Crypto regulation in Australia: where are we now and where are we headed?

By John Bassilios and Max Ding

Across the world, many jurisdictions have begun to consider or implement frameworks for regulating the crypto ecosystem. Some jurisdictions have taken the approach of repurposing or modernising existing legislation, whereas others are proposing crypto-specific laws.

The Australian Government’s policy toward crypto regulation falls toward the former camp. However, it also recognises that some of the unique challenges of crypto may call for bespoke laws.

This article outlines Australia’s current approach to regulating crypto, as well as the Government’s proposed approach to reforming the existing framework. In the first part, we discuss how Australia’s current financial services and anti-money laundering laws are used to regulate crypto products. Next, we discuss where Australia’s regulatory framework is headed.

Australia’s regulatory regime for crypto-related activities

There are a range of laws in Australia which regulate crypto-related activities. Chief among them are Australia’s financial services, and anti-money laundering and counter terrorism financing (AML/CTF) regimes, respectively. Australia’s financial services regime regulates activities relating to financial products such as securities, derivatives, payment services and investment products. Whereas the AML/CTF regime aims to prevent money laundering and the financing of terrorism by imposing requirements on certain service providers (referred to as ‘designated services’).

Australia’s financial services regime

A key concept in determining whether an activity falls within the ambit of financial services regulations, is whether the object of the activity is a ‘financial product’. Under the Corporations Act 2001 (Cth), a ‘financial product’ is a ‘facility’ through which a person ‘makes a financial investment’, ‘manages financial risk’, or ‘makes non-cash payments’. ‘Facility’ is a broad term which includes intangible property, a term of a contract, agreement, understanding, or arrangement through which a person performs a function.

Australia’s financial services regulator, the Australian Securities and Investments Commission (ASIC), has published guidance on whether certain crypto-related activity involves a financial product and, therefore falls within ASIC’s regulatory ambit.

ASIC’s guidance suggests that in determining whether a crypto product is a financial product, they will consider all the rights and features associated with the crypto product in question, which is a question of fact turning on the circumstances of each case. This consideration is one of substance over form, as it is less important to consider how the crypto product is labelled or marketed, and more important to consider the substantive rights and features the crypto product offers.

Despite ASIC’s guidance, there remains substantial uncertainty among stakeholders in the Australian crypto space as to how the regime would apply to certain other crypto products that are not tied to what would be considered traditional financial products. This has led to greater calls for clarity and reform in Australia.

Even if a crypto token is not deemed a financial product, certain activities related to crypto activities may still be regulated under Australian’s consumer protection laws. For example, ASIC has suggested the use of marketing and social media to inflate the true level of interest in a crypto product or wash selling (the practice of buying and selling crypto assets to artificially increase the price), are examples of activities that constitute misleading or deceptive conduct which contravene Australian law.

Australia’s AML/CTF regime

Australia’s AML/CTF crypto regime seeks to prevent money laundering and terrorist financing activities involving crypto tokens by imposing obligations on digital currency exchange businesses that provide fiat-crypto on/off ramping.

These obligations include registering with Australia’s AML/CTF regulator, the Australian Transaction Reports and Analysis Centre (AUSTRAC), performing know your customer and due diligence procedures to verify a customer’s identity, reporting to AUSTRAC on certain matters, keeping records, and having systems and controls in place to mitigate and manage money laundering and terrorist financing risks.

Proposed reforms to crypto regulation in Australia

Proposed crypto reforms to Australia’s financial services regime

The Australian Treasury has engaged in an exercise called Token Mapping to provide greater clarity to stakeholders on how, and the extent to which, the current financial services regime applies to crypto products.

As part of the exercise, the Treasury has proposed that the test for assessing whether crypto products are financial products should be the same as that which is used for traditional financial products.

This involves determining whether the crypto product is a facility through which certain financial functions can be performed such as, making financial investment, managing financial risk, or making non-cash payments, which is in line with ASIC’s guidance.

Further, Treasury has proposed the following definitions.

• Tokens – physical or digital units of information that have a role in a token system.
• Token system – a collection of steps involved in performing, or anything designed to ensure or facilitate, a function.
• Function – any benefit ensured or facilitated by the token system to the token holder.

Applying these definitions, the test to determine whether a crypto product is a financial product may be restated as follows.

• Is the token system a facility?
• If so, is the token system one through which a person does any of the general financial functions (ie makes a financial investment, manages financial risk, or makes non-cash payments)?

In addition, the Treasury identifies two types of token systems: intermediated token systems, and public token systems. Intermediated token systems involve intermediaries or agents that perform functions pursuant to certain promises or other arrangements. Whereas public token systems involve functions that are performed by decentralised crypto networks in the absence of promises, intermediaries, and agents.

An example of an intermediated token system is an exchange where a customer can transfer cryptocurrencies or fiat money to a service provider which credits the consumer’s crypto wallet. Another is a crypto token which gives the token holder rights to access an event or subscriptions, intellectual property, or reward programs offered by a third party.

In contrast, public token systems encompass crypto tokens that are created as part of a consensus mechanism on public crypto networks, where the tokens are created by the network itself (as opposed to an intermediary or agent). It also includes smart contracts (code) that are created for the purpose of enabling parties unknown to other to enter into commercial transactions without an intermediary.

Although the Treasury has not proposed specific regulations for public token systems, it does recognise that the current financial services regime is inadequate to address the unique challenges posed by these systems. Public token systems are therefore fertile ground for future regulatory reform in Australia.

The Australian Government will soon begin consultation to revise regulations pertaining to the licensing and custody of crypto assets, particularly for crypto products which fall outside the financial services regime. It is anticipated that the new regulations will take the form of bespoke obligations and operational standards for crypto service providers to ensure they adequately safekeep assets for customers. It is also expected that ASIC will enhance its focus on crypto products by bringing enforcement actions where appropriate, and increasing the size of its crypto team.

Proposed crypto reforms to Australia’s AML/CTF regime

The Government plans to bolster the AML/CFT regime in relation to digital currency service providers. In particular, the Australian Government may expand the designated activities that will be subject to AML/CTF obligations to 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.

Moreover, the Government may require digital currency exchanges registered in Australia to comply with the travel rule, as prescribed by the Financial Action Task Force (FATF). Currently, the travel rule only applies to traditional financial institutions. Under the travel rule, entities are required to obtain and share payer and payee information alongside a transfer of value as it is transmitted from one entity to another. Under FATF’s standards, the travel rule applies to fiat-crypto on/off ramping, the transfer of digital currency, and the exchange between one or more forms of digital currency.

This article was first published in The International Journal of Blockchain Law, Volume VI. The full text of journal is available on our Blockchain practice group page and all volumes can be found on the Global Blockchain Business Council website.