Cryptocurrency and digital asset platforms could soon be required to hold an Australian Financial Services Licence (AFSL) under a proposed legislative change being pursued by the Australian Government, with additional regulations to address the unique technology features of crypto exchange platforms.
The proposed regulations would, the Government said, leverage existing Australian financial services laws, and would require digital asset platforms that hold over a certain threshold of Australian assets ($1,500 for an individual; $5 million in aggregate) to obtain an AFSL and be regulated as licence holder.
The AFSL framework would apply to any person “carrying on a financial services business in Australia” in relation to a digit asset facility.
The Government said the extension of the regulatory framework aims to address “the significant risks and potential harms associated with digital asset platforms, while fostering innovation and safe usage of digital assets and distributed ledger technology”.
In addition to general obligations required of licensees – including requirements to maintain a dispute resolution system, uphold solvency and cash reserve obligations, keep and submit financial records, provide product disclosure statements to customers, and self-monitor misconduct – the Government has also proposed requiring digital asset platforms to follow other ‘specific obligations’.
Among these will include minimum standards for holding digital asset tokens, standards for custody software (including continuous, real-time monitoring and routine auditing of software systems that hold tokens), and standards when transacting in tokens.
The Government, which has put its proposed rule changes to a public consultation, noted that automated systems are commonplace in token marketplaces. As part of its consultation, it asked whether regulations could be encoded into software to ensure such automated systems remain compliant.
For a digital asset platform with an asset tokenisation function, this could mean a requirement to program systems to either blacklist sanctioned addresses, embed permissions, and incorporate time-constrained access, where appropriate. Additionally, this programming would enable the platform provider to respond to instances of token theft, court orders, and regulator notifications by freezing tokens, removing their linked platform entitlements, and relinking those platform entitlements to tokens controlled by the original owners, the court, or a regulator.
The Government said its proposed rule changes were inspired by similar, though discrete, crypto sector regulations in place within the EU, Canada, the UK and Singapore.
Citing recent high-profile collapses of the crypto exchanges, including FTX which affected around 50,000 Australian consumers, the Government said that extending AFSL obligations to digital asset platforms “will decrease the risk of crypto exchange collapses, protecting the assets of Australians who use these platforms”.
“It will increase scrutiny on exchanges to ensure their customers are well informed, and reduce the risks of consumers being impacted by scams involving crypto.”
The Government identified several factors typicalled related to the collapse of crypto businesses, including ineffective management practices, inadequate governance structures, poor operational resilience, instances of fraudulent activities, widespread conflicts of interest, and the significant loss of assets held on behalf of customers.
“The failures of digital asset platforms are symptomatic of unregulated asset holding intermediaries,” the Government said in its consultation briefing document. “Such risks are further amplified by the vertically integrated nature of digital asset platforms – where various functions, like trading and holding assets, are managed within a single organisational structure”.
“While the risks that led to these failures are the same risks mitigated by Australia’s financial services, digital asset platforms that do not deal in financial products are not subject to financial services laws.
“The Australian financial service laws are a time-tested and well-understood framework to mitigate risks involving businesses holding or utilising client assets.”
Peak industry body the Australia Banking Association (ABA) backed the Government’s proposed rule change.
“A rigorous licensing system for the crypto industry will mean greater oversight,” said ABA chief executive Anna Bligh.
“The changes will also help banks and customers ensure money is only transferred to reputable crypto operators that are subject to strict rules and regulator enforcement action.”
Feedback on the proposal paper closes on 1 December, with further consultation to take place next year on the draft legislation.
