State of Financial Crime 2023 Report
Australia’s government has announced it will prioritize “token mapping” as part of its review of crypto-assets. Treasurer Jim Chalmers and Assistant Minister for Competition, Charities, and Treasury Andrew Leigh argued that “regulation is struggling to keep pace and adapt with the crypto-asset sector.”
The government believes no other country has conducted a token mapping exercise. It will focus on better understanding how Australians use crypto-assets and the gaps in current regulatory frameworks. A core theme of the government’s statement is consumer protection and the need to “provide additional consumer safeguards.”
Token mapping was a core recommendation of an October 2021 review by a parliamentary select committee into Australia as a technology and financial centre. The committee’s reasoning focused heavily on the rise of Decentralized Finance (DeFi) and, in particular, the growth of DeFi protocols and blockchain projects using Decentralized Autonomous Organization (DAO) models. DAOs feature governance models that enable stakeholders to vote, making decisions collectively rather than through a centralized entity or designated person. For example, some DAOs are used to launch crypto-backed stablecoins.
A “serious approach” to crypto regulation
The Morrison government, which left office in May 2022, had announced a consultation on a proposed Digital Services Act. Built around four pillars that included technology neutrality, flexible principles, direct ministerial oversight, and cooperation, the plan included a framework for DAOs. However, the Albanese government will pause these plans while it conducts the token mapping work: “The previous government dabbled in crypto-asset regulation but prematurely jumped straight to options without first understanding what was being regulated.”
Nonetheless, Australia’s policymakers recognize the potential upsides of acting fast. Noting that examples of DAO legal structures globally are “limited,” the parliamentary committee highlighted that the US state of Wyoming legislated in this area and has attracted “significant business activity” as a result of its “proactive stance.”
The race to establish frameworks and manage arbitrage
Regulators in other major regional economies are still grappling with regulatory arbitrage related to the crypto-asset space. In July 2022, South Korean regulators intervened to tackle so-called “kimchi premium dealers.” These dealers buy tokens, including bitcoin, overseas before selling them for a profit through domestic crypto exchanges. In August, the country’s Financial Intelligence Unit (FIU) took action against 16 foreign-based firms it believes have been conducting business without the appropriate authorizations under the Financial Transactions Report Act.
Meanwhile, Hong Kong is preparing to launch its virtual asset service provider (VASP) licensing regime, which its government believes will be one of the most comprehensive in the world. License applications for covered firms must be submitted by December 1st, 2023.
The announcement from the Australian government represents the first step in a likely years-long process toward legislating to deliver a comprehensive regulatory framework. In the meantime, firms should keep abreast of the latest announcements and in particular, look out for the public consultation paper on token mapping. The government has pledged to issue this “soon.”
Originally published August 26, 2022, updated August 26, 2022
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