ASIC consults on proposed updates to crypto-guidance

6 minute read 17.12.2024 Prayas Pradhan; Ian Lockhart; Nicole Brown; Richard Batten; Tony Coburn and Danelle Prinsloo

On 4 December, ASIC commenced consultation on proposed changes to its existing guidance on digital assets. We discuss the proposed changes.

Key takeouts

ASIC seeks industry feedback on proposed updates to ASIC's existing guidance in Information Sheet 225 Crypto Assets.

ASIC intends to update INFO 225 to provide further guidance about how existing Australian financial services (AFS) regulation applies to crypto and other digital assets

As well as providing worked examples, ASIC has expressed a view that fiat-backed stablecoins may be a financial product

ASIC has released Consultation Paper 381: Updates to INFO 225: Digital Assets: Financial Products and Services (CP 381) to seek industry feedback on proposed updates to ASIC's existing guidance in Information Sheet 225 Crypto Assets (INFO 225). Attached to CP 381 is a draft of the updated INFO 225.

We discuss the key proposed changes below.

ASIC's application of existing financial product definitions in digital asset scenarios

ASIC proposes to include 13 worked examples to demonstrate its interpretation of how existing financial product definitions may potentially apply to digital assets in practice. The worked examples cover a range of digital assets, including exchange tokens, native token staking services, in-game non-fungible tokens (NFT), yield-bearing stablecoins, gold asset referenced tokens, membership NFTs, tokens representing a claim for pre-paid services, fundraising for a new blockchain, meme coins, tokenised concert tickets, tokenised securities, CFDs over a digital asset and digital asset wallets.

The inclusion of the worked examples is in response to industry requests for more detailed guidance on digital assets and related products that ASIC considers are financial products. The worked examples are of course not an exhaustive list, but merely ASIC's views on those specific sets of hypothetical scenarios.

Proposed regulation of stablecoins

In CP 381, ASIC states that non-interest bearing stablecoins that are fiat-backed, pegged 1:1 to the AUD and redeemable as such may constitute a financial product in the form of a non-cash payment facility (NCPF).

This view expressed by ASIC, if maintained in the final guidance, will have far reaching impacts not just on issuers of 'regulated' stablecoins (who would need an AFS licence to issue NCPFs), but also potentially on other industry participants that buy, sell and/or use stablecoins within their business. In particular, centralised exchanges would likely need an AFS licence to 'make a market' in the relevant regulated stablecoin. Marketplaces that facilitate the trading of such stablecoins may also trigger the need to obtain an Australian markets licence.

ASIC appears to have based their view on the fact that the meaning of ‘makes non-cash payments’ in the Corporations Act allows for the possibility of payments being made by passing the ownership of a non-cash payment facility from one person (the payer) to another person (the payee).

ASIC has acknowledged that 'stakeholders may have a range of views on these digital assets and their legal treatment' and has encouraged industry to provide their feedback on this matter, and the practical implications for businesses.

In addition, ASIC has also acknowledged its view may not align with treatment of stablecoins under the proposed reforms to Australia's payments licensing framework and digital asset platforms. The Government previously consulted on these proposed reforms at the end of 2023, but we are yet to see draft legislation to give effect to either of those reforms.

What about non-AUD backed stablecoins?

Although CP 381 refers only to AUD-backed stablecoin, ASIC's confirmed in a Digital Assets liaison meeting that non-AUD denominated stablecoins are potentially within scope if they have the same features described in CP 381. That is, ASIC's view is agnostic to which fiat currency a stablecoin is pegged to – and therefore if an overseas stablecoin issuer were to offer a 'regulated' stablecoin in Australia, they would have to consider whether they are carrying on a financial services business in Australia and therefore need an AFS licence.

Evolving AFS licensing in the age of digital assets

CP 381 confirms ASIC's position that the existing AFS licensing and markets licensing regimes should and will be uniformly applied to digital assets that are categorised as financial products, as well as to entities providing financial services in relation to these products.

In particular, ASIC is of the view that:

AFS licence authorisations: existing AFS licence authorisations options are appropriate for digital asset businesses that engage in activities that involve a financial product – except for digital assets that: are derivatives without leverage/margin requirements; or act as a facility for making financial investments.
AFS licensing proofs: existing proofs remain adequate, and there is no need to require digital asset business applying for an AFS licence to submit new or additional proofs. ASIC acknowledged that it may require additional information in relation to such applications, but proposes to seek additional information through its current process of issuing requisitions.
AFS licence requirements: key compliance requirements for AFS licensees (including for example financial requirements, organisational competence, conflicts of interest and dispute resolution) will apply equally to digital asset business that require an AFS licence.

What about the major coins and tokens (Bitcoin, Ether, Litecoin etc.)?

Earlier this year in September, ASIC commissioner Alan Kirkland said (at the Australian Financial Review Crypto and Digital Assets Summit) that ASIC considers many widely traded crypto assets are financial products. This sent alarm bells ringing as many feared ASIC would be amending their guidance to specify their view that Bitcoin, Ether and other commonly traded crypto are financial products.

Fortunately, ASIC has not expressed such views in CP 381 or the proposed draft INFO 225.

Other proposed changes

In addition to the above, the Consultation Paper also:

confirms ASICs position that the current legislative regime for financial markets and clearing and settlement facilities is sufficiently flexible to cover a range of business models, including digital asset business models;
includes additional guidance in relation to design and distribution obligations applicable to digital assets that are financial products;
includes additional guidance in relation to financial products that are facilities for making a financial investment, and how this financial product definition may apply in digital asset scenarios;
proposes the introduction of two new financial product authorisations for digital assets as follows: Derivatives: a tailored authorisation that caters to digital assets that are derivatives without leverage or margin requirements, acknowledging the distinct risk profile of such products; Facility for Making a Financial Investment: to accommodate digital assets that may not fall under a specific financial product category but act as a facility for making financial investments (and which would currently fall under the 'miscellaneous financial facility') authorisation.

Transitional arrangements – potential class no-action position

In the Consultation Paper, ASIC proposes to provide no-action relief for digital asset businesses that are in the process of applying for or varying an AFS licence, market licence or CS facility licence. The proposed no-action position will provide digital asset businesses with a 'transitional period' to align its business with ASIC's updated guidance under INFO 225.

The availability of the no-action relief will be limited only to businesses that commenced operations in Australia before 4 December 2024. Further, the no-action relief would only become effective, subject to certain conditions being met, from the time the application is lodged (for AFS licence applications) or when a business notifies ASIC of its intention to make an application (for market or CS facility licences), which must be no later than six months from the date the updated INFO 225 is published. The no-action position would remain in effect until the licence application is either withdrawn or decided upon.

The no-action position has been intentionally drafted such that relief would not cover conduct occurring prior to the date of an licence application. ASIC therefore appears to be signalling its intent to industry to carefully consider their regulatory position in light of the proposed draft updated INFO 225.