More than 800,000 Australians have transacted in digital assets over the past three years. However, due to regulatory uncertainty, growth in retail investment in digital assets has led to concerns that retail consumers are without adequate consumer protections.
Digital assets as a technology have immense potential (beyond highly volatile alternative currency) to revolutionise the way people do business, transact, and even engage in entertainment. Industry participants who understand this have been advocating for greater regulatory certainty in order to provide confidence and legitimacy to the sector, enabling further growth and innovation.
In response, the Senate Select Inquiry on Australia as a Financial and Technology Innovation Centre, led by Senator Andrew Bragg, recommended the establishment of a market licensing regime for digital currency exchanges and a custody regime for digital assets. Subsequently, the Federal Government agreed to consult on approaches to licensing digital currency exchanges and custody requirements for crypto assets.
The Treasury consultation paper identifies what it calls ‘Crypto asset secondary service providers’ (CASSPrs) covering a range of activities including :
“exchange between crypto assets and fiat currencies; exchange between one or more forms of crypto assets; transfer of crypto assets; safekeeping and/or administration of virtual assets or instruments enabling control over crypto assets; and participation in and provision of financial services related to an issuer’s offer and/or sale of a crypto asset.”
A separate licensing regime for CASSPrs is proposed, under which CASSPrs would have conduct, risk management and custody obligations, many of which mirror some but not all of the the current financial services regime.
A key policy question is whether CASSPrs should be subject to a separate licensing regime rather than the existing Australian Financial Services (AFS) licensing regime under Chapter 7 of the Corporations Act 2001. Central to this question is whether crypto assets can be properly classified as a ‘financial product’ under sections 763A, 764A and 765A of the Corporations Act 2001.
The key risk for policymakers is that if a CASSPr provides a service that can arguably, but not certainly, be characterised as a financial service, then under Treasury’s proposal they may have the option to be licensed solely under the CASSPr regime to avoid the consumer protection obligations that come under the AFS regime.
While, as noted above, Treasury’s proposed CASSPr licensing aims to mirror the AFS regime, it does not include significant consumer protections such as the provision of a Product Disclosure Statement (Part 7.9 of the Corporations Act 2001) and the Product Design and Distribution Obligations (Part 7.8A of the Corporations Act 2001) which require financial services licensees to determine an appropriate target market for their product, create a target market determination, and take reasonable steps to ensure that retail distribution of the product complies with the target market determination.
While only CASSPrs that provide a financial service should be subject to the AFS regime, determining the use case of a digital asset and whether it should be characterised as a financial product or not is itself a significant challenge. ASIC’s information sheet on crypto assets (INFO 225) provides high level considerations when seeking to determine whether a service provider offering crypto assets is offering a financial product. Treasury’s proposed token mapping exercise should help generate greater clarity on how various crypto assets are being used, by specifying classes of crypto assets.
The Financial Services Council is preparing a submission to Treasury. Treasury is due to provide policy options to the Government by mid-2022.
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