On 21 March 2021, Treasury released a consultation paper on the potential regulation of Crypto-Assets Secondary Service Providers (CASSPrs) (the Paper), marking an early government attempt to regulate the crypto industry. There is a strong emphasis throughout the Paper on the need to protect consumers and provide greater security and confidence in dealing with crypto assets, while still encouraging innovation and the requisite regulatory flexibility to adjust to a rapidly changing technology. The Paper acknowledges the increased prevalence of digital assets both within Australia and globally, with more than 800,000 Australians having transacted in digital assets in the last 3 years. Australia has also pledged to spend $1.2 billion on their Digital Economy Strategy aimed at making the country “a leading digital economy society by 2030”.
What are crypto assets and CASSPrs?
ASIC defines crypto assets as:
“A digital representation of value or contractual rights that can be transferred, stored or traded electronically, and whose ownership is either determined or otherwise substantially affected by a cryptograph proof.”
In the Paper, a CASSPrs is defined as:
“Any natural or legal person who, as a business, conducts one or more of the following activities or operations for or on behalf of another natural or legal person:
i. exchange between crypto-assets and fiat currencies;
ii. exchange between one or more forms of crypto assets;
iii. transfer of crypto assets;
iv. safekeeping and/or administration of virtual assets or instruments
enabling control over crypto assets; and
v. participation in and provision of financial services related to an
issuer’s offer and/or sale of a crypto asset.”
Notably, these definitions do not capture the issuing of crypto which is to remain unregulated. It appears that presently, priority is being given to the protection of consumers from those providing access to crypto services, rather than the products themselves. This is except for crypto assets that are classified as financial products, which are currently regulated under AFS licensing regime.
These definitions have been created to provide more precision in the description of digital assets. ASIC’s definition of a crypto asset can be incorporated into all of Australia\’s current regulatory regimes, and its definition is intentionally wide. The idea is that a wider definition more closely matches the aim of providing a flexible regulatory framework.
How will CASSPrs be regulated?
The Paper proposes the creation of a regulatory framework like the current AFS licensing framework for CASSPrs. The proposed CASSPr licensing regime would operate independently but would still be administered by ASIC. The classification as a CASSPr would apply to anyone who fits the definition, regardless of the services provided.
The suggested CASSPr licensing regime would include:
- minimum standards and obligations, such as to act fairly and honestly;
- new obligations including compliance with all relevant Australian laws, regular independent audits, and general prohibitions on scams and misrepresentation;
- prohibitions on hawking and pressure selling; and
- allowing ASIC to provide relief through the establishment of enforcement and supervisory mechanisms including the powers to gather information (and civil and criminal penalties).
Significantly, the proposed regime does not require CASSPrs to meet disclosure requirements or provide notification of breaches as is the case for AFS license holders. Decentralised protocols also wouldn’t be required to have a license.
What are the alternatives to a CASSPr licensing regime?
The Paper also seeks feedback on two proposed alternatives, being:
- the regulation of CASSPrs within the already established AFS Licensing framework; or
- the crypto industry being self-regulated.
According to the Paper, the regulation of CASSPrs in the same legislative regime as AFS licensing would include:
- classifying crypto assets as financial products and requiring CASSPrs to have a ‘trading venue’ to hold a market license;
- adjusting the AFS licensing regime to ‘achieve the appropriate outcomes’ for crypto assets; and
- providing flexibility for the government or ASIC to issue exemptions for certain crypto assets.
Attempts to regulate a rapidly changing industry with laws created before the technology was conceived, will no doubt be problematic. As noted in the Paper, this approach may not necessarily provide the desired flexibility needed to cope with the innovation that comes from crypto technology. It is likely that both the adjustment of the AFS licensing regime for crypto-assets and issuing of exemptions will cause delays and ultimately stifle innovation in the space.
The proposed self-regulation of the crypto industry would include:
- the creation of a code of conduct for service providers addressing matters such as consumer protection and levels of insurance;
- industry set minimum standards or codes of conduct (a good starting point would be consideration of Blockchains Australia’s code of conduct); and
- maintenance of the application of AML/CTF regulations.
The Paper notes a similar approach has been taken in the US and UK where only crypto assets which are securities or financial products are regulated. While a similar approach would provide the flexibility required to keep pace with the innovation being seen with crypto technology, its lack of an effective recourse mechanism may prove challenging.
The Paper seeks submissions on whether there should be an external dispute resolution body and whether the establishment of the same would be an appropriate approach. There has also been a suggestion that a \’Digital Services Act\’ may also be introduced to protect consumers and allow Australia to regulate the potential and promise of blockchain technology.
A self-regulatory approach for the crypto industry currently seems the most adaptable and appropriate for Australia, consistent with the US and UK approaches. The government evidently wants to continue to foster the growth and innovation of crypto assets whilst employing a flexible regulatory regime. The proposed CASSPr licensing regime would likely fall short because whilst the definitions it uses are wide, they are unlikely to keep pace with the new developments within the crypto industry. Therefore, over a short period of time, more and more regulatory gaps would appear. Furthermore, the retrofitting of crypto regulation into the already existing AFS Licensing regime would be cumbersome at best and unlikely to be easily amended to meet new developments. A regulatory regime that is too rigid will prejudice the development and adoption of crypto assets within Australia. A self-regulatory approach would more closely align Australia with other global leaders in crypto technology and ultimately position Australia to be one of the prime benefactors of digital assets.
Submissions to Treasury’s Consultation are due by COB 27 May 2022 and can be sent to email@example.com.
This article was written by GRT Lawyers, Panashe Muzira (Law graduate).