The plan involves subjecting crypto exchanges and digital asset platforms to existing financial service laws and introducing licensing requirements for platform operators. This article delves into the details of Australia’s crypto regulation proposal, its implications, and the broader context of the evolving digital asset landscape and the implications for various digital assets, including the increasingly popular Non-Fungible Tokens (NFTs) and Decentralised Finance protocols.

Current Scenario

Australia’s financial service laws currently apply to digital assets classified as financial products. This categorization subjects businesses providing financial services related to digital assets to the Australian Financial Services License (AFSL) framework. However, it’s important to note that NFTs are not recognized as specific legal assets or financial products under current Australian law.

The Digital Assets (Market Regulation) Bill 2023 (Cth) has been proposed to regulate crypto asset providers, but the Senate Committee reviewing the Bill has recommended further consultation rather than immediate passage.

Australia’s Proposed Regulatory Regime for Digital Asset Platforms

On October 16, 2023, the Australian Federal Treasury released a public consultation paper outlining a proposed regulatory regime for digital asset platforms. This encompasses crypto exchanges, brokers, market makers, and introduces a new financial product called a ‘digital asset facility’ for specific asset holding arrangements.

Acknowledging that many digital assets fall outside the realm of financial products, the consultation paper proposes a ‘financialised functions’ regime. This regime aims to cover activities that, while not involving financial products, still need to adhere to additional minimum standards. One notable aspect is the proposal for digital asset platforms with a funding tokenization function to ensure fair distribution of facility tokens to backers in the form of NFTs or fungible tokens.

NFTs and Regulatory Considerations

While many NFTs may not involve financial or investment functions, the regulatory treatment depends on the nature of the NFT and its underlying rights. Australia’s regulatory stance emphasizes that the legal status of NFTs is determined by their representation and attached rights, not merely their name or marketing. Entities involved in NFTs, including issuers, intermediaries, exchanges, and trading platforms, are urged to consider all rights and features of the cryptocurrency. If an NFT project is deemed a financial product or security under the Corporations Act 2001 (Cth), significant regulatory consequences may follow.

Definition of Financial Product and Security

Australia’s legal approach defines a financial product broadly, encompassing facilities that involve making a financial investment, managing financial risk, or making non-cash payments. Crypto assets like NFTs can be classified as financial products if they fall under securities, interests in a managed investment scheme (MIS), or derivatives.

A security, according to the Corporations Act, includes shares, debentures, and legal or equitable rights in them. An NFT may be considered a security if it represents such rights.

Managed Investment Scheme (MIS)

MIS, a collective investment vehicle, is defined under the Corporations Act. It involves contributors pooling money or assets for financial benefits. If an NFT project resembles an MIS, it may trigger regulatory obligations.

Financial Services Business and AFSL

Entities carrying on a financial services business in Australia must hold an AFSL or have an exemption. NFT projects that constitute financial products may fall under the AFSL regime, subjecting them to disclosure obligations and regulatory compliance.

DeFi

Chapter seven of the Corporations Act gives mixed messages – a DeFi protocol can be a managed investment scheme, an equity or a derivative. Currently, there are no specific laws or regulations tailored for the utilization of distributed ledger technology (DLT) or blockchain. Australian regulatory frameworks are designed to be technology-neutral, requiring individuals and entities to assess the nature of the services offered to determine the applicable laws and regulations.

ASIC’s Information Sheet 219 presents an evaluation tool to assist businesses in determining whether an Australian Financial Services Licence (AFSL) is necessary for blockchain-based services. This tool considers various factors, including the blockchain platform used, its operational aspects, legal implications, data utilization, and impacts on stakeholders.

Several existing laws in Australia may be relevant to Decentralized Finance (DeFi), including the Corporations Act 2001 (Cth), the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act), the National Consumer Credit Protection Act 2009 (Cth), the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), and the Australian Consumer Law.

According to the Corporations Act, a business engaging in or issuing a financial product must hold an AFSL. The same requirement applies to individuals “arranging” for others to deal in or issue financial products. Challenges arise in the context of DeFi, where protocols operate autonomously and may not neatly align with the existing regulatory framework.

The legal status of DeFi protocols remains uncertain, and it is unclear how regulators might seek to establish liability or accountability for decentralized autonomous organizations (DAOs) and their participants. The unique characteristics of DeFi, particularly its decentralized and autonomous nature, pose challenges in fitting within traditional regulatory structures.

ASIC’s Evolving Approach

The Australian Securities and Investments Commission (ASIC) emphasizes a technology-neutral approach, placing responsibility on entities to justify whether their NFT involves a regulated financial product. ASIC’s Information Sheet 225 “Crypto-assets” outlines the need for entities to consider all aspects of their proposed cryptocurrency. Australia’s proactive approach to crypto regulation is highlighted by its recent proposal to subject platforms holding over $1,500 of an individual’s assets or $5 million in aggregate to existing financial service laws. The move aims to mitigate risks associated with online platforms, as highlighted by the collapses of digital asset platforms globally, resulting in the loss of assets for Australians.

Notably, about a quarter of Australians own some form of cryptocurrency, with online platforms holding billions of dollars in assets. The proposed reforms seek to enhance operational standards and oversight to reduce the risk of platform collapses. Treasurer Chalmers emphasizes the government’s commitment to protecting consumers while fostering innovation in the rapidly evolving crypto space. The proposed rules draw inspiration from frameworks used in the UK, Canada, and Singapore. The proposed regulations were open for public feedback until December 1, 2023. The consultation period provides stakeholders, industry players, and the public an opportunity to share insights and concerns. A draft legislation covering licensing and custody rules for crypto asset providers is expected to be released in 2024, with a 12-month transition period for exchanges to comply with the new regulations. Moreover, The Reserve Bank of Australia and Treasury plan to release a joint report in mid-2024, providing a comprehensive overview of their research into a central bank digital currency and outlining a roadmap for future endeavors.

Conclusion

Australia’s crypto regulation proposal marks a significant step toward creating a secure and transparent environment for digital assets. As the nation navigates the evolving landscape of cryptocurrencies, the proposed regulations aim to strike a balance between consumer protection and fostering innovation. The ongoing consultation period allows for a collaborative effort in shaping a regulatory framework that addresses the unique challenges posed by the crypto industry. As Australia paves the way for crypto regulation, the global community watches closely, recognizing the importance of creating a sustainable and secure digital asset ecosystem. Stakeholders are encouraged to stay abreast of regulatory developments to navigate the nuanced regulatory framework effectively.  As the regulatory landscape unfolds, rest assured that our team remains your steadfast ally, combining legal expertise with a commitment to excellence and stands ready to provide comprehensive guidance, ensuring that your business aligns seamlessly with the latest regulatory standards.

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