Crypto exchanges and other digital asset platforms will be subject to existing Australian financial services laws, requiring them to provide efficient, honest and fair services while managing conflicts of interest under the watch of the corporate regulator.
The proposal, announced by Assistant Treasurer Stephen Jones on Monday, comes almost two years to the day that a similar model was backed by the Senate and as one-in-four Australians hold crypto in an unregulated market.
The Albanese government’s proposal will require platform operators to obtain an Australian Financial Services Licence and meet new special obligations like minimum standards for holding tokens, standards for custody software, and standards when transacting in tokens.
It comes after more than a million Australians engage in an unregulated market that Treasury says holds billions of dollars in Australians’ assets.
“Collapses of crypto platforms, both locally and globally, have seen Australians lose their assets or be forced to wait their turn amongst long lines of creditors,” Mr Jones said in a joint statement with Treasurer Jim Chalmers.
“The proposed reforms seek to reduce the risk of these collapses happening by lifting the standard of the operation of platforms and increasing oversight.”
But Opposition Senator Andrew Bragg, who has sought to establish a regulatory regime through a private member’s bill, has said the government’s “slow lane” approach means investors will be unnecessarily exposed for longer.
The new regulation put forward by the government will require digital asset platforms that hold over a certain threshold of Australians assets — $1,500 for an individual; $5 million in aggregate — to obtain an Australian Financial Services Licence.
The threshold seeks to strike a balance between protecting investors from scams and exchange collapses while allowing innovation and experimentation in the early stages of developing novel digital asset and service offerings.
Above the threshold, the well-established Australian Financial Services Licence system will apply.
It already applies to almost all financial service businesses, imposing an obligation to provide efficient, honest and fair financial services, manage conflicts of interest and meet solvency and cash reserve requirements through a range of conduct and disclosure requirements.
Platforms would need to be granted the licence by the corporate regulator and will also face new specific requirements like standard form contracts, standards for custody software that include it being continuously monitored and regularly audited, and minimum requirements for holding and transacting in tokens.
Tokens are digital units or records that can be used to represent or refer to anything. They include cryptocurrencies like bitcoin and non-fungible tokes or NFTs like those linked to digital artworks.
The tokens themselves will not be regulated under the proposal, except for tokens that operate like financial products, which will be regulated under existing corporate law.
The collapse of token holding platforms like FTX – estimated to have impacted around 50,000 Australians – are “symptomatic of unregulated asset holding intermediaries” and the vertical integration common in the industry, according to a new consultation paper released on Monday.
“While the risks that led to these failures are the same risks mitigated by Australia’s financial services laws, digital asset platforms that do not deal in financial products are not subject to financial services laws,” it said.
The government is consulting on the new regulatory regime until December 1, and will conduct more on draft legislation next year.
Senator Bragg was behind a similar plan to regulate digital assets, albeit through a new licence model, he put forward through a Senate Committee last year. Treasury had accepted the plan but it was disrupted by the change in government, with the Senator attempting to revive it through a private members bill more than a year ago.
That bill, which is largely based on the 2021 proposal, was rejected by a Labor chaired Senate committee last month due to concerns over the operation of the reforms, a lack of detail, and because it “fails to interoperate with the established regulatory landscape, creating a genuine concern for regulatory arbitrage and adverse outcomes to the industry”.
The return to a Treasury consultation on a proposal and no legislation until next year at the earliest means crypto and other digital assets will continue largely unregulated in Australia for years yet.
Senator Brag said the Albanese government had “locked Australia into the slow lane on crypto reform”.
“There is a bill in the Parliament that would do virtually everything the government now says is important,” Senator Bragg said.
“If Labor was serious about protecting consumers, they would have continued the regulatory process commenced by the former Liberal government in 2021.”
Australia’s banks welcomed the tougher oversight of crypto exchanges, saying it would help stop scammers.
“Almost half of scammed funds are currently being channelled into crypto, the getaway vehicle of choice for scammers. Once the stolen money reaches a crypto exchange, it is virtually impossible to recover,” Australian Banking Association chief executive Anna Bligh said.
Do you know more? Contact James Riley via Email.