Government proposes regulatory framework for digital asset providers
Digital asset providers that operate with similar risks to traditional financial service providers will be required to obtain an AFSL under proposals released today.
Treasurer Jim Chalmers has today released a proposed framework for regulating crypto and digital assets following a number of high-profile failures of digital asset platforms in recent years.
The government has released a proposal paper that recommends making crypto exchanges and digital asset platforms subject to existing Australian financial services laws.
As part of the reforms, the government will introduce a new type of product called a digital asset facility.
A digital asset facility is considered to be an asset-holding arrangement under the proposed changes.
The proposed framework would recognise certain asset holding arrangements as a financial product (a digital asset facility). The existing AFSL framework would apply to any person ‘carrying on a financial services business in Australia’ in relation to a digital asset facility.
The proposals paper said while the application of the AFSL regime would be jurisdictionally limited to Australia in the usual way, an intermediary business in Australia, like a broker, would need to be licensed to provide services that involve dealing in digital asset facilities generally (including those not licensed or located in Australia).
Digital asset facilities would also be required to meet minimum standards that largely replicate the minimum standards that apply to financial products and services that hold assets.
“This includes the requirement to hold financial products on trust. The minimum standards for holding assets would be tailored to include ‘additional standards for holding tokens’,” the paper said.
“In addition, the minimum standards would permit additional types of ‘true’ custody arrangements for non-financial products, such as bailment. This tailoring means digital asset facilities would be able to safely hold any type of asset. The minimum standards for holding assets will apply to all digital asset facilities, including ‘custody only arrangements’.”
Dr Chalmers said the Albanese government is acting methodically to ensure that consumers are adequately protected and innovation can flourish.
“Our proposals have been designed to ensure they are consistent with other jurisdictions, adopt existing financial service laws as appropriate and create new bespoke obligations in the areas of highest risk,” he stated.
The Treasurer noted that the collapse of crypto platforms, both locally and globally, has seen Australians lose their assets or be forced to wait their turn among long lines of creditors.
The proposed reforms seek to reduce the risk of these collapses happening by lifting the standard of the operation of platforms and increasing oversight.
The proposal paper referred to the recent collapse of FTX, impacting approximately 50,000 Australian consumers.
“The failures of digital asset platforms are symptomatic of unregulated asset holding intermediaries. Such risks are further amplified by the vertically integrated nature of digital asset platforms – where various functions, like trading and holding assets, are managed within a single organisational structure,” the paper said.
“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.”
The paper said that the government intends to introduce a regulatory framework aimed at addressing the significant risks and potential harms associated with digital asset platforms, while fostering innovation and safe usage of digital assets and distributed ledger technology.
“The framework outlined in this paper proposes to regulate digital asset platforms within the existing Australian financial services laws, while ensuring all consumers and businesses have the opportunity to safely explore and share in any benefits of the technology,” it said.
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