2022 is the Year of the Tiger. The Australian Government is getting into the spirit by announcing on 8 December 2021 that next year it will be undertaking 'the most significant reforms to Australia's payment systems in more than 25 years'. An aggressive schedule has been set and these reforms will transform Australia's payments system and build on Australia's Digital Economy Strategy.
Government responds to payments reviews
The details of how the Government intends to embark on these reforms are found in its responses to each of the recommendations from the following major reviews into Australia's current payment systems regulatory framework. These were all recently completed:
The three reviews made 41 recommendations between them. Most were accepted - the Government has only rejected two.
- 14 of the 15 Review of the Australian Payments System recommendations were accepted. The Government has not supported the establishment of a payments industry convenor.
- Six of the 12 Senate Committee recommendations were agreed or agreed in principle and five were noted. The Government has not supported the proposal for renewable tax discounts for digital asset mining.
- Eight of the 14 Parliamentary Joint Committee recommendations were supported by the Government and six were noted. None were rejected.
Timing of the reforms
The reforms will broadly progress in two phases. The most urgent and immediately implementable reforms will be consulted on in the first half of 2022, and the remainder by the end of 2022.
Although many in the industry were not expecting a response from the Government until the new year, the Government has reacted quickly and assertively. It has demonstrated this area is a priority by accepting almost all of the recommendations put forward in the three reviews, including establishing a financial markets licensing regime for digital currency exchange providers. The Government will also be consulting on extending Australia's rigorous custody requirements to holders of digital assets as well as a new payments licensing framework.
The Government is aiming to progress key items in accordance with the below timeline:
Urgent action items
- Commence consultation immediately and develop an initial strategic longer-term plan for the payments systemby mid-2022.
- Establish a payments forum in early 2022 with all of the relevant regulators to ensure coordination and alignment in approach and policy outcomes.
Complete consultation by mid-2022
- Additional powers for the Treasurer to set payment system policy, including a power to designate payment systems and participants where it is in the national interests to do so. The Government intends to provide additional funding to allow the Treasury to build an enhanced payments function.
- Modernise payments system legislation to accommodate new and emerging payment systems (including buy now, pay later and digital wallets) – including updating the definition of 'payment system' in the Payment Systems (Regulation) Act 1998.
- Introduce a list of payment functions that require regulation.
- Establish a market licensing framework for digital currency exchanges to provide greater confidence in the trading of crypto assets.
- Establish a custody or depository regime with minimum standards for businesses that hold digital assets on behalf of consumers.
- Advice from the Council of Financial Regulators and other relevant agencies on the underlying causes and policy responses to de-banking.
Complete consultation by end of 2022
- Develop framework to replace the current one-size-fits-all payment licensing arrangements with a functionally based framework adopting graduated, risk-based regulatory requirements in-line with recommendations made by the Council of Financial Regulators.
- Mandate the ePayments Code for payments licensees.
- Report from the Board of Taxation on an appropriate framework for the taxation of digital transactions and assets.
- Complete mapping exercise of existing cryptocurrencies and tokens to determine best way to characterise various types of digital assets in Australia.
- Consult with industry on an appropriate regulatory structure for innovative new corporate structures like Decentralised Autonomous Organisations (DAO).
- Review and advice from the Treasury and RBA on the feasibility of a retail Central Bank Digital Currency (CBDC) in Australia.
This means that by the end of 2022, Australia will likely see an updated and refreshed financial regulatory and payments regime that is fit for the future, "placing it among a handful of lead countries in the world" (from the Hon Josh Frydenberg MP's address to the Australia-Israel Chamber of Commerce, Melbourne).
The reforms will be guided by industry, and led by Josh Frydenberg and Senator Andrew Bragg, who chaired the Senate Select Committee on Australia as a Technology and Financial Centre.
A much needed change - but balance is key
These changes in the Australian regulatory and licensing landscape will provide much needed clarity and guidance to providers, as well as giving assurance and confidence to consumers.
The Government's rapid response to the three reviews and willingness to progress a number of key items by mid-2022 reflects the growing number of voices in Australia (from regulators, industry and consumers alike) about the urgent need to renovate Australian payments system framework. However, although pressure is building for the new regime to be implemented as soon as possible, it is crucial that the reforms are fit-for-purpose and easy to navigate.
The consequences of fast-tracking piecemeal changes to the Australian financial services regulatory regime has led to the Australian Law Reform Commission being handed the mammoth task of inquiring into the simplification of the legislative framework for financial services regulation.
It is important that the proposed reforms do not add further complexity. Instead, the Government should take the opportunity to develop clear and simple regulation which future-proofs the regulation of payment systems and digital assets in Australia. If the Government can achieve this, the new regime will mark an important development, not only for Australia but also for the global payments and crypto/digital asset community.
Along with our clients and other industry participants, we are preparing for the consultations and legislative changes coming its way in early 2022. We encourage participation in the Government's consultations and will provide further updates as and when the Government's consultation papers are released. Contact us if you require any assistance.