above, presumably the travel rule would require payee and payer information to be shared during fiat-crypto on/off ramping, the exchange between one or more forms of digital currency, as well as the transfer of digital currencies.

Do other changes in the consultation paper apply to digital asset services?

The Department’s consultation paper also includes wide-sweeping changes to the AML/CTF regime applying to AML/CTF-regulated entities generally. Broadly, these changes include simplification of the AML/CTF regime by:

streamlining AML/CTF Programs;
clarifying core customer due diligence obligations under the AML/CTF regime;
re-framing the ‘tipping-off’ regime to be outcomes-focused;
continuing flexible customer verification measures introduced during COVID-19; and
repealing the Financial Transaction Reports Act 1988 (Cth).

These changes would apply to digital asset service providers to the extent they are captured under the AML/CTF regime as reporting entities.

The Department also proposes expanding the AML/CTF regime to cover ‘tranche-two entities’ including lawyers, accountants, conveyancers, trust and company service providers, real estate agents and dealers in precious metals or precious stones.

You can read more about these changes in our previous article, ‘Tranche two: a massive leap – consultation timetable, finally (AML/CTF)’.

The Department’s full consultation paper, Modernising Australia’s anti-money laundering and counter-terrorism financing regime, is available online.

Submissions on the consultation paper close on 16 June 2023.

Second round consultation will commence in September 2023.

The Department will also conduct roundtable discussions with key stakeholders.

Please contact John Bassilios if you wish to make a submission and require assistance.