Cryptocurrency and digital assets are approaching something of a tipping point, finding increasing adoption from mainstream institutional players, including major banks, investment funds and other traditional finance players. Government and regulators have thus far declined to introduce any legislation specifically targeted at crypto-assets, instead relying on existing financial services legislation to regulate the space. As a consequence, the regulatory and legal status of the crypto-asset market remains in a state of relative uncertainty.
Regulators now appear to have crypto-assets firmly in their sights. ASIC has recently sought to clarify the existing law and guidance around crypto-assets, and further parliamentary reform appears likely in light of the recommendations in the Senate Select Committee Inquiry Report into Australia as a Technology and Financial Centre.
Current regulatory landscape
Entities participating in crypto-asset markets are currently subject to a suite of existing financial services and consumer legislation, including:
Corporations Act 2001 (Cth) (Corporations Act) and Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act): The financial services provisions of the Corporations Act and ASIC Act may apply to crypto-assets. For example, if the entity deals in crypto-assets that meet the definition of ‘financial product or service,’ or conducts activities meeting the definition of ‘financial market’ under the Corporations Act and/or ASIC Act.
Anti-Money Laundering and Counter-Terrorism Finance (AML/CTF) Act 2006 (Cth) (AML/CTF Act): Entities must comply with AML/CTF and ‘Know-your-customer’ (KYC) obligations if operating as a digital currency exchange provider exchanging fiat money for digital currency.
Consumer protection legislation: Entities providing crypto-asset products and services to retail consumers are subject to obligations under consumer protection legislation, including the Competition and Consumer Act 2010 (Cth) and the Australian Consumer Law (Cth).
Despite the apparently broad scope of the above legislation, there is not, as of yet, any legislation specifically directed towards the regulation of crypto-assets in Australia. This has led some industry participants to express concerns at the lack of clarity around the current laws as they apply to crypto-assets. Regulators and Government are facing increasing calls for industry-specific legislation to be implemented to ensure regulations governing the sector are fit for purpose.
ASIC has recently sought to clarify the existing laws around crypto-assets with its Information Sheet 225 (INFO 225). The information sheet provides guidance for crypto industry participants offering investors exposure to crypto assets or otherwise dealing in crypto-assets. The information sheet outlines the current obligations on participants (including token issuers, exchange operators and consumers) under the Corporations Act and the ASIC Act.
Key guidance outlined in INFO 225 includes:
Crypto-assets or ICOs are likely to be considered a ‘financial product’ if they meet the test for a managed investment scheme, security, derivative or non-cash payment facility.
Providers of certain crypto-asset services and products are required to hold an Australian Financial Services License (AFSL). These providers include issuers of crypto-assets, crypto-asset trading platforms, crypto-asset intermediaries (such as advisers and insurers), and crypto-asset payment and merchant service providers.
Crypto-asset participants must ensure they comply with all relevant legislation, including the Corporations Act, ASIC Act, and the Australian Consumer Law, and AML/CTF Act. ASIC places particular emphasis on the obligation to avoid engaging in misleading and deceptive conduct when offering crypto-assets or ICOs to consumers, as these obligations apply irrespective of whether an entity is required to hold an AFSL.
Any platform that enables consumers to buy (or be issued) or sell crypto-assets may involve the operation of a financial market requiring an Australian market licence. This means that overseas crypto-asset trading platforms cannot offer services to Australian clients without an appropriate market licence or exemption.
Overseas laws and regulations relating to crypto-assets and initial coin offerings (ICOs) should not be relied upon as having any application in Australia. Australia’s definition of ‘financial product’ is broader than equivalent terms in overseas jurisdictions, meaning that entities may be subject to ASIC’s jurisdiction irrespective of their overseas regulatory status.
When does a crypto-asset or ICO involve a ‘financial product’?
Broadly, the Corporations Act defines a ‘financial product’ as a facility through which, or through the acquisition of which, a person:
makes a financial investment;
manages financial risk; or
makes non-cash payments.
Specific products expressly defined as financial products include:
managed investment schemes;
non-cash payment (NCP) facilities.
A crypto-asset or ICO may involve a financial product if it involves a managed investment scheme, security, derivative or NCP facility, or otherwise meets the broad definition of a financial product.
The table below sets out the relevant tests for determining whether an asset meets the definition of each of these sub-groups of financial products, and the categories of crypto-assets to which they may apply:Financial productTestApplication to crypto-assetsManaged Investment Scheme A managed investment scheme involves a three-step test:
people contribute money or assets to obtain an interest in the scheme;
contributions are pooled or used in a common enterprise to produce financial benefits; and
contributors do not have day-to-day control over the scheme but may have certain rights.ICOs, decentralised finance (DeFi) protocols, and Decentralised Autonomous Organisations (DAOs) may be caught by this definition.
Notwithstanding the ‘decentralised’ label, many DeFi protocols and DAOs, on their face, meet each of the elements of the three-step test.Security A security can include:
shares in a body corporate or an unincorporated body. Shares are defined as a collection of rights relating to a body; or
interests in a managed investment scheme.A crypto-asset may be considered a ‘security’ where:
the crypto-asset is issued under an ICO created to fund a company (or an undertaking that looks like a company);
the rights attaching to the crypto-asset are similar to the rights attaching to share ownership (e.g. voting rights, rights to profits of the body); and
the crypto-asset falls within the above definition of a managed investment scheme.DerivativeA derivative is a financial product that ‘derives’ its value from another underlying asset or financial instrument. Examples include options, futures, and contracts for difference.As with traditional derivative products based on stocks and commodities, derivatives based on underlying crypto-assets are likely to be financial products.NCP FacilityAn NCP facility is any arrangement through which a person makes payments other than by the physical delivery of Australian or foreign currency.Crypto-assets are likely to be NCP facilities if the asset provides the holder with the right to use the asset to make a payment. This is a broad definition that is likely to cover most crypto-assets, subject to whether the asset is by any entity accepted as a form of payment.
What are the obligations on participants if a crypto-asset is a financial product?
Entities issuing or otherwise dealing in crypto-assets and ICOs falling within the definition of financial products may be subject to the extensive obligations under the Corporations Act and ASIC Act attaching to financial products. These include:
obtaining relevant licences, which may include an AFSL, Australian market licence (for crypto-asset trading platforms) or named scheme licence (for managed investment schemes);
preparing appropriate disclosure documents relating to ICOs, managed investment schemes or derivatives;
issuing Product Disclosure Statements for the relevant crypto-assets;
complying with the Design and Distribution obligations, including publishing Target Market Determinations;
prohibitions against misleading or deceptive conduct and unconscionable conduct;
otherwise complying with the general obligations on licence holders, e.g. to act efficiently, honestly, and fairly.
Additionally, irrespective of whether a crypto-asset is a financial product for the purpose of the Corporations Act, industry participants may be subject to:
AML/CTF regulations e.g. businesses exchanging digital currency for fiat currency through a digital currency exchange business may be engaged in a ‘designated AML/CTF Act and obliged to enrol with AUSTRAC, develop an AML/CTF program, and report both on a regular and situational basis where certain and suspicious transactions are detected.
prohibitions against misleading or deceptive conduct and unconscionable conduct under the Australian Consumer Law.
Senate Committee Report
Separately, the Senate Select Committee Inquiry Report into Australia as a Technology and Financial Centre delivered its report in October 2021 (Report). The Report made a number of recommendations with respect to regulating crypto and digital assets in Australia.
Key recommendations include:
that a consumer protection licensing regime be established in relation to digital currency exchange providers (Recommendation 1);
that a custody or depository regime be established specifically for digital assets (Recommendation 2)
that Treasury conduct a token mapping exercise to assist in the categorisation of digital asset tokens for the purpose of placing them within the existing regulatory framework (Recommendation 3);
that a new Decentralised Autonomous Organisation company structure be established in response to the growth of DeFi (Recommendation 4);
that AML/CTF, CGT, and taxation legislation and regulations are clarified and made consistent (Recommendations 5 – 7); and
that Treasury lead a policy review of the viability of a Central Bank Digital Currency (CBDC) in Australia consistent with other developed nations such as Singapore and China (Recommendation 8).
The Report notes that the current regulatory approach is not keeping pace with the rapid growth of digital assets and fintech more generally. The primary objective underlying the Committee’s recommendations is to ensure that Australia positions itself as a world leader in the burgeoning digital payment and technology space. The Committee aims to develop a fit-for-purpose regulatory framework to foster innovation and attract investment, while at the same time ensuring adequate investor protections are in place.
As with most overseas jurisdictions, a similar story is playing out in Australia. Governments and regulators are grappling with the rapidly evolving crypto industry and have not yet settled on an appropriate policy response.
The lack of any specific, fit-for-purpose crypto legislation means that the present uncertainty is likely to linger for some time to come. Australian crypto participants can nonetheless take some comfort from the recent Senate Inquiry Report and ASIC guidance. Australian regulators look set to embrace crypto and ensure that the eventual regulatory framework is an enabler, not an impediment to development.
We anticipate further clarity is on the horizon over the next 12 to 18 months as the Senate Committee implements its recommendations.
Philip O’Brien Stephanie Rawlinson Alistair MacLennan