As previously flagged by the government and supported by many consumer advocates, the government is taking the first steps to introduce regulations for crypto exchanges and digital asset platforms in the interests of consumer protection while also providing certainty to the industry. A proposal paper has been released which seeks to improve the operating standard for multi-function platforms that holds assets for customers in the digital assets space, which is currently unregulated.
The government estimates that the unregulated nature of the digital asset platforms have lead to considerable consumer losses. In the collapse of one prominent exchange alone, around 50,000 Australian consumers were affected with varying degrees of losses.
In short, the paper proposes to incorporate the digital asset platforms (ie crypto exchanges) and other intermediaries within the existing financial services framework which will involve the introduction of a new type of financial product called a “digital asset facility”. The existing AFSL framework would then apply to any person carrying on a financial services business in Australia in relation to a digital asset facility.
This proposed regime would be engaged when a platform provider deals in digital assets that are not financial products and may apply to investments in tokenised real-world assets such as gold or collectables, investments in digitally native assets (eg bitcoin), and digitally native investments (eg participation in some form of staking).
The issuer of a digital asset facility under the proposal would be the person or persons responsible for the obligations owed to customers under the terms of the asset holding arrangement. In addition, platform providers and other intermediaries performing financial services in relation to digital asset facilities including brokers, arrangers, agents, market makers, and advisers would be required to hold an Australian Financial Services Licence (AFSL).
Standard AFSL obligations would apply, although a low value exemption will be introduced similar to the low value facility exemption for non-cash payment facilities. The low value exemption is anticipated to apply to digital asset facilities holding less than $1,500 per customer and less than $5m in total. In addition to standard AFSL obligations, a platform provider must also comply with general obligations (eg standard solvency and positive net asset requirements etc) and disclosure obligations.
Minimum standards will also apply digital asset facilities that essentially replicate the minimum standards that apply to financial products and services that hold assets (ie a requirement to hold financial products on trust). However, the minimum requirement will be tailored to include additional standards for holding tokens and permit additional types of true custody arrangements for non-financial products. The proposal paper also deals with other related topics such as minimum standards for intermediating platform entitlements and funding tokenisation.
Feedback on the paper will inform the government’s formulation of the draft legislation which is scheduled to be released next year. Further consultations of the draft legislation will then occur before the introduction of the legislation into Parliament. A 12-month transitional period has been flagged to commence upon Royal Assent of the relevant legislation. The government notes that this period will allow an appropriate amount of time for industry participants to plan and make changes to ensure compliance and obtain a licence where required.