Australia launches major consultation on cryptoasset regulation

New legislation to build a regulatory framework covering crypto custody, market licensing, taxation, and decentralized autonomous organizations (DAO), has been proposed by the Australian government.

A consultation paper has been released on a planned Digital Services Act (DSA), seeking input from the private sector.

Announcing the proposal at the Australian Blockchain Week conference, Senator Andrew Bragg told delegates: “To do this would make Australia one of the only jurisdictions confronting this issue head-on, signaling that we fully appreciate the promise and potential of blockchain technology.”

Cryptoassets are becoming increasingly mainstream in Australia, with around 23% of Australians owning crypto between October-December 2021, significantly ahead of the global average of 15.5% according to pollster Finder. 

Embracing innovation

The planned DSA signals that Australia intends to approach crypto regulation as part of a wider embrace of emerging technologies. 

Along with plans to better regulate the industry and increase consumer confidence, it also actively encourages a competitive and innovative crypto landscape. This ‘regulate and tolerate’ approach from Australian policymakers seeks to establish the country as an early proponent of a regulated, dynamic crypto industry.

“We want to encourage innovation in cryptoassets – innovation creates jobs and growth,” Minister for the Digital Economy, Jane Hume, told the Blockchain Australia event. “There are so many innovative use cases for cryptoassets, many of which are not far at all away from becoming mainstream. These include international payments, lending and borrowing, NFTs, and asset tokenization.”

Current challenges highlighted in the DSA consultation paper include: classifying cryptoassets as financial products or non-financial products, counterparty risks associated with using crypto as a store of value or investment, perceptions that similar services are regulated in a similar way, and the need to protect the community from criminal enterprises and fraud. 

Digital Services Act: Key proposals

The proposed DSA is built around four key pillars:

1. Technology neutrality
2. Broad, flexible principles, not a prescribed code
3. Regulation by a Minister, not bureaucratic agencies.
4. Cooperation and appropriate powers, resourcing, and personnel within government

The DSA also aims to create a framework for DAO standards that doesn’t stifle their core principles.

The standards would ensure consumers could access audit, assurance, and disclosure services from DAOs that would help them distinguish between retail and wholesale organizations – helping protect against malicious operators. DAOs could be brought under the umbrella of the Corporations Act under proposed tax reforms.

Crypto taxation is another area of focus. The Board of Taxation is tasked with reviewing the country’s crypto tax landscape, minimizing the tax burden, and offering recommendations for the sector. A report is due by the end of 2022. 

Treasury has also launched a consultation on “token mapping” to properly define what rights different crypto tokens provide to holders, which will then inform how they are regulated in corporate and tax law.

Impact of Russian sanctions  

These proposed reforms are particularly timely as global discussions continue around crypto sanctions evasion, following Russia’s invasion of Ukraine.

Senator Bragg told the conference: “It is possible Russian entities are using cryptocurrency to exchange currency. We can’t have a situation where a product that is used by millions of people can become a backdoor for sanctions. 

“When individuals, businesses, investment funds, pension funds, sovereign wealth funds, are being compelled to divest from Russian assets, it doesn’t make sense to allow crypto to provide a back door.”

Crypto regulation: Next steps

Firms have been invited to comment on the proposed new measures by May 27, 2022. 

Comments are also invited on two alternative options for the industry: 

1. Regulation under the current financial services regime by defining crypto assets as financial products.
2. Self-regulation by the crypto industry – the industry would develop a code of conduct for crypto asset service.

Firms should take this opportunity to share their views on the future of crypto regulation in Australia, and review the proposals in detail to understand the spirit and wider direction of travel that regulation will take. Where possible, getting ahead of proposed regulatory requirements before they become mandated will help provide a seamless, competitive experience for customers.