Views on the bill
1.1This chapter provides an overview of the key issues raised by submitters and witnesses during the Senate Economics Legislation Committee’s (committee) inquiry into the Digital Asset (Market Regulation) Bill 2023 (bill).
1.2In particular, the chapter considers issues related to the bill’s objectives, definitions, licensing provisions, transitional arrangements, central bank digital currencies and other matters. The chapter concludes with the committee’s views and recommendations.
Support for the objectives of digital asset regulation
1.3Submitters and witnesses expressed broad support for fit-for-purpose digital assets regulation in Australia.
1.4Evidence to the committee highlighted that the digital assets industry has developed rapidly in recent years, and there is now a need for a specific digital assets regulation regime. The committee heard that such regulation would provide certainty to industry and balance consumer protections with industry innovation.
1.5Stakeholders emphasised the importance of well-considered definitions and licensing requirements to ensure Australia’s digital assets regulation operates effectively and is harmonious with international regulatory regimes. As certain international jurisdictions have progressed digital assets regulation, witnesses told the committee that Australia has an advantage in being able to learn from overseas experience.
1.6While stakeholders generally welcomed the objectives of the bill, there were diverse views expressed as to how regulation should be designed to achieve positive outcomes for industry and consumers. Several submitters and witnesses noted that the Australian Government is undertaking consultation on digital assets regulation, separate to this private senators’ bill.
Industry growth and the need for regulation
1.7The committee heard that the digital assets industry has evolved rapidly in recent years and is now a complex ecosystem that presents both significant opportunities and risks.
1.8In evidence to the committee, Mr Simon Callaghan, Chief Executive Officer of Blockchain Australia, outlined the impact that digital assets are expected to have on traditional financial markets:
We find ourselves at yet another pivotal moment in the evolution of digital assets. With the advent of central-bank digital currencies, we will see a transformation of how traditional markets operate through the tokenisation of real-world assets, leveraging technology developed and incubated by cryptocurrency businesses. This maturation of our industry is unsurprising to those who have held an interest in emerging and innovative technologies. In much the same way that spatial technologies have become ubiquitous in our daily lives, the underlying technology of digital assets has the same power to transform how the traditional financial system operates.
1.9Mr Faryar Shirzad, Chief Policy Officer at Coinbase, shared the view that digital asset technologies are ‘pathbreaking’ and will have wide-ranging impacts, including to Australia’s banking and capital market sectors. Mr Shirzad emphasised the need for timely and thoughtful digital assets regulation:
There is a migration of development of talent and investment that's occurring around the world. There is also, commensurately, a tendency for customers to go offshore as domestically regulated exchanges are not available or if they're not offering compelling services. National authorities in places like Australia certainly need to move quickly but thoughtfully, recognising that important advances in proximate regional markets—in this case, Hong Kong and Singapore—are available to customers who may be looking for options. That is why timely action is critical.
1.10The case for improving digital assets regulation in Australia was also made by a number of other contributors the inquiry. The RMIT Blockchain Innovation Hub Researchers summarised that regulation is needed to provide regulatory certainty for industry and, on the consumer side, address ‘risks around custody management, cyber security, adequate capital and liquidity, and dispute resolution’. The Law Council of Australia (LCA) submitted that the absence of ‘comprehensive regulation’ can ‘undermine market stability, and threaten the overall integrity of the financial system’.
1.11The Australian Bitcoin Industry Body (ABIB) held an alternate view and submitted there ‘is no need to further regulate the Bitcoin-Only industry within Australia’. ABIB maintained that its members have acted to protect their customers from the ‘key risks that exist in the bitcoin and adjacent ecosystems’. As such, ABIB requested that its members be excluded from the bill.
1.12Several submissions discussed the complexity of existing regulations in the digital assets industry, and the challenge of implementing new regulations. The LCA told the committee that ‘foundational technologies, such as distributed ledger and blockchain, give rise to a wide range of use cases that cross over traditional legal frameworks and sectors’ and it is ‘often unclear how existing law should apply’. The RMIT Blockchain Innovation Hub Researchers highlighted that emerging technologies create a regulatory challenge for government as the ‘digital economy cannot easily be squeezed into existing taxation and regulatory frameworks’.
‘Bespoke’ regulation vs ‘filling the gaps’
1.13The committee heard differing views as to whether digital assets regulation requires a ‘bespoke’ legislative framework, as proposed by the bill, or whether adapting existing regulations would be more effective.
1.14For example, Piper Alderman considered that a:
…bespoke legislative framework is necessary to enhance consumer protection and support innovation to enable Australians to fully grasp the opportunities and efficiencies unlocked by blockchain technology.
1.15However, FinTech Australia submitted that its ‘members generally do not support a bespoke licensing regime separate to financial services licensing for crypto service providers’.
1.16In considering the most appropriate form of digital assets regulation, submitters emphasised the need for regulation to adopt a technology neutral and risk equivalent approach to digital assets.
Technology neutral and risk equivalent regulation
1.17In considering the principles of ‘technological neutrality’ and ‘same risk, same regulation’, witnesses raised concerns with how the bill’s proposed licensing regime would interact in practice with the existing Australian Financial Services Licence (AFSL) regime and financial product requirements under Chapter 7 of the Corporations Act 2001 (Corporations Act).
1.18For example, Blockchain Australia submitted that products should be ‘regulated with equivalence on and off blockchain’, which it considered the bill has not achieved. Ripple Labs proposed that digital assets ‘should not solely be defined relative to a specific technology’ and should instead be classified depending on an asset’s ‘particular economic function and purpose’.
1.19The Australian Custodial Services Association (ACSA) told the committee that digital assets regulation should ‘look through the technology’ and regulate in a manner comparable to traditional financial products with ‘…similar licensing disclosure and other requirements’. Incorporating digital assets into the existing AFSL regime would, according to ACSA, achieve consistency in licensing outcomes.
1.20The Australian Financial Markets Association (AFMA) held similar views, submitting that ‘as digital assets present similar or higher risks to other financial products, they should be subject to similar regulation’. AFMA stated that its ‘preferred mechanism’ for digital assets regulation is for digital assets to be ‘explicitly included in the definition of "financial product", such that the existing licensing framework applies’.
1.21Digital asset exchange providers also considered that there are benefits in regulating digital assets under existing legislation.
1.22For example, Swyftx told the committee that the ‘existing financial services licensing regime can be appropriately modified to accommodate crypto assets’. MrAdam Percy, General Counsel at Swyftx, raised the issue of risk equivalent regulation and told the committee that as the risks associated with the activities of crypto exchanges are broadly comparable to traditional equities brokers, they should be subject to the same regulation.
1.23Revolut Australia described extending the provisions of the Corporations Act, including the AFSL regime, to crypto products as ‘logical’. Revolut Australia noted that that regulatory infrastructure already exists, and that industry is already familiar with the role of the Australian Securities and Investments Commission (ASIC) in regulating financial services products. AsMrScottJamieson, Chief Compliance Officer, Australia and New Zealand at Revolut Australia, outlined:
The actual infrastructure already exists. The industry knows ASIC well. ASIC is already experienced, in its role, in regulating consumers across financial services, and we think there are so many similarities to what would ultimately be needed for crypto regulation that it would make sense for it to be regulated in a very similar way to what currently exists for financial services. … we think it could be done relatively easily legislatively by including a new class of financial product within the current definitions that already exist within the Corporations Law. We think that's probably easiest both from an implementation point of view and also from the point of view of current providers like us who actually already operate under a financial services licence.
1.24Mr Jamieson further noted the range of existing consumer protection provisions under existing law. If a ‘completely new licensing regime’ was implemented that does not involve the current laws, then consideration would then need to be given to ensuring consumer protections:
Again, the easiest way to do that would be to declare crypto assets as a class of financial products, and then you automatically would have the coverage of those existing consumer protections. It may be that you need to amend those protections a little bit and maybe not necessarily amend the legislation.
1.25Ms Jaime Lumsden, Partner at Hamilton Locke, expressed a firm view that ‘the best approach to regulating digital assets is integration into the current financial services regime’. Ms Lumsden explained that a standalone regime for digital assets regulation risked creating inconsistent rules for products on and off the blockchain and creating new barriers to entry.
1.26The LCA submitted that the application of existing regulatory regimes:
…should account for the innate dynamism of digital assets and recognise that the addition of rights or features within an asset may mean that the authorisations and the licences can change over time and might also be required in a short time frame.
1.27In proposing a principles-based regulatory framework, Ripple Labs noted that, given the dynamic nature of digital assets, overly prescriptive regulation ‘may have the unintended consequences of hindering innovation and unwittingly increase financial stability risk through ‘business-model herding’’.
1.28Blockchain & Digital Assets - Services + Law (BADAS*L) submitted that blockchain infrastructure is increasingly being used for ‘trusted non-financial online transactions … where financial services laws and frameworks are simply insufficient’. BADAS*L considered that digital assets regulation should be ‘activities-based’ and permit regulatory equivalence in technology design.
Regulatory arbitrage
1.29Ms Lumsden outlined to the committee that if digital assets regulation is not well-designed, there is a potential risk of regulatory arbitrage. Inconsistent regulations across platforms could cause market participants to ‘opt into the regime that gives them the lowest compliance burden’ and result in inconsistent protections for consumers depending on how they access a certain product.
1.30The Digital Law Association also submitted that potential inconsistencies between Australia’s digital assets regulations and that of international jurisdictions could give rise to regulatory arbitrage between countries.MrDavid Chung, Director of Creo Legal, which advises crypto asset start-ups and SMEs, made the point that digital assets sector is ‘not anchored by jurisdiction’ and businesses were already making product decisions based on the regulations that apply in different jurisdictions.
1.31Concerns relating to avoiding opportunities for regulatory arbitrage were also shared by other witnesses. ADFSAC submitted that the Australian Government should collaborate with international counterparts to establish consistent regulatory standards to ‘avoid regulatory arbitrage and ensure a level playing field for market participants’.
1.32Mr David Menz, Acting Director, Crypto Policy Unit, Financial System Division, Markets Group, Treasury noted that regulatory arbitrage could also arise where:
…a financial product is potentially carved out because it uses a DLT [distributed ledger technology] solution, or blockchain solution, or where a DLT solution is brought into the financial system just because of a technology it uses.
1.33Treasury told the committee that the issue of regulatory arbitrage is being considered as part of its work on digital assets regulation.
Definitions: importance and challenges
1.34Contributors to the inquiry told the committee that clear definitions are vital for the effective operation of digital assets regulation. Given the global and evolving nature of the digital assets sector, contributors emphasised the importance of definitions in Australian digital asset regulation regime being interoperable with international regulatory regimes.
1.35Blockchain Australia told the committee that the issue of definitions was ‘difficult’, due to significant variations in peoples’ interpretations of key terms. Ripple Labs noted that ‘there is no single or generally recognised definition of digital assets in Australia’.
1.36Indeed, defining whether a crypto product is a financial product under the current regulatory framework is complex and case-by-case. As outlined below, several submitters raised specific issues with definitions used in the bill.
Classification of digital assets
1.37Submitters noted a range of potential issues with the bill’s proposes definition of digital assets, and related concepts, including the impact the definitions could have on the efficient operation of regulation.
1.38For example, the LCA submitted that the classification of digital assets should be:
…based on their functional risks for the purpose of regulatory treatment is imperative to ensure compliance, mitigate systemic risks, guide the regulatory framework, and bolster the effectiveness of supervision and oversight functions.
1.39Blockchain Australia submitted that the bill’s definition of ‘digital assets’ should be amended to remove non-fungible tokens (NFTs), consistent with the European Union’s Markets in Crypto-Asset Regulation (MiCA) regime.
1.40The Digital Law Association recommended that the term ‘digital asset’ be replaced with ‘token’ to ‘ensure that the Bill, once legislated, is technology neutral, and suitably flexible to accommodate a wide range of digital asset use cases’.
Regulated digital assets
1.41FinTech Australia suggested that many assets that meet the bill’s definition of ‘regulated digital assets’ may ‘fall within the carve out for products which are financial products under the Corporations Act’ and thereby limit the scope of the bill and create duplication.
1.42The RMIT Blockchain Innovation Hub Researchers noted the bill’s definition of ‘distributed ledger technology’ (applied in the definition ‘regulated digital asset’) differs from that proposed by the MiCA regime and considered that it should be the same to ‘promote consistency and interoperability amongst global regulatory frameworks’.
Digital asset exchange
1.43Hamilton Locke submitted that the definition of ‘digital asset exchange’ was ‘disconnected’ from the treatment of digital assets under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, as the ‘exchange of digital assets for other digital assets is not currently regulated’ by the act.
1.44Hamilton Locke further submitted that extending the definition of ‘digital asset exchange’ to ‘licensing fiat to regulated assets and the exchange of regulated assets for other regulated assets’ creates a ‘significant disparity in regulation for off-chain equivalents’. In Hamilton Locke’s view, the definition of digital asset exchange should:
… account for whether the exchange runs an order book (operates a market), acts as a counterparty to the trade (makes a market) or sources digital assets from other exchanges (a broker) in order to implement effective market conduct regulations.
1.45Blockchain Australia proposed that the definition of ‘digital asset exchange’ should be narrowed ‘so it does not pick up other business models which do not exhibit the same risk factors’.
Other issues
1.46Pier Two highlighted the complexity of non-custodial models and considered that the bill’s proposed definition of ‘digital asset custody service’ may inadvertently capture non-custodial service providers, which do have access to the underlying asset.
Definition of stablecoins
1.47Several submitters raised concerns with the bill’s proposed definition of stablecoins, particularly that the definition incorporates other types of tokens that are inconsistent with the bill’s licence provisions for stablecoin issuance.
1.48As highlighted by the RMIT Blockchain Innovation Hub Researchers, potential ‘shortcomings’ in the bill’s definition of ‘asset-referenced token’ could result in the definition of ‘stablecoin’ incorporating other types of tokens. This includes, for example, non-fiat backed tokens such as wrapped assets, derivative DeFi assets, liquidity pool tokens and cryptocurrency collateralised stablecoins.
1.49The RMIT Blockchain Innovation Hub Researchers submitted that it was a ‘clear assumption in the licencing provisions of the Bill is that stablecoins are fiat-backed’.
1.50Piper Alderman considered that the bill’s definition of stablecoins was too broad and that it would be appropriate to ‘limit the definition to stablecoins which purport to be pegged to a single fiat currency to address the specific risks relating to these assets’.
1.51FinTech Australia similarly considered there was ‘ambiguity’ in the bill’s definition of stablecoin, such that it could ‘encompass tokens that may not typically be classified as stablecoins, such as asset-backed tokens’.
Definitions of tokens
1.52FinTech Australia submitted that there was ‘ambiguity’ in relation to certain definitions of tokens proposed in the bill. In particular, FinTech Australia raised a concern with the bill’s distinction between ‘Electronic Money Token’ and ‘Exchange Token’, noting that:
…it may not be appropriate to define a token based solely on its primary function as a medium of exchange, without defining what constitutes an exchange purpose or when it qualifies as the predominant purpose.
1.53Clyde & Co’s submission to the inquiry observed that the ‘breadth of the definition of ‘exchange token’ means it is liable to catch a wide variety of tokens’, including non-fungible tokens (NFTs). Clyde & Co queried the appropriateness of regulating NFTs in this way, noting that the use cases of NFTs bear little resemblance to that of financial products. Absent regulatory clarity, Clyde & Co suggested that the bill could require NFT market operators to comply with the same requirements as firms undertaking regulated financial activities.
1.54Treasury considered that bill’s proposed definitions potentially lead to multiple interpretations and that NFTs differ from other tokens in that they are, primarily, a store of data:
…when we talk about the concept of NFTs, there's also a bit of a mismatch between how people may talk about them casually and the technical nature of them. NFTs are a data structure only, not necessarily a point to an exact form of holding. In our token mapping, we pointed out that it is ultimately what is underlying the token rather than the token itself that decides how it should be regulated or looked at, and NFTs are just another way of structuring data in a token form.
Harmonisation with international regulation
1.55The committee heard that definitions are central for Australia’s digital assets regulation to be interoperable with regulatory regimes of other key international markets. Submitters commented broadly on the lessons that can be learnt from other jurisdictions.
1.56In evidence to the committee, Mr Shirzad stated that ‘defining key terms and concepts clearly and in a manner that maintains harmonisation between the domestic market and international markets is critical’.
1.57Mr Schofield advocated that ‘future regulations and laws be consistent in approach and terminology with other key global jurisdictions and with existing Australian regulations and laws’. Mr Schofield elaborated:
Our view is that certainly where assets, whether they be digital or otherwise, are defined as investable they should be treated as internationally fungible. That means that we need to be recognising the jurisdictional approach and regulation of markets in which those assets are traded. That's been the approach we've taken with traditional assets throughout the course of time.
1.58Digital asset exchange operators also called for global alignment of digital assets regulation. Mr Jonathon Miller, Managing Director of Kraken Exchange told the committee that it is ‘critically in support of global regulatory alignment’. MrMiller explained:
This is a global technology, and regimes that are not harmonised interjurisdictionally create risks of regulatory arbitrage. We're seeing this kind of balance of existing principles and bespoke regulation being played out globally, and we should be doing the same. The EU and the UK come to mind specifically. MiCA has already been mentioned today, I believe, but we'll also raise that as a regime to look to, particularly because it's got similar policy goals, I think, to traditional regulation—protecting consumers, outlining good conduct, governance practices and rationalising an approach to licensing.
1.59Ms Caroline Bowler, Chief Executive Officer, BTC Markets considered that international approaches offer a ‘guideline’ for Australia:
It's not likely that there will be a global harmonisation across all of the economies with regard to their approach to crypto. There are going to be certain nuances at national levels. But, certainly as a guideline for how Australia can approach it, it's really helpful to look at those large and significant trading partners, such as the European Union and others. So, for us as a business making business decisions, by looking at the framework that they've put forward, I have something concrete to base decisions and plans on. So I think it's a key point for Australia.
1.60Blockchain Australia emphasised that definitions are ‘vital’ for a consistent global approach to digital assets regulation and suggested the definitions used by the Bank of International Settlements are a useful ‘starting point’.
1.61The Australia Digital Financial Advisory Council (ADFAC) proposed that comprehensive definitions of key terms should be adopted based on ‘widely accepted international standards and best practices to ensure consistency and facilitate international coordination’. ADFAC said such definitions could be drawn from ‘international standard-setting bodies such as the Financial Stability Board (FSB), International Organization of Securities Commissions (IOSCO) and the Financial Action Task Force (FATF)’.
1.62Submitters frequently commented that global developments in digital assets regulation are fast moving. Jurisdictions including the European Union, the United States, the United Kingdom, Singapore, and Hong Kong are ‘actively exploring and implementing new regulatory frameworks for the issuance and trading of digital assets’. Piper Alderman submitted that by ‘moving in step with other jurisdictions in establishing a broadly based legislative regime’, Australia can retain and attract technology talent.
1.63Several contributors to the inquiry highlighted MiCA regimes as a framework that could be used to inform Australia’s regulatory approach. In evidence to the committee, Ms Nghi Luu, Assistant Secretary, Financial System Division, Markets Group, Treasury explained that the MiCA regime has informed its upcoming consultation on digital asset custody and licensing requirements:
We've looked at a range of the regulatory frameworks that are being proposed and implemented around the world. The EU one provides us with a lot of insight into how something could be designed. It shows where there are differences between the financial services type of regulation and where there needs to be changes. So I think it's a piece of work that certainly will be reflected in our consultation paper.
Licensing digital assets activities
1.64The licensing of digital asset activities was broadly supported in evidence to the committee.
1.65For example, the RMIT Blockchain Innovation Hub Researchers expressed support for the bill’s proposed licensing provisions and considered the provisions are a high priority to ‘achieve regulatory certainty for industry and consumer protection’.
1.66However, a range of issues were raised in relation the bill’s proposed mechanisms for implementing licences. Submitters suggested that the bill’s proposed licensing regime could be adversely affected by:
a lack of clarity, or unintended coverage, regarding certain categories of digital assets;
the complexity of interactions between the bill’s proposed licensing regime and AFSL requirements; and
a regulatory burden of establishing multiple licence categories.
1.67Notwithstanding the call from several submitters for the licensing of digital asset to be incorporated within the AFSL regime, some submitters proposed that the bill adopt a simpler approach to licensing. For example, Blockchain Australia proposed one licence with three authorisations for stablecoin issuance, exchanges and custody. Blockchain Australia also recommended turnover and asset under custody thresholds that ‘provide opportunities for startups to enter the market’.
1.68The Digital Law Association recommended that the bill’s licensing provisions could be improved by:
adopting a ‘tiered licensing regime to allow licence obligations to be applied taking into account the nature and risks of the market and digital assets traded on the platform’; and
consolidating ‘licensing powers into a single regulatory authority’.
1.69Zero Hash raised concerns that bill’s proposed licensing requirements would ‘eliminate’ its business model of providing technology services to institutional clients to ‘embed’ digital assets within their existing product offerings.
Digital asset exchange requirements
1.70FinTech Australia considered the bill contained a ‘lack of detail’ in relation to the digital asset exchange requirements and queried whether the requirements would be formal licence conditions, or general operating rules.
1.71BTC Markets agreed ‘in theory’ with the bill’s proposed digital asset exchange requirements for a ‘minimum capital amount; the regulation of exchange participant conduct and protection; market monitoring; asset segregation; and reporting and disclosure obligations’. However, BTC Markets noted that, as an operating business, it would require ‘further clarity’ on the details of the requirement.
1.72Clyde & Co submitted that clarity is required as to ‘what it means for a person to operate a digital asset exchange’ and who is considered not to operate an exchange under the bill. Clyde & Co noted that ‘developers, node validators and other participants’ are beyond the intended scope of the bill and ‘should be carved out as not to stifle the industry’. Clyde & Co further noted that the digital asset exchange licensing requirement should not apply to decentralised exchanges that ‘operate on the basis of user interactions with smart contracts’ and ‘where, generally, no custody occurs’.
1.73ABIB submitted that the bill’s proposed criminal penalty provision of five years’ imprisonment, for not complying with bill’s requirement to obtain a licence, is ‘completely unreasonable’ and ‘at odds’ with the objective of the act to promote investment in Australia.
1.74Kraken Exchange proposed that exchange regulation should incorporate principles of good practice in relation to: issuance and disclosures; conflicts of interest; and market abuse. Creo Legal recommended that specific requirements be added to the bill for:
‘maximum debt to asset ratios – to preclude high risk commercial activities’; and
‘disclosure requirements for arrangements with third parties for market making, liquidity provision, and related services – to ensure that such arrangements to not pose a risk to consumers’.
Minimum capital requirement
1.75While several submitters supported the bill’s proposed minimum capital requirements, some submitters noted that the requirement could limit smaller market players if set too high. FinTech Australia submitted that the capital requirements may be improved if ‘aspects of the capital requirements could be met in crypto assets’ for certain businesses.
1.76ABIB noted that the bill does not provide sufficient detail on the proposed minimum capital amount requirement and cautioned that if the amount is set too high, the requirement could ‘consolidate the industry to a much smaller number of exchanges’.
Segregation of customers’ funds
1.77In relation to the bill’s proposed requirement to segregate customers’ funds, Kraken Exchange considered that consumer protection outcomes could be achieved using omnibus account structures ‘subject to robust controls’.
1.78FinTech Australia noted that its members support the requirement for ‘segregation of participants’ funds from those of the licensee’ and associated reporting requirements.
Australian operations
1.79Creo Legal cautioned that the bill’s provision for the circumstances in which a digital asset exchange is taken to be operated in Australia (Clause 17) is:
…likely to result in all digital asset exchanges around the world geo-blocking Australia. Australians will then be cut off from accessing the world of Crypto, even where the intended activity may not pose an undue risk to them.
1.80Further, Creo Legal suggested the provision would likely discourage: crypto-related businesses from entering, or continuing to operate in, the domestic market; foreign investment in the domestic market; and skilled workers in the crypto industry from migrating to Australia.
Digital asset custody requirements
1.81As BTC Markets submitted, ‘custodial services, or the safeguarding of assets, is a core tenet of the digital asset industry’. While custody outcomes between digital assets and traditional finance are the same, the mechanism differs. As BTC Markets outlined:
…the execution differs in the digital assets space versus in traditional finance. Primarily, the reality that the holder of the key controls the digital asset versus centralised registrars recording ownership of traditional securities. There is also an option of self-custody with digital assets that provides clients with alternative solutions. Regulation may need to consider an education requirement for clients to understand the differing risk profiles of each solution.
1.82BTC Markets noted that ‘majority of centralised digital asset exchanges also operate as custodian’. As such, BTC Markets considered that the establishment of a custody service licence requirement, would require a grace period for exchanges to respond to the new regulation.
1.83Hamilton Locke considered digital asset custody is a ‘significant issue for digital asset service providers’ and custody regulations have ‘significant potential to benefit from alignment with the existing custody regulations that apply to financial services’.
1.84Hamilton Locke highlighted that the definition of digital asset custody services creates ‘unnecessary regulatory complexity’ in its application to digital assets defined as a ‘regulated digital asset’ by the bill, rather than providing for custody requirements for all digital assets. Noting that the bill’s definition of ‘regulated digital asset’ carves out financial products, Hamilton Locke suggested that it may be:
…inappropriate to opt financial products that are digital assets into the financial services custody requirements, as AFS licensed custodians are unlikely to currently have the means or the appetite to hold digital assets in custody. This would force exchanges (and other platforms) to obtain both a digital asset custody licence and an AFS licence in order to manage custody.
1.85FinTech Australia raised a concern with the ‘requirement to have the totality of the custody service provided in Australia’ given there are ‘highly competent’ providers in jurisdictions comparable to Australia. The Australian Custodial Services Association submitted that it did not support ‘domestic custody location requirements as this would hinder the ability to achieve scale and Australian markets to maintain international competitiveness’.
1.86Kraken Exchange submitted that custody requirements need to be ‘carefully designed’ to avoid prescriptive requirements that may inadvertently limit the ability of consumers to withdraw their crypto assets in a timely way.
1.87Blockchain Australia’s submission recommended that further consultation be undertaken on digital asset custody requirements, given the ‘complexity and nuances’ of providing custody for digital assets. Treasury officials confirmed to the committee that the Australian Government’s consultation paper on custody and licensing arrangements is due to be released within the ‘next few weeks’.
Stablecoin issuance
1.88The Reserve Bank of Australia (RBA) submitted that stablecoin activity in Australia ‘has been relatively limited to date’, however, there is ‘potential for stablecoins to play a more prominent role in the financial system in the future’. The RBA noted that some banks have been exploring the use of stablecoins.
1.89The RBA expressed support for development of stablecoin regulations and, in particular, the prioritisation of a regulatory framework for stablecoins given that stablecoins may become widely used as a ‘means of payment and store of value in the economy’.
1.90Further to the issues raised by other submitters in relation to the bill’s proposed definition of stablecoin, Hamilton Locke suggested that the proposed Stablecoin Issue Requirements are also not compatible with the definition. In particular, Hamilton Locke anticipated that stablecoin issuers who issue asset-backed tokens would not meet the requirement to ‘hold the face value of liabilities in either Australian or foreign currencies with an ADI’.
1.91FinTech Australia raised concerns about the bill’s lack of proposed governance requirements for stablecoins and queried how certain provisions would be applied in practice.
Foreign provider licence recognition
1.92FinTech Australia supported, in principle, the bill’s provisions for the recognition of foreign licences, noting that it would not apply to the majority of its members. However, FinTech Australia cautioned that foreign provider licence recognition could create an unfair advantage for larger international market participants if it does not operate on a reciprocal basis with other international regimes.
1.93The Digital Law Association considered that the bill does not ‘clearly identify the jurisdictional nexus that must exist for foreign businesses to identify whether they are subject to the proposed legislation’.
1.94Hamilton Locke recommended that the bill’s proposed approach to foreign licence recognition be ‘reconsidered’, noting a concern that it ‘may discourage foreign providers from having a local presence in Australia and may provide an easier path to recognition than if a business applied for a licence in Australia’.
Role of ASIC
1.95The committee notes that bill’s proposal to confer significant functions to ASIC in respect of digital assets regulation, including to administer licences for digital asset exchanges, digital asset custody services and stablecoin issuance.
1.96ABIB noted that the bill’s provision for ASIC to supervise digital assets creates uncertainty as to role of Australian Transaction Reports and Analysis Centre, which currently has certain responsibilities in relation to the regulation of digital asset exchanges.
1.97FinTech Australia noted that ASIC would need to provide further guidance to industry during the bill’s proposed transition period to ‘ensure market participants understand how these new and existing licensing regimes interact and apply to their activities’.
1.98FinTech Australia also considered it important that ASIC be adequately resourced to effectively manage licence applications. BTC Markets noted, if ASIC does become the regulator for all digital assets, this may:
… have policy implications for the shape, size, and resourcing of the ASIC's remit, as the size of the digital asset market and transferability of digital assets exponentially grows. This also begs the question of whether regulators from traditional finance backgrounds have the means to oversee this large of a market, or if it warrants a new body of regulators altogether.
1.99ASIC officials told the committee that the bill’s resourcing implications were difficult to comment on given as significant details of the bill are to be determined in the associated delegated legislation.
Central bank digital currencies
1.100The RBA submitted that, to date, only a ‘small number of developing economies have issued CBDCs and that issuance has been ‘relatively small’. The RBA noted that, while the use of CBDCs has focussed domestic purposes, it is possible CBDCs may be accessed by persons outside the issuing jurisdiction.
1.101In giving evidence, Mr Ellis Connolly, Head of the Payments Policy Department at the RBA, told the committee that the RBA has undertaken a pilot project to access use cases for a CBDC currency. Mr Connolly noted that there was significant interest in the project from industry, further opportunities exist to research CBDC and that the RBA maintains ‘open mind on the possibility and the case for a central bank digital currency to emerge in the future’.
1.102Ms Joni Pirovich, Principal, Blockchain & Digital Assets - Services + Law, gave evidence that the results from the CBDC pilot were ‘extremely positive’ and that Australia is ‘potentially now in the lead globally on CBDCs and stablecoins’.
CBDC reporting requirement provisions
1.103The bill makes provision for rules to make CBDC reporting requirements which would obligate authorised deposit taking institutions (ADIs) to report information on CBDC use and holdings to ASIC and the RBA.
1.104The RBA submitted that the efficacy of the provision would likely depend on design of the reporting requirements. The RBA noted that if CBDC wallet services were provided by non-ADI entities then ‘collecting data from ADIs alone would not provide a full picture of Australian residents’ use of foreign CBDCs’. As such, the RBA concluded that reporting requirements may not meet the objectives of the bill.
1.105The RMIT Blockchain Innovation Hub Researchers considered that the risks presented by CBDCs are prudential in nature and, as such, would be more appropriately monitored by the Australian Prudential Regulation Authority rather than ASIC.
Transitional arrangements
1.106Many submitters to the inquiry raised concerns that the bill’s proposed implementation period was too short for industry to effectively transition to a new regulatory regime.
1.107The bill proposes a three-month transition period, following a commencement date of six-months after the bill receives Royal Assent.
1.108Blockchain Australia submitted that regulators have limited resources and limited experience to implement the proposed licensing regime and, as such, considered that an 18-to-24-month timeframe is more appropriate. Hamilton Locke also supported a transition period of this length, based on its experience with other licensing regimes.
1.109BTC Markets told the committee that, from the perspective of a crypto exchange operator, the transition period is too brief given the informed decision on the regulations and to implement any consequential changes to its technology.
1.110FinTech Australia supported ‘greater flexibility in the implementation timeline’, given novelty of regulatory regime, ASIC’s capacity to administer licences and the lack of detail in the bill on specific obligations and requirements. Further, FinTech Australia suggested that the suggested 3-month transition period ‘may disproportionately impact members who do not currently have the internal capabilities to quickly adapt to a new licensing regime’.
1.111Pier Two cautioned that the disproportionate impact of compliance with the bill’s proposed regulation on smaller industry operators creates a ‘risk to market competition and the creation of an incumbent monopoly’.
Safe haven / harbour provisions
1.112The LCA recommended that:
… the Government explores the implementation of a safe harbour framework to assist newly regulated entities with their transition to new licensing requirements.
1.113Blockchain Australia similarly recommended that the bill should include provisions to exempt certain Digital Currency Exchanges and Digital Asset Custody Services while a licence application is being determined.
1.114A safe harbour provision would, according to Hamilton Locke, allow for ‘existing participants to continue operating without significant market disruption until their licence application was approved or rejected’.
1.115The LCA also submitted that a safe harbour provision, ‘with appropriate compliance eligibility criteria’, would offer a range of benefits, including: fostering innovation; promoting regulatory clarity; and safeguarding consumer protection.
Implementation timeframe
1.116Timely regulation of the digital asset industry is important. However, as industry stakeholders told the committee, there is a ‘tension between acting quickly in an environment that's moving globally’ while ensuring that we get domestic digital asset results ‘right’.
1.117FinTech Australia submitted that care must be taken to ensure regulatory changes ‘provide clarity as to the relevant laws which apply’.
1.118Witnesses offered differing perspectives on when they would like to see further digital asset regulation to be enacted. Blockchain Australia suggested that implementing such regulation ‘[t]his year would be beneficial’. However, they also noted that, if regulation took longer Australia is not likely to lose growth opportunities as companies are applying the existing legislation relating to financial products.
1.119The LCA and the Digital Law Association did not have an expected timeframe in which legislation would be enacted. Conversely, Associate Professor Berg, appearing in a private capacity, told the committee that there is degree of urgency for the enactment of regulation, noting recent examples of consumer harm in the crypto sector and the known policy options for regulation.
1.120Some witnesses cautioned that delays to regulation could risk talent and capital going offshore without ‘a bespoke regulatory framework or clarity in how the existing regime applies’.
Other matters
1.121Contributors to the inquiry raised a broad range of other matters in relation to the bill.
Reliance on rules
1.122Submitters noted that significant elements of the bill are left to delegated legislation, including key requirements for digital asset exchanges, digital asset custody providers and stablecoin issuers.
1.123FinTech Australia commented that this approach ‘makes it difficult’ to comment on the rules’ appropriateness, as the rules have not been prescribed. Hamilton Locke ‘strongly suggested’ that any future draft legislation for digital assets regulation be accompanied by the ‘draft delegated legislation that contains specific regulatory requirements’.
Additional responsibilities for the Parliamentary Joint Committee on Corporations and Financial Services
1.124Submitters expressed differing views on the bill’s proposed additional duties of the Parliamentary Joint Committee on Corporations and Financial Services (PJCCFS).
1.125AFMA welcomed the proposed additional responsibilities of the PJCCFS to focus, and report to government, on the appropriate regulatory framework for digital assets. In doing so, AFMA noted that digital assets, and their underpinning technologies, continue to develop and considered it ‘imperative’ that Australia’s regulatory framework continue to protect investors while promoting innovation.
1.126FinTech Australia described the additional responsibilities as ‘unnecessary’ and considered that a statutory review mechanism would be more appropriate.
Matters not addressed in the bill
1.127Submitters noted a range of matters that were not addressed by, or were unclear in, the bill.
1.128ADFSAC submitted that thebill should ‘include provisions to prevent fraud, money laundering, and illicit activities in the digital asset sector’. This could be achieved through implementation of know-your-customer, anti-money laundering measures and alignment with international best practices.
1.129In relation to Bitcoin, ABIB acknowledged Bitcoin’s role in money laundering activities, however noted Treasury data suggests that only 0.15 per cent of cryptocurrency transactions in 2021 were illicit.
1.130Several submitters noted that it is not clear how the bill would address decentralised autonomous organisations (DOAs) given the lack of legal personhood of those entities. The Digital Law Association recommended that further consultation be carried out in relation to DOAs, particularly to ‘identify the deterministic characteristics and potential regulatory perimeter between centralised and decentralised’ structures.
1.131The Blockchain Innovation Hub Researchers highlighted that the proposed regulatory framework ‘does not provide any clarity over tax implications’. Given the high rate of crypto asset ownership in Australia, they recommended that the Board of Taxation Review consider the tax treatment of digital assets and transactions in Australia’.
Committee view
1.132The committee welcomes the opportunity the bill presents for the committee to consider stakeholders’ views on the regulation of digital assets in Australia. The committee welcomes the broad support from submitters and witnesses for developing further digital asset regulation.
1.133The committee recognises that growth in the digital asset industry and workforce will continue to make a significant contribution to the Australian economy, which would develop further in the right regulatory settings. At the same time, the committee recognises that there are significant consumer and market integrity risks in the industry that should be mitigated.
1.134Australia’s existing regulatory regime for financial products is well-established, but less so for digital assets. Accordingly, further regulation is needed to capitalise on opportunities for the industry, to promote consumer confidence and genuine market integrity outcomes.In the committee’s view, well-designed digital assets regulation can strike the right balance between improved consumer protections and support for industry development. Importantly, new regulation should clarify the application of existing laws and address where regulatory shortfalls may exist.
1.135The committee notes that inquiry participants emphasised the importance of ensuring digital assets regulation are congruent with international regimes. To this point, many inquiry participants held concerns with the bill’s proposed definitions, and licensing requirements left significant details to delegated legislation which has not been presented with the bill for consideration.
1.136The committee is of the view that the bill is at odds with the measured and industry accepted approach the government is undertaking to ensure that current and new regulations are well considered and effective in supporting consumers and the digital assets industry. The committee welcomes the view held by many submitters that the government’s approach is one that should be pursued.
1.137Considering the evidence presented to the inquiry, the committee is of the view that the bill lacks the detail and certainty that investors, consumers, and the industry should be provided with. Crucially, the bill fails to interoperate with the established regulatory landscape, creating a genuine concern for regulatory arbitrage and adverse outcomes to the industry.
1.138The committee notes evidence that detailed the complexity between the bill’s proposed licensing regime and AFS licensing requirements, and the regulatory burden of establishing multiple licence categories. Given this significant evidence from inquiry participants, the committee is of the view that a bespoke regulatory framework is not a supported or workable regulatory setting for the industry.
1.139The Australian Government has recently undertaken a significant token mapping exercise and further consultation on digital assets licensing and custody requirements is anticipated in the coming weeks. The committee views such consultations as the most appropriate approach to ensure future digital asset regulation is informed by industry participants and industry best practices. The committee commends the Australian Government’s commitment to improving digital assets regulation.
1.140Given the issues noted above, the committee does not consider the bill to be the appropriate vehicle to implement digital asset regulation in Australia.
1.141The committee recommends that the Australian Government continue to consult with industry on the development of fit-for-purpose digital assets regulation in Australia.
1.142The committee recommends that the bill not be passed.
Senator Jess Walsh
Chair
Labor Senator for Victoria