The Australian Securities and Investments Commission (ASIC) is set to deliver a strong message to the cryptocurrency industry: prepare to be licensed under the Corporations Act. What’s less clear is how ASIC says the Corporations Act will apply and how far that regulation will extend. ASIC Commissioner Alan Kirkland will address the Australian Financial Review Crypto and Digital Assets Summit today and is expected to signal that many crypto assets are considered by ASIC to be financial products under existing law.
What isn’t expected to be addressed is how specific crypto-assets can comply with current financial services laws.
The move, part of a broader regulatory shift, will require cryptocurrency exchanges (currently registered with and regulated by AUSTRAC) to also hold Australian Financial Services Licences. Licensing has been sought by industry bodies and the industry for years, but in a manner tailored to give consumers the benefit of protections which well regarded crypto exchanges in Australia have provided, but without labelling all crypto assets as financial products.
Australia was a leader in implementing AML/CTF requirements for digital asset exchanges in 2018 but later years saw progress on tailored regulation pivot to repeated government consultations coupled with regulation by enforcement.
Imposing licensing requirements on a significant number of crypto-asset exchanges on the basis that widely traded crypto assets are financial products, while simultaneously abstaining from providing clear guidance on how these tokens are financial products and how they can comply with licensing and disclosure obligations causes confusion and uncertainty, and risks doubling up of licensing obligations on exchanges as they must seek both a digital asset exchange licence for non-financial product tokens plus licensure for tokens which are financial products.
Many of those exchanges have taken significant steps to ensure regulatory compliance by obtaining and maintaining strong protection of client assets, KYC and AML/CTF policies, and receiving legal advice regarding their products.
While ASIC is expected to update its main regulatory guidance note for crypto-assets (INFO225) later this year, its latest comments leave critical questions unanswered, absent ASIC committing to providing a pathway to compliance, including:
There are tokens which nearly all lawyers in the industry agree are likely financial products, which are already caught in the existing financial service regime, but there are a great many which do not meet the traditional definitions of a financial product, and provide utility to users beyond any kind of speculation or investment.
Shoehorning these innovations into a licensing regime that was created over a decade before the first bitcoin was mined will have serious and ongoing ramifications for the industry. The reality of such a regime is that the overwhelming majority of tokens will not meet the heavy compliance burden that Australian financial products face, which will likely stifle innovation and encourage Australians to access offshore and decentralised platforms (in conflict with ASIC’s focus on consumer protection). Token projects will continue moving offshore to jurisdictions that provide certainty and scams may proliferate more broadly, as licensed exchanges delist tokens which cannot meet licensing requirements and consumers go looking for them.
Globally, crypto firms face similar challenges, with the US Securities and Exchange Commission (SEC) taking action against major platforms like Coinbase for offering what they assert are unregistered securities under US law. Similar to the proposed approach for Australia, no pathway to compliance has been proposed by the SEC for token issuances.
At the same event Fred Schebesta, founder of Finder, which found itself on the wrong end of regulation by enforcement said:
It would be a really good idea to try and update the law, as opposed to suing organisations and crushing the Australian economy and killing our innovation.
The USA and SEC has been seen as hostile to crypto and ASIC’s position on crypto as financial products risks Australia also being seen as an unfriendly jurisdiction. Meanwhile, jurisdictions seeking to lead in crypto, including the United Kingdom, the European Union, Singapore, and Dubai, are grappling more directly with the global nature of crypto-assets and are seeking to attract new businesses to be based within their borders.
Amy-Rose, CEO of the Digital Economy Council of Australia, said:
Our start-ups are innovating in stealth mode behind closed doors so that they’re not targeted… Then once they build product, they plan to go to Singapore or Dubai or even the US, depending on the election outcome
Samira Tollo, CTO and Cofounder of exchange elbaite said:
Australia is stuck in an echo chamber. For years, we’ve been calling for clear regulation to define digital assets, trying to fit them into existing frameworks.
In choosing a path similar to the SEC journey, ASIC will still have to grapple with the key questions on how decentralised tokens can comply with laws made for centralised issuers, plus a potential about face at the SEC if Trump wins the presidency and keeps his promises, and traditional financial product issuers will likely object to any lighter touch regime while they themselves face ongoing burdensome compliance obligations for products.
One upside of this approach is that it may drive a harder examination of existing disclosure and licensing, and real world asset tokenisation may become even more attractive to exchanges who will push their superior automation and systems into greater competition with traditional financial services businesses.
Michael Bacina – Partner, Piper Alderman
Steven Pettigrove – Partner, Piper Alderman
Luke Misthos – Lawyer, Piper Alderman