Global Legal Insights: Blockchain & Cryptocurrency Regulation 2023

Government attitude and definition

Australia is regarded as a relatively neutral and stable jurisdiction for blockchain and cryptocurrency businesses, which has caused the product landscape to expand significantly in recent years. This expansion has been generally led by businesses in the payments, crypto asset, lending, investment and custodial services spaces, and has, in part, been driven by the Commonwealth Government of Australia’s (Government) overall approach to the financial technology (fintech) sector and its broad support for new and innovative financial services and products.

The Government has historically taken a minimal intervention approach to the regulation of cryptocurrency. However, 2021 saw a raft of government reviews into both the cryptocurrency and fintech sectors, each of which sets out recommendations for expanded and clarified regulatory regimes around cryptocurrencies and payments. In March 2022, Australian Treasury released a consultation paper on a proposed regulatory framework for crypto asset secondary service providers (CASSPrs). CASSPrs are entities that provide crypto asset exchange services, transfer services, marketplace services and custody services. The proposed regime broadly reflects the current regime for financial services providers, with scope for tailored application to address the nuances of crypto asset services. The initial consultation process closed on 27 May 2022 and, at the time of writing, Treasury is still considering the industry responses to the proposals. As this consultation coincided with the election of a new Government, it remains unclear whether the new Government will continue to support the proposals. However, it is broadly expected that Australia will see a licensing regime introduced at some stage in respect of businesses providing certain crypto asset services.

In August 2022, the new Government announced that it is ready to commence consultation with stakeholders on a regulatory framework for the crypto sector and the first step will be Treasury prioritising a token mapping exercise in 2022 to better inform regulation. Token mapping will seek to define different types of digital assets and the overall aim will be to “identify notable gaps in the regulatory framework, progress work on a licensing framework, review innovative organisational structures, look at custody obligations for third party custodians of crypto assets and provide additional consumer safeguards”. A public consultation paper on token mapping is expected to be released soon.

Australian law does not equate digital currency with fiat currency and does not treat cryptocurrency as “money”. The Reserve Bank of Australia (RBA), Australia’s central bank, indicates no immediate plans to issue a retail central bank digital currency (CBDC) but has indicated a perceived use for wholesale CBDCs. As part of the various 2021 reviews, recommendations were also given to providing the RBA with expanded scope to regulate stablecoin payment systems that become fundamental to Australia’s payments infrastructure (although this has not progressed further).

There has been some general clarification of the application of Australian regulatory regimes to the sector. For example, digital currencies have been caught by Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime since 2018, recognising a shift towards digital currencies as a method of transferring value and the associated money laundering and terrorism financing (ML/TF) risks. In 2021, Australia’s primary corporate, markets, consumer credit and financial services regulator, the Australian Securities and Investments Commission (ASIC), clarified its expectations for crypto assets that form part of the underlying assets of exchange-traded products (ETPs) and other investment products (set out in ASIC Information Sheet 230 (INFO 230)). This is in addition to ASIC’s expectations regarding the regulatory status of certain crypto assets (set out in ASIC Information Sheet 225 (INFO 225)). Such clarifications are expected to continue as the cryptocurrency and blockchain sector matures and regulators upskill on the structures, benefits and risks of associated services and products.

Australian regulators have also been focusing on consumer protection. ASIC has released its 2022–2026 corporate plan, which highlights crypto assets as a key focus for the regulator. ASIC indicated that it will support the development of an effective regulatory framework for crypto assets focused on consumer protection and market integrity. In keeping with this, ASIC will also supervise and assess regulated disclosure documents and target market determinations (see Sales Regulation below) for major crypto offerings in Australia and take enforcement action to protect consumers from harm associated with crypto assets.

Cryptocurrency regulation

While there have been legislative amendments to accommodate the use of cryptocurrencies, to date these have predominantly focused on the transactional relationships (e.g., the issuing and exchanging process) and activities involving cryptocurrencies, rather than the cryptocurrencies themselves. As set out above, Australian Treasury has recently closed consultation on a proposed regulatory framework for CASSPrs, and future legislative reform in this sector is anticipated. The Government is also proposing to undertake a token mapping exercise to identify the relevant characteristics and regulated status of select crypto assets.

ASIC has reaffirmed the view that legislative obligations and regulatory requirements are technology-neutral and apply irrespective of the mode of technology that is being used to provide a regulated service. While there is currently no legislation created to deal with cryptocurrencies as a discrete area of law, this does not prevent them from being captured within existing regimes under Australian law (see under Sales regulation below).

ASIC’s regulatory guidance informs businesses of its approach to the legal status of crypto assets. This turns on how they are structured and the rights attached, which ultimately determines the regulations with which an entity must comply. For example:

• Cryptocurrency that is, or forms part of a collective investment product that is, a financial product under the Corporations Act 2001 (Cth) (Corporations Act) will fall within the scope of Australia’s existing financial services regulatory regime. See Sales regulation for further information.
• There has also been a proliferation of cryptocurrency lending activities. Where such activities fall within the scope of the credit activities and services caught under the National Credit Consumer Protection Act 2009 (Cth) (NCCP Act), the relevant entities may need to hold an Australian credit licence or be otherwise exempt from this requirement.

ASIC has clarified expectations for crypto assets that form part of the underlying assets of ETPs and other investment products (see INFO 230). In INFO 230, ASIC sets out expectations for market operators, retail fund operators (i.e., responsible entities), listed investment entities (including listed investment trusts and listed investment companies) and Australian financial services licence (AFSL) holders dealing in crypto assets. This primarily centres around criteria that ASIC expects market operators to apply when determining whether a specific crypto asset is an appropriate asset for market-traded products. This broadly requires institutional support of the crypto asset, service providers willing to support ETPs that invest in or provide exposure to the crypto asset, maturity of the spot market for the crypto asset, regulation of derivatives linked to the crypto asset, and the availability of robust and transparent pricing mechanisms for the crypto asset. ASIC has commented that (as at October 2021) it considers Bitcoin and Ether likely satisfy ASIC’s criteria for determining appropriate underlying assets for an ETP. ASIC has also included good practices in relation to how fund asset holders are required to custody crypto assets, as well as ensuring that adequate risk management systems are in place.

There are currently no specific regulations dealing with blockchain or other distributed ledger technology (DLT) in Australia. However, ASIC maintains a public information sheet (INFO 219 Evaluating distributed ledger technology) outlining its approach to the regulatory issues that may arise through the implementation of blockchain technology and DLT solutions more generally. Businesses considering operating market infrastructure, or providing financial or consumer credit services using DLT, will remain subject to the compliance requirements that currently exist under the applicable licensing regime. There is a general obligation that entities relying on technology in connection with the provision of a regulated service must have the necessary organisational competence and adequate technological resources and risk management plans in place. While the existing regulatory framework is sufficient to accommodate current implementations of DLT, as the technology matures, additional regulatory considerations will arise.

Various cryptocurrency networks have also implemented “smart” or self-executing contracts. These are permitted in Australia under the Electronic Transactions Act 1999 (Cth) (ETA) and the equivalent Australian state and territory legislation. The ETA provides a legal framework to enable electronic commerce to operate in the same way as paper-based transactions. Under the ETA, self-executing contracts are permitted in Australia, provided they meet all the traditional elements of a legal contract.

Sales regulation of cryptocurrency

The sale of cryptocurrency and other digital assets is regulated by Australia’s existing financial services regulatory regime. Core considerations for issuers are outlined below.

Licensing

Entities…