Treasury comments on stakeholder feedback on updated cryptocurrency legislation

In the context of the scope of the DAF Bill, stakeholders were concerned that the legislation would:

• ‘overextend’ ASIC’s regulatory ambit for digital assets;

  • alter the legal position of commodity-like assets (such as Bitcoin) or collapse key distinctions between decentralised, issuer-less tokens, and issuer-created tokens; and

    • create a definition for a digital asset platform (DAP) that is too wide and conflicted with emerging international practice or Australian case law.

Following consideration of this feedback, the Government highlighted its position that the amended DAF Bill strikes the most appropriate balance of approach and that the framework does not regulate digital assets as an independent class or to ‘re-characterise commodity-like tokens as financial products’. 

Instead, the amended DAF Bill would only prescribe obligations for custody-based intermediaries who hold customer-owned assets. 

Stakeholder generally raised concern regarding:

• the clarity and breadth of the proposed definition of ‘digital token’;
• the potential circularity of the definition of ‘control’; and
• additional guidance to support interpretation of concept such as ‘control’ and ‘joint possession’.

Industry was concerned that the ‘digital token’ definition contained in the exposure draft was too wide and lacked sufficient clarity, with the consequence being that it may unintentionally cover non-commodity-like assets (for example, standard electronic records). Some stakeholders instead proposed that the DAF Bill adopt a definition of digital token that is aligned with international concepts, such as ‘virtual asset’ definition applied in anti-money laundering and counter-terrorism financing contexts. On this point, Treasury considered that such an approach would be unfeasible and create ‘substantial downstream complexity’ and would overlap with existing financial product concepts when eventually incorporating the definition into the Corporations Act.

Similarly, consultation illuminated that clearer parameters for the concepts of ‘control’ and ‘possession’ of digital tokens are needed, as these terms determine when an electronic record is considered a digital token and when an individual operates a DAP or tokenised custody platform (TCP). In the amended DAF Bill, the term ‘control’ has been updated to become ‘factual control’, and it now expressly excludes legal control of a digital token.

The definitions of DAPs and TCPs outlined in the DAF Bill were considered to be too narrow by stakeholders. Stakeholders also sought confirmation as to when a person becomes considered a ‘client’ of a TCP.

To address this, the amended DAF Bill has:

• included broader definitions for the DAP and TCP terms;
• clarified that the possession of a TCP token does not, by itself, create a client relationship; and
• clarified that the act of transferring a TCP token does not amount to the issuance of a new TCP.

Stakeholders requested more guidance about how the DAF Bill’s proposed DAP and TCP framework would interact with existing regimes for financial markets, clearing and settlement and managed investment schemes, and the proposed regime for stored-value facilities. In response: 

• the amended DAF Bill now provides drafting notes explaining how obligations apply where a facility meets more than one definition;
• the TCP definition has been amended to clarify that facilities for tokenising money are not TCPs, ensuring a clear boundary with stored-value facility reforms; and
• DAPs will only require a licence where they meet current statutory tests, noting a blanket exemption would undermine technology neutrality and heighten arbitrage risks.

Stakeholders flagged concerns in relation to ASIC’s new powers to prescribe minimum standards under the DAF Bill, emphasising that: 

• debanking standards may obstruct platform operators from meeting minimum client-money requirements; and
• given the digital asset market is global, platforms should not be obstructed from interacting with global liquidity.

In response to these concerns, the amended DAF Bill has added reasonable satisfaction thresholds, where ASIC must:

• be reasonably satisfied that its asset-holding standards allow operators to hold client money in ways that mitigate debanking risks; and
• be reasonably satisfied that minimum standards do not restrict platforms to liquidity sources only within the Australian jurisdiction.

Industry consultation suggested that the drafting of the ‘staking’ and ‘public digital token infrastructure’ exemptions in the DAF Bill needs to be more consistent with the nature of the arrangements and technology.

In response, the amended DAF Bill has provided the following updates:

• an adoption of a ‘custodial staking arrangement’ in the original ‘staking’ exemption;
• an extension of the ‘staking’ exemption to both DAPs and TCPs; and
• amendments to clarify that an interest in a ‘custodial staking arrangement’, an interest in ‘public digital token infrastructure’ (regardless of whether it is tokenised or not), and any rights, interests and benefits which may arise from undertaking consensus activities are not financial products and will not be considered the provision of financial services.

• Expert advisory panel: some stakeholders proposed creating a dedicated expert advisory panel to aid in interpretation of the framework. However, the Government concluded that this was outside the scope of the reforms.
• Ministerial powers: some stakeholders found that the Ministers powers of declaration could empower unjustified intervention.
• Transitional licensing arrangements: stakeholders, including ASIC, considered that the proposed six-month transition period for ASIC to assess and determine AFS licence applications may not be practically achievable. Importantly, the amended DAF Bill now permits a person who applies for an AFS licence (or a variation) covering DAPs or TCPs during the transition period to continue operating while ASIC reviews the application.