Government attitude and definition

There has been a proliferation of blockchain and cryptocurrency businesses in Australia. The Commonwealth Government of Australia (Government) has taken a generally supportive approach for new and innovative financial services and products in the financial technology (fintech) sector.

Clarity regarding the application of Australian regulatory regimes to the blockchain and cryptocurrency sector has been iterative.

There has been a raft of government reviews into the cryptocurrency, fintech, financial services, payments
and stored value regimes over the last few years. This has included (among others):

• In 2022, Australian Treasury (Treasury) consulted on a proposed regulatory framework for crypto asset secondary service providers (CASSPrs). The proposals broadly reflected the regime for financial service providers, with scope for tailored application to address the nuances of crypto asset services. The CASSPr consultation coincided with a change of Government and the proposals were suspended in favour of a token mapping consultation.
• On 3 February 2023, Treasury released a token mapping consultation paper, which sought to identify the key activities and functions of crypto assets and map them against existing regulatory frameworks.
• On 29 March 2023, opposition Senator Andrew Bragg introduced a private member’s bill, Digital Assets (Market Regulation) Bill 2023 proposing to regulate digital assets, including by introducing licensing requirements for digital asset exchanges, digital asset custody service providers and stablecoin issuers and disclosure requirements for facilitators of central bank digital currencies (CBDCs) in Australia.
• On 20 April 2023, the Attorney-General released its proposed reforms to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act). On 2 May 2024, the Attorney-General released its second consultation in relation to the proposed AML/CTF Act reforms.
• On 7 June 2023, Treasury released its Strategic Plan for Australia’s Payment System (Payments Strategic Plan), outlining the policy objectives and priorities to reform Australia’s payments system. The Payments Strategic Plan was released alongside two consultations, the first on reforming the Payments Systems (Regulation) Act 1998 (Cth) (Payments Systems Act) and the second on modernising the licensing framework for payment service providers (PSPs). Subsequent consultations have been released providing more information on how the Government proposes to implement the Payments Strategic Plan.
• On 11 October 2023, as part of the Payments Strategic Plan, Treasury released a draft bill and explanatory memorandum for industry comment on proposals to update the Payments Systems Act. The draft bill proposes to expand the Payments Systems Act coverage across key definitional areas and introduce new ministerial powers.
• On 16 October 2023, Treasury released a consultation paper for industry comment on proposals to regulate digital asset intermediaries under the existing financial services licensing framework. The overarching theme of the proposals was to require digital asset intermediaries to hold an Australian financial services licence (AFSL) and comply with enhanced requirements regarding conduct and standard contracts. Submissions closed on 1 December 2023 and exposure draft legislation is expected to be released later in 2024.
• On 30 November 2023, Treasury released a consultation relating to mandatory industry scam codes for the private sector. The consultation notes that there is currently no overarching regulatory framework to set clear roles for the Government, regulators and the private sector to address and combat scam activity. The Government has committed to mandatory industry codes that outline the responsibilities of the private sector in relation to scam activity, focusing on banks, telecommunications providers and digital platforms. The consultation closed on 29 January 2024.
• On 8 December 2023, as part of the Payments Strategic Plan, Treasury released its second consultation paper in relation to an enhanced regulatory framework for Australian PSPs. The paper proposed amendments to existing prudential regulation, including requiring major stored value facilities and major payment stablecoin issuers holding in excess of A$100 million to be authorised by the Australian Prudential Regulation Authority (APRA). All non-bank issued stablecoins will also need to be collateralised 1:1 with appropriate reserves.

This backdrop of extensive regulatory change has been underpinned by regulators (primarily the corporate regulator, the Australian Securities and Investments Commission (ASIC)) pursuing high-profile enforcement actions against crypto businesses. These actions have focused on alleged unlicensed activities and the nature of associated conduct (e.g., perceived instances of investor and consumer risks with crypto-adjacent businesses) (see “Sales regulation” below). While this reflects ASIC’s 2023–27 Corporate Plan and 2024 Enforcement Priorities focusing on consumer protection and scams, the “regulate by enforcement” approach adopted to date has strengthened calls for legislative clarity.

The Reserve Bank of Australia (RBA), Australia’s central bank, indicates no immediate plans to issue a retail CBDC. However, it indicates a perceived use for wholesale CBDCs and is currently undertaking various industry research projects to explore use cases and economic benefits of a CBDC in Australia. This coincides with Treasury’s consultation proposing to provide the RBA with expanded scope to regulate stablecoin payment systems that become fundamental to Australia’s payments infrastructure.

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, Treasury has undertaken (and continues to undertake) multiple consultations to clarify the nature of digital assets and how the associated risks translate to a regulatory framework for crypto asset service providers. These consultations are maintaining the focus of managing risks through regulating centralised entities rather than individual assets or decentralised (or distributed) structures.

In the context of its recent enforcement actions, ASIC reaffirms 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 exchange-traded products (ETPs) and other investment products (see ASIC Information Sheet 230 (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 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. While ASIC has provided this clarity, recent enforcement actions indicate that it considers crypto assets to be an appropriate investment asset for retail clients in very limited circumstances.

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

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 carrying on a financial services business in Australia must hold an AFSL or be exempt. Therefore, persons providing financial services in relation to crypto assets that constitute financial products will trigger the AFSL requirement and associated compliance and disclosure requirements. The definitions of “financial product” and “financial service” under the Corporations Act are broad and ASIC has indicated in ASIC Information Sheet 225 (INFO 225) that crypto assets with similar features to existing financial products will trigger the relevant regulatory obligations.

As above, ASIC indicates (in INFO 225) that the legal status of crypto assets turns on their structure and the associated rights (which ASIC interprets broadly). Depending on the circumstances, crypto assets may constitute interests in managed investment schemes (collective investment vehicles), securities, derivatives, or fall into a category of more generally defined financial products, all of which are subject to AFSL regulation. In INFO 225, ASIC provides high-level regulatory signposts for crypto asset participants to determine whether they have legal and regulatory obligations. These signposts are relevant to crypto asset issuers, crypto asset intermediaries, miners and transaction processors, crypto asset exchanges and trading platforms, crypto asset payment and merchant service providers, wallet providers and custody service providers, and consumers.

Entities dealing in financial product crypto assets will need to comply with the regulatory requirements under the Corporations Act, which generally include disclosure, registration, licensing and conduct obligations. An entity that facilitates payments by crypto assets may also be required to hold an AFSL and the operator of a crypto asset exchange may be required to hold an Australian market licence if the supported assets are financial products.

As noted, Treasury continues to consult on a proposed licensing regime for crypto asset service providers.
See “Government attitude and definition” for further information.

Additionally, the Australian Law Reform Commission (ALRC) recently conducted an inquiry into simplifying Australia’s overarching financial services regulatory framework to make it “more adaptive, efficient and navigable for consumers and regulated entities”. As part of the inquiry, the ALRC provided interim reports on three areas, being the design and use of definitions in corporations and financial services legislation, the regulatory design and hierarchy of laws, and the potential to reframe or restructure financial services laws. A final consolidated report, Confronting Complexity: Reforming Corporations and Financial Services Legislation (ALRC Report 141) was released on 18 January 2024 containing 58 recommendations designed to produce this improved legislative framework. While the final report’s key proposals do not address crypto assets as an asset class, it does recognise the regulation of crypto assets as a public policy initiative that may be accommodated for by the improved legislation.

Marketing

As crypto asset sales may involve an offer of financial products, this has marketing implications. For example, financial product offers to retail clients (with some exceptions) must be accompanied by a regulated disclosure document (e.g., a product disclosure statement or a prospectus and a financial services guide) that satisfies the content requirements of the Corporations Act and regulatory guidance published by ASIC. Such a disclosure document must set out prescribed information, including benefits and risks of the product, as well as the provider’s fee structure, to assist a client in deciding whether to acquire the crypto asset from the provider. In some instances, the marketing activity itself may cause the sale to be an offer of a regulated financial product.

Depending on the investor’s status as a wholesale client, an offer of financial products may not require regulated disclosure under the Corporations Act.

Cross-border issues

Carrying on a financial services business in Australia will require a foreign financial service provider (FFSP) to hold an AFSL, unless an exemption applies. Notably, the Corporations Act may apply to crypto asset sales regardless of whether they are created and offered from Australia or overseas. At the time of writing, Australia’s treatment of regulated offshore entities is in a state of flux. Historically, FFSPs regulated in comparable jurisdictions had the benefit of limited licensing relief for financial services provided to wholesale clients. In 2020, this was repealed and replaced with a foreign AFSL regime. In 2021, the Government proposed reverting back to the comparable jurisdiction regime (with some amendments). This proposal was put to Australian parliament in early 2022; however, the proposed legislation lapsed with the change of Government. Subsequently, on 7 August 2023, Treasury released consultation and related exposure draft legislation on licensing exemptions for FFSPs. The licensing exemptions were broadly based on the 2022 legislation, including a professional investor exemption, a comparable regulator exemption, a market maker exemption and a fit and proper person test exemption. On 30 November 2023, the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 was introduced to Parliament, which was an updated bill considering the feedback from the August 2023 consultation. The draft bill has been referred to the State Economics Legislation Committee, who released a report on 10 May 2024 recommending that the Bill be passed. If the draft bill is passed, it will take effect from 1 April 2025.

Foreign companies taken to be carrying on a business in Australia, including by dealing in crypto assets, may be required to either establish a local presence (i.e., register with ASIC and create a branch) or incorporate a subsidiary. Broadly, the greater the level of system, repetition or continuity associated with an entity’s business activities in Australia, the greater the likelihood that registration will be required. Generally, a company holding an AFSL will be carrying on a business in Australia and will trigger the requirement.

Marketing financial product crypto assets to Australian residents from offshore may still trigger licensing and disclosure requirements. Generally, an offshore service provider may respond to requests for information and issue products to an Australian resident if the resident makes the first (unsolicited) approach and there has been no conduct on the part of the issuer designed to induce the investor to make contact, or activities that could be misconstrued as the provider inducing the investor to make contact.

Design and distribution obligations and product intervention powers

Since October 2021, issuers and distributors of financial products must comply with design and distribution obligations (DDO), which may impact the way crypto assets are structured and sales are conducted. Issuers and distributors must implement effective product governance arrangements, which include (among other things) creating and distributing target market determinations (TMDs) in relation to retail clients acquiring the relevant financial products. The DDO aims to ensure that financial products are targeted at the correct category of potential customers, and disclosures regarding the adequacy and suitability of the product for the target market are required to be accurate and timely.

ASIC also has product intervention powers where there is a risk of significant consumer detriment, enabling ASIC to address market-wide problems or specific business models and deal with certain “first mover” issues. The power covers financial products under the Corporations Act and Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and credit products under the NCCP Act.

In ASIC’s 2023–27 Corporate Plan, ASIC has identified product design and distribution as one of its key strategic priorities, and has been actively enforcing this space. ASIC issued its first DDO stop orders in July 2022 in response to deficiencies in TMDs made under the DDO regime. Between July 2022 and May 2024, ASIC issued 86 stop orders to prevent consumers and investors being targeted by products that may be inappropriate for their objectives, financial situation and needs. This included three stop orders preventing the distribution of crypto funds associated with alleged deficient TMDs. ASIC’s powers are likely to impact marketing and distribution practices in the crypto asset sector where they fall within its remit.

Consumer law

Even if a crypto asset sale is not regulated under the Corporations Act, it may remain subject to other regulation and laws, including the Australian Consumer Law set out at Schedule 2 to the Competition and Consumer Act 2010 (Cth) (ACL) relating to the offer of services or products to Australian consumers. The ACL prohibits misleading or deceptive conduct in a range of circumstances, including in the context of marketing and advertising. Therefore, care must be taken in crypto sale promotional material to ensure that it does not contain false information and that buyers are not misled or deceived. Additionally, promoters and sellers are prohibited from engaging in unconscionable conduct and must ensure that the issued crypto assets are fit for their intended purpose. The protections of the ACL are generally reflected in the ASIC Act, providing substantially similar protection to investors in financial products or services.

ASIC has also received delegated powers from the Australian Competition and Consumer Commission to enable it to take action against misleading or deceptive conduct in marketing or issuing crypto asset sales (regardless of whether it involves a financial product). ASIC has indicated that misleading or deceptive conduct in relation to crypto asset sales may include:

• using social media to create the appearance of greater levels of public interest;
• creating the appearance of greater levels of buying and selling activity for a crypto asset by engaging in (or arranging for others to engage in) certain trading strategies;
• failing to disclose appropriate information about the sale; or
• suggesting that the sale is a regulated product or endorsed by a regulator when it is not.

ASIC has stated that it will use this power to issue further inquiries into crypto asset issuers and their advisers to identify potentially unlicensed and misleading conduct. A range of significant consequences may still apply for failing to comply with the ACL or the ASIC Act, including monetary penalties, injunctions, compensatory damages and costs orders.

Common law

There has been recent judicial consideration of the application of financial services laws to crypto-related
products and services following increased regulatory attention from ASIC. Notably:

• On 25 October 2022, ASIC commenced proceedings against BPS Financial Pty Ltd (BPS) for allegedly making false, misleading or deceptive representations and engaging in unlicensed conduct in relation to a regulated payment facility involving a crypto asset token called Qoin. On 3 May 2024, the Federal Court found that BPS engaged in unlicensed conduct when offering the “Qoin Wallet”. On 18 June 2024, ASIC appealed part of the judgment where the Court held that BPS was exempt from the requirement to be licensed.
• On 23 November 2022, ASIC commenced proceedings against Web3 Ventures Pty Ltd (Block Earner) alleging that it provided unlicensed financial services in relation to its crypto asset-based products and that it operated an unregistered managed investment scheme. On 9 February 2024, the Federal Court held that Block Earner’s fixed yield product required Block Earner to be licensed and the product registered. The Court found that Block Earner’s variable yield product, which provided access to decentralised finance (DeFi) protocols, did not require Block Earner to be licensed. On 4 June 2024, the Federal Court relieved Block Earner from liability to pay a penalty. On 18 June 2024, ASIC appealed the Federal Court’s decision to relieve Block Earner from liability to pay a penalty. On 9 July 2024, Block Earner cross-appealed the Court’s finding regarding its fixed yield product.
• On 15 December 2022, ASIC commenced proceedings against Finder Wallet Pty Ltd (Finder) for allegedly providing unlicensed financial services, breaching product disclosure requirements and failing to comply with design and distribution obligations in relation to its crypto asset-related product Finder Earn. On 14 March 2024, the Federal Court dismissed the proceedings. On 14 April 2024, ASIC appealed the decision.

Taxation

The taxation of cryptocurrency in Australia has been an area of much debate, despite recent attempts by the Australian Taxation Office (ATO) to clarify the operation of the tax law. For income tax purposes, the ATO views cryptocurrency as an asset that is held or traded (rather than as money or a foreign currency). Recent amendments to Australia’s tax legislation clarify that cryptocurrencies are not foreign currencies for income tax purposes.

The tax implications for holders of cryptocurrency depend on the purpose for which the cryptocurrency is acquired or held. The summary below applies to holders who are Australian residents for tax purposes.

Sale or exchange of cryptocurrency in the ordinary course of business

If a holder of cryptocurrency is carrying on a business that involves sale or exchange of the cryptocurrency in the ordinary course of that business, the cryptocurrency will be treated as trading stock. Gains on the sale of the cryptocurrency will be assessable and losses will be deductible (subject to integrity measures and “non-commercial loss” rules).

Whether or not a taxpayer’s activities amount to carrying on a business is a question of fact and degree, and is ultimately determined by weighing up the taxpayer’s individual facts and circumstances. Generally (but not exclusively), where the activities are undertaken for a profit-making purpose, are repetitious, involve ongoing effort, and include business documentation, the activities would amount to the carrying on of a business.

Isolated transactions

Even if a holder of cryptocurrency did not invest or acquire the cryptocurrency in the ordinary course of carrying on a business, profits or gains from an “isolated transaction” involving the sale or disposal of cryptocurrency may still be assessable where the transaction was entered into with a purpose or intention of making a profit, and the transaction was part of a business operation or commercial transaction.

Cryptocurrency investments

If cryptocurrency is not acquired or held in the course of carrying on a business, or as part of an isolated transaction with a profit-making intention, a profit on sale or disposal should be treated as a capital gain. In this regard, the ATO has indicated that cryptocurrency is a capital gains tax (CGT) asset. Capital gains may be discounted under the CGT discount provisions, so long as the taxpayer satisfies the conditions for the discount (for example, the cryptocurrency is held for at least 12 months before it is disposed of).

Although cryptocurrency may be a CGT asset, a capital gain arising on its disposal may be disregarded if the cryptocurrency is a “personal use asset” and it was acquired for A$10,000 or less. Capital losses made on cryptocurrencies that are personal use assets are also disregarded. Cryptocurrency is more likely to be a personal use asset if it was acquired and used within a short period of time for personal use or consumption (that is, to buy goods or services).

Note that the ATO’s view on the income tax implications of transactions involving cryptocurrencies is in a state of flux due to the rapid evolution of both cryptocurrency technology and its uses. On 21 March 2022, the Government released the Terms of Reference for a review to be undertaken by the Board of Taxation into the appropriate policy framework for the taxation of digital assets and transactions in Australia. In August 2022, the Board of Taxation published a consultation guide, and on 23 February 2024 the Board of Taxation delivered its report on the Tax Treatment of Digital Assets and Transactions to the Government.

Other transactions involving cryptocurrency

Other transactions involving cryptocurrency that may have taxation implications including the following:

• Staking – An entity may stake their cryptocurrency to facilitate the validation and verification of transactions on a blockchain. The entity may be rewarded with additional tokens for its role in this process. The market value of the additional tokens at the time they are received will be ordinary income that the entity will be taxed on at marginal tax rates.
• DeFi – An entity may lend their cryptocurrency via DeFi apps protocols or platforms. Any “interest” that the entity receives in the form of tokens should be assessable as ordinary income. However, it is important to note that entering into the DeFi arrangement may trigger a capital gain or loss. This is because the DeFi arrangement may result in a disposal of the cryptocurrency to the borrower. The key question is whether the entity, as a lender, maintains beneficial ownership of the cryptocurrency that has been lent. If there is a change in beneficial ownership, this will constitute a disposal for CGT purposes.

Australian goods and services tax (GST)

The normal GST rules apply to using or receiving digital currency to pay for goods and services as if the digital currency is money, but the remittance of GST to the ATO must be in Australian currency.

However, supplies of digital currency in exchange for money or digital currency (i.e., trading in digital currency) are not subject to GST on the basis that the supplies will be:

• input-taxed financial supplies, if supplied to another Australian resident located in Australia; or
• GST-free supplies, if supplied to a non-resident who is not located in Australia.

Consequently, such suppliers of digital currency will not be required to pay to the ATO GST on these supplies. However, the suppliers of digital currency may be charged GST on costs that relate to their sale of the digital currency (i.e., a transaction fee charged by a digital currency exchange (DCE) platform), and may be restricted from claiming input tax credits for such costs.

The term “digital currency” is defined under the A New Tax System (Goods and Services Tax) Act 1999 as a digital unit of value that has all of the following characteristics:

• it is fungible and can be provided as consideration for a supply;
• it is generally available to the public without any substantial restrictions on their use as consideration;
• it is neither denominated in any country’s currency, or denominated in a currency that is not issued by, or under the authority of, an Australian government agency or a foreign government agency;
• its value is not derived from or dependent on the value of anything else;
• it does not give an entitlement to receive, or to direct the supply of, anything unless the entitlement is incidental to holding the digital currency or using it as consideration; and
• if supplied, it would not be an input-taxed financial supply for a reason other than being a supply of a
  digital currency or money.

In relation to a holder carrying on an enterprise of cryptocurrency mining, whether or not GST is payable by the miner on its supply of new cryptocurrency depends on a number of factors, including its specific features, whether the miner is registered for GST, and whether the supply is made in the course or furtherance of the miner’s enterprise.

For example, if the miner supplies mining services, i.e., to a mining pool operator in Australia, the supply of mining services may be taxable if the supply is made in the course or furtherance of an enterprise that is registered for GST.

A miner would generally be required to register for GST if, over a 12-month period, the miner has a GST turnover (i.e., gross income from all businesses minus GST, excluding the value of any input-taxed supplies of digital currencies and other input-taxed supplies) of A$75,000 or more. A miner who is not required to register for GST may nevertheless elect to register for GST in order to claim input tax credits from the ATO for certain GST costs related to its supplies of mining services.

A miner will carry on an enterprise where the miner conducts the activity, or a series of activities, in the form of business or in the form of an adventure or concern in the nature of trade. However, this does not include activities conducted for a private recreational pursuit, a hobby, activities carried on as an employee or office holder, or activities carried on by individuals or partnerships without a reasonable expectation of profit. The scope of carrying on an “enterprise” can be broader than carrying on a “business” and some miners may unintentionally be carrying on an “enterprise” for GST purposes.

Enforcement

The ATO has created a specialist task force to tackle cryptocurrency tax evasion. The ATO also collects bulk records from Australian cryptocurrency designated service providers to conduct data matching to ensure that cryptocurrency users are paying the right amount of tax. With the broader regulatory trend around the globe moving from guidance to enforcement, it is likely that the ATO will also continue to tighten its scrutiny of cryptocurrency.

Money transmission laws and anti-money laundering requirements

DCE providers are required to register and enrol with the Australian Transaction Reports and Analysis Centre (AUSTRAC) as a reporting entity under Australia’s AML/CTF regulatory framework. Since 9 November 2023, an unenrolled DCE may be liable for a daily penalty of up to 60 penalty units (currently A$18,780 per day where penalty units are A$313 each). Broadly, registered exchanges will be required to implement know-your-customer processes to adequately verify the identity of their customers, with ongoing reporting obligations such as annual compliance reporting and the requirement to monitor and report suspicious and large transactions. Exchange operators must also keep certain records relating to customer identification and transactions for up to seven years. DCE providers are required to renew their registration every three years.

The DCE sector has been of great interest to AUSTRAC, in particular monitoring the money laundering and terrorism financing (ML/TF) risks associated with digital currency. In April 2022, AUSTRAC released a financial crime guide to preventing the criminal abuse of digital currencies. Since April 2023, the Attorney-General’s Department has undertaken two consultations on long-awaited reform to Australia’s AML/CTF regime (see "Government attitude and definition”). Relevant to DCEs, among the matters are proposed changes to:

• how DCEs are regulated from an AML/CTF perspective. The reforms proposed expanding the types of regulated services to cover exchanges between one or more other forms of digital currency, transfers of digital currency on behalf of a customer, safekeeping or administration of digital currency and provision of financial services related to an issuer’s offer and/or sale of a digital currency;
• expand the definition of the designated service relevant to foreign exchange services to now include
  digital assets;
• update the travel rule and extend its application to remitters and DCE providers. The consultation proposes to update the travel rule to align with international standards by requiring payer and payee information for transfers on behalf of customers to other businesses, payer information to be verified and the inclusion of payee information; and
• introduce a suitability test for fit and proper individuals with respect to registrable designated
  services (including DCE services). 

Submissions closed on 13 June 2024.

Promotion and testing

Subject to recent events, regulators in Australia have generally been receptive to new technology (including blockchain and cryptocurrency) and have sought to improve their understanding of, and engagement with, businesses by regularly consulting with industry on proposed regulatory changes. Both ASIC and AUSTRAC have established Innovation Hubs designed to assist new market entrants (including those operating in the blockchain and cryptocurrency sectors) more broadly in understanding their obligations under Australian law. ASIC has also entered into a number of cooperation agreements with overseas regulators, which aim to further understand the regulatory approach and product offerings in other jurisdictions.

ASIC Innovation Hub

The ASIC Innovation Hub is designed to foster innovation that could benefit consumers by helping Australian start-ups (including those operating in the blockchain and cryptocurrency sectors) navigate the Australian regulatory system. The Innovation Hub provides tailored information and access to informal assistance intended to streamline the AFSL process for innovative fintech start-ups, which could include cryptocurrency-related businesses.

In 2016, ASIC established the fintech regulatory sandbox, which included a fintech licensing exemption to allow businesses to test certain financial services, financial products and credit activities without holding an AFSL or Australian credit licence. This had strict eligibility requirements for both the type of businesses and the products and services that qualify for the licensing exemption, as well as restrictions on how many persons can be serviced and caps on the value of the financial products or services that can be provided. In 2020, the Government passed regulation to enhance this regulatory sandbox (aptly named the “enhanced regulatory sandbox”), which expanded the scope of the sandbox to test a broader range of financial services and credit activities for up to 24 months. This is broadly considered to better support innovation in the sector by increasing the cap restrictions as well as providing more nuanced parameters for clients that can be serviced.

Cross-border business

ASIC engages with regulators overseas to deepen its understanding of innovation in financial services, including in relation to cryptocurrencies. In particular, ASIC’s enhanced cooperation agreement with the United Kingdom’s Financial Conduct Authority remains on foot, which allows the two regulators to, among other things, information-share, refer innovative businesses to each regulator’s respective regulatory sandbox, and conduct joint policy work. ASIC also currently has either information-sharing or cooperation agreements with regulators in jurisdictions such as Austria, Brazil, Canada, China, Germany, Hong Kong, Indonesia, Israel, Italy, Japan, Kenya, Luxembourg, New Zealand, Singapore, Switzerland and the United States of America. These arrangements facilitate the cross-sharing of information on a range of market trends, many encouraging referrals of new market entrants (including those in the blockchain and cryptocurrency sector), and share insights from proofs of concepts and innovation competitions.

ASIC is also a signatory to the IOSCO Multilateral Memorandum of Understanding, which has committed over 130 regulators at the time of writing to mutually assist and cooperate with each other, particularly in relation to the enforcement of securities laws.

ASIC has committed to supporting financial innovation in the interests of consumers by joining the Global Financial Innovation Network, which is an international network of financial regulators and related organisations dedicated to facilitating regulatory collaboration in a cross-border context and providing more efficient means for innovative businesses to interact with regulators.

AUSTRAC Innovation Hub

AUSTRAC’s Fintel Alliance is a private-public partnership seeking to adopt innovative approaches to combatting financial crime, including by adopting new technology and ways of working with government and industry. This includes setting up an Innovation Hub targeted at designing and testing technology solutions (including assessing the impact of emerging technology like blockchain and cryptocurrency), and setting up an Operations Hub to facilitate the exchange of financial intelligence for analysis. In its 2022–23 Annual Report, the Fintel Alliance noted that its Tax Crime and Evasion working group focused on tax evasion using virtual assets and that its new Virtual Assets working group focused on disrupting ML/TF enabled by cryptocurrency, awareness and prevention of cryptocurrency-related scams, and combatting child exploitation where virtual assets are part of the typology.

Ownership and licensing requirements

At the time of writing, there are no explicit restrictions on investment managers owning cryptocurrencies for investment purposes. However, investment managers may be subject to the AFSL regime where the cryptocurrencies held are deemed to be “financial products” and the investment managers’ activities in relation to those cryptocurrencies are deemed to be the provision of financial services.

For example, investment managers providing investment advice on financial product cryptocurrencies will be providing financial product advice and must hold an AFSL or otherwise be exempt from this requirement. ASIC has provided significant guidance in relation to complying with the relevant advice, conduct and disclosure obligations, as well as the conflicted remuneration provisions under the Corporations Act. Further, investment managers may be required to hold an AFSL with a custodial or depository authorisation or be exempt from this requirement if they wish to custody financial product cryptocurrencies on behalf of clients. In relation to cryptocurrencies that form the underlying assets of ETPs, investment managers will need to consider ASIC’s expectations in INFO 230 regarding the appropriateness of such assets within the overall profile of the ETP (see Cryptocurrency regulation for further information).

Australia has also seen expansion in robo-advice or digital advice models (including algorithmic or automated financial product advice without a human advisor). For investment or fund businesses seeking to operate in Australia by providing digital or hybrid advice (including with respect to investing in cryptocurrencies), there are licensing requirements under the Corporations Act. ASIC guidance contained in Regulatory Guide 255: Providing digital financial product advice to retail clients details issues that digital advice providers need to consider generally, during the AFSL application stage and when providing digital financial product advice to retail clients, and complements ASIC’s existing guidance on providing financial product advice, including Regulatory Guide 36: Licensing: Financial product advice and dealing. On 8 February 2023, the Government publicly released the Quality of Advice Final Report, which made 22 recommendations regarding, among other matters, the regulation of financial advice (including digital advice). The report confirmed that the same licensing requirements apply to fintech digital advisors as other financial service providers in their provision of financial advice (i.e., they still need an AFSL or to rely on an exemption).

Financial product advisers also need to consider their conduct and disclosure obligations. ASIC has released
Regulatory Guide 175: Licensing: Financial product adviser – conduct and disclosure with respect to this.

Mining

At the time of writing, there are no prohibitions on mining Bitcoin or other cryptocurrencies in Australia.

Cryptocurrency mining taxation

As above, the taxation of cryptocurrency and associated activities in Australia has been an area of much debate, and this has extended to taxation relating to mining cryptocurrency. See “Taxation” above for further information.

Cybersecurity

With the rise of cloud-based Bitcoin mining enterprises in Australia, mining businesses should carefully consider cybersecurity issues in relation to mining activities.

Following a number of prominent cyber breaches in Australia, legislators and regulators have prioritised industry awareness and action with respect to cyber resilience and enhanced investment in digital infrastructure to prevent data breaches, technology failures and system outages.

ASIC has also released regulatory guidance to help firms improve their cyber resilience, including reports, articles and practice guides. ASIC’s most recent report, Report 716 Cyber resilience of firms in Australia’s financial markets: 2020–21, identifies key trends in cyber resilience practices and highlights existing good practices and areas for improvement. The report builds on ASIC’s last look into the cyber resilience of firms in Australia’s financial markets, being Report 651 Cyber resilience of firms in Australia’s financial markets: 2018–19 and notes that there has been a small but steady improvement in cyber resilience, but that such improvement has not met the anticipated targets as a result of factors such as the pandemic, escalated threats and overly ambitious targets. ASIC has also previously provided two other reports, Report 429 Cyber resilience: Health check and Report 555 Cyber resilience of firms in Australia’s financial markets, which examine and provide examples of good practices identified across the financial services industry. The reports contain questions that board members and senior management of financial organisations should ask when considering cyber resilience.

In June 2023, ASIC invited regulated entities to anonymously take part in a survey to measure cyber resilience in Australia’s corporate and financial markets. The survey was designed to assist entities with assessing its ability to govern and manage cyber risks, identify and protect critical information assets and detect, respond to and recover from cybersecurity incidents. ASIC released its report noting that the survey exposed gaps in cybersecurity risk management of critical cyber capabilities with organisations being more reactive than proactive. While the survey noted that organisations are doing well in identity and access management, governance and risk management and information asset management, the survey noted deficiencies with respect to supply chain risk management, data security, consequence management and adoption of cybersecurity standards. ASIC intends to use the key findings to identify gaps within certain sectors, guide initiatives and work with industry to uplift cyber resilience.

Border restrictions and declaration

There are currently no border restrictions or obligations to declare cryptocurrency holdings when entering or leaving Australia.

The AML/CTF Act mandates that both individuals and businesses must submit reports where physical currency in excess of A$10,000 (or foreign currency equivalent) is brought into or taken out of Australia. This requirement is restricted to “physical currency”, which AUSTRAC has defined as being any coin or printed note of Australia or a foreign country that is designated as legal tender, and is circulated, customarily used and accepted as a medium of exchange in the country of issue. Although market commentary indicates that some governments have created or are attempting to issue official cryptocurrencies, the intangible nature of cryptocurrency remains a bar to it being captured by declaration obligations under the AML/CTF Act.

While the AML/CTF Act was amended to address some aspects of cryptocurrency transfer and exchange in 2017, this amendment did not see the scope of AML/CTF regulation widen the border restrictions. At the time of writing, there appears to be no indication that any such further amendment to include border restrictions is being contemplated, but there is ongoing consultation on expanding the application of the AML/CTF regime to DCEs. See “Money transmission laws and anti-money laundering requirements” for further details.

Reporting requirements

The AML/CTF Act imposes obligations on entities that provide certain “designated services” with an Australian connection. Generally, the AML/CTF Act applies to any entity that engages in financial services or credit (consumer or business) activities in Australia, including the provision of DCE services. These obligations include record-keeping and reporting requirements.

For example, AML/CTF legislation outlines reportable details for matters including, but not limited to, threshold transaction reports (TTRs). TTRs will be required to be submitted where a transfer of physical currency of A$10,000 or more (or the foreign currency equivalent) has occurred. As above, the intangible nature of digital currencies means that DCE providers are generally not required to make TTRs in connection with digital currency transactions. However, the rules associated with the AML/CTF Act set out specific details to be reported by DCE providers (such as digital currency type, value, description and relevant wallet addresses) in connection with TTRs, which may indicate scope for DCE providers to be caught by TTR obligations in the future.

There is also current AML/CTF reform proposing the extension of the travel rule to DCEs – see “Government attitude and definition” and “Money transmission laws and anti-money laundering requirements.

Estate planning and testamentary succession

To date, there has been no explicit regulation or case law surrounding the treatment of cryptocurrency in Australian succession law. Generally, if estate plans do not cater for the specific nature of cryptocurrency and steps are not taken to ensure that executors can access a deceased’s cryptocurrency (e.g., by accessing the private key), it may not pass to the beneficiaries.

A will should be drafted to give the executor authority to deal with digital assets. It may be helpful to select an executor with some knowledge of or familiarity with cryptocurrencies. As cryptocurrencies are generally held anonymously, a will should also establish the existence of the cryptocurrency (e.g., by identifying and cataloguing the relevant cryptocurrency) as an asset to be distributed to beneficiaries. A method must also be established to ensure that passwords to digital wallets and external drives storing cryptocurrency are accessible by a trusted representative. Unlike a bank account, which can be frozen or have access restrictions placed upon death, anyone can access a digital wallet, so care should be taken to ensure that external drives and passwords are not easily accessible on the face of the will. This may include providing a memorandum of passwords and accounts to the executor to be placed in a safe custody facility that remains unopened until a will is called upon.

There may also be tax implications arising for the beneficiaries of cryptocurrencies, which are similar to
the tax implications for cryptocurrency holders. See Taxation above for further details.