The long awaited Treasury Consultation on digital currency exchange licensing has been released at the AFR Crypto Summit this morning and, as expected, rather than take an approach of using a bespoke fit-for-purpose digital currency regulation with a specialist regulator, such as the Dubai approach, Australia is proposing an approach closer to the Singapore model of licensing with feedback due by 1 December 2023 with a view to legislation to be brought to Parliament next year.
Stephen Jones, Assistant Treasurer said the changes are to be:
pragmatic, consumer centric and ... striking the right balance between innovation and consumer protection and system stability.... informing consumers to be protected to make the right decision while encouraging innovation.
The Tax Office estimates there are over 600,000 taxpayers who have invested in cryptocurrency.
Despite market volatility Australians remain heavily invested in these assets around the world...collapses are front and centre with around 50,000 investors tangled up with FTX.
Platforms have sold tokens with overinflated prices and the issuers have cut and run leaving investors holding losses.
We are concerned that exchanges are being used to facilitate scams, with scams increasing 33%... this is not to say crypto is criminal, but it is being used as a vector. Bank transfers remain the primary way for scammers to move money but there are protections and regulation to protect consumers.
All of this points to a need for regulation to protect consumers, that's important in and of itself, but ... providing certainty will drive innovation and it will drive investment.
The government sees extraordinary opportunity in the underlying technology ... it will be the tokenisation of real world assets which will drive real innovation in financial and product markets and, frankly, we want to encourage this... but for any of this consumers need to have trust.
We need a fit-for-purpose regulation which keeps pace with the rapidly evolving ecosystem and technology... we did consider applying Australian financial products laws to all crypto-assets or starting a new custom regulation from the ground up but we felt both approaches would lead to regulatory overreach and impact products.
Our approach is to regulate crypto-asset platforms to promote digital asset innovation, to provide clarity and to protect consumers.
We have taken input from the consultation from our token mapping exercise... it's not every token in every scenario that requires oversight... instead our focus will be on the entities that hold customers digital assets for Australians. Digital asset platforms will be required to hold an [AFSL]. The benefits of this approach is that it leverages Australia's existing licensing laws.
The comments from the Assistant Treasurer are positive and if proposed regulation strikes the right balance then the on-going 'brain drain' may be addressed and Australia might start to catch up with other jurisdictions.
Businesses which hold more than $1,500 from a customer in a wallet or $5,000,000 in aggregate will be required to be licensed. Any threshold of this nature is likely to meet with submissions around the variability of digital asset pricing which could cause the threshold to be breached swiftly if asset prices move.
In interview with James Eyres, the Assistant Treasurer said, in relation to the FTX collapse and minimum standards for exchanges and custody requirement:
You can imagine the sorts of things we have seen emerging...based on what's in the public domain the [FTX allegations] are the actions we are regulating against: conflicts of interest, acting in the best interests of customers, capital and custody rules, all of the things that you would expect to apply in a grown up business where someone is dealing in assets for customers.
And Mr Jones clarified in response to a question about tokens which "act and smell like a financial product":
From our token mapping exercise... it was quite clear to us that a whole bunch of things being developed and offered was financial products... derivatives obviously... as we looked at the most appropriate regulatory model, we wanted to ensure we didn't create a whole new stack of regulation which sat in addition to Australian financial services law, and build into where it currently does apply.
James Eyers asked if ASIC is sufficiently resourced and has the know-how to do the task:
Short answer is yes, we will have a 12 month lead in, we fully expect to see further consolidation going on in the industry... there will be high expectations from ASIC... [the ASIC Chair Joe Longo]... wants to get into this area... there's no lack of willingness from the regulator to get involved.
We will provide a full write-up on the paper shortly.
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