On 16 October 2023, Treasury released a paper seeking stakeholder feedback on proposals for a new framework to regulate entities providing access to cryptocurrencies and digital assets and holding them for Australians and Australian businesses. The release of Regulating Digital Asset Platforms – Proposal paper (Proposal Paper) follows a token mapping exercise undertaken by the Government earlier this year.
A number of changes are proposed by Treasury to achieve three main goals:
- introduce a framework for the digital asset industry innovation and growth;
- provide certainty and clarity for the digital asset industry; and
- protect consumers and their assets involved in the digital asset space.
This alert is intended to give you a brief summary of the proposed changes.
Summary of the proposed changes
Treasury intends to leverage and apply existing Australian financial services (AFS) laws to the sector by expanding the definition of a ‘financial product’ to include a ‘digital asset facility’ A ‘digital asset facility’ is a facility for holding assets and assets backing digital assets.
The issuer of a digital asset facility would be the person or persons responsible for the obligations owed to customers under the terms of the asset holding arrangement (platform provider).
This means a person carrying on a business of providing financial services in Australia in relation to a digital asset facility will need to hold an AFS licence (and comply with all obligations that come with holding an AFS licence). For example, platform providers and other intermediaries performing financial services in relation to digital asset facilities (e.g. brokers, arrangers, agents, market makers, and advisers) would be required to hold an AFSL.
In addition, the following key changes are proposed (amongst others):
- provide an AFS licensing exemption for ‘low value’ digital asset facilities, similar to that which currently exists for ‘non-cash payment facilities’. This exemption would apply to digital asset platforms holding less than A$1,500 per customer and less than A$5 million in aggregate;
- require all arrangements involving digital asset facilities to be ‘non-discretionary arrangements’ – i.e. the arrangements must be written, disclosed and operate according to pre-agreed and transparent rules and procedures, as well as meet various minimum standards;
- platform providers to give a ‘facility guide’ to any retail client before services are provided to them;
- require platform providers to enter into a standard form facility contract (which meets minimum standards) with any user of the platform;
- introduce a new framework for protecting consumers when interacting with service providers who deal in digital assets that are not financial products (i.e. ‘financialised functions’). Additional minimum standards are intended to be imposed on digital asset platforms in these circumstances.
These financialised functions would include:
- facilitating the trade of platform entitlements among account holders (token trading);
- assisting account holders in participating in transaction validation on public networks (token staking);
- managing the creation and exchange of platform entitlements supported by tangible and intangible non-financial product assets (asset tokenisation); and
- overseeing the sale of platform entitlements to finance the development of non-financial products and services (funding tokenisation),
albeit, that a single facility would not be permitted to perform more than one of the financialised functions.
Consultation on the Proposal Paper closes on 1 December 2023.Exposure Draft legislation is expected to be released in 2024.
A 12-month transitionary period is proposed (once legislation is passed) to allow an appropriate amount of time for industry participants to plan and make changes to ensure compliance and obtain a licence where required.
Please do not hesitate to contact us if you have any queries about the proposal or require assistance making a submission.