On 7 December 2021, Treasurer Frydenberg announced his plans to reform the Australian crypto industry in response to the recommendations of the Final Senate Committee Report on Australia's Future as a Technology and Financial Centre (Report) published in October this year. A detailed summary of the Committee's findings can be found in our previous article.
It is notable that the Treasurer responded so quickly, and favourably, to the recommendations in the Report. The Treasurer outlined several key positions and committed to a consultation process due to complete in mid-2022.
Introducing a Market Licensing Regime for Digital Currency Exchanges (DCE)
The consultation process will consider the introduction of a new DCE Market Licence. Currently, Info Sheet 225 provides that where a crypto-asset is a financial product, any platform that enables those assets to be traded may involve the operation of a financial market. However, under the current regime, the application for a market licence is highly complex and onerous for smaller startups due to large capital and operational requirements.
The Report recommended that a new category of market licence for DCEs be introduced with requirements regarding capital adequacy, auditing requirements and responsible person tests. These requirements would be scalable with business size so that obligations were not overly onerous on newer operators.
Exploring a custody or depository regime with minimum standards for digital assets
The Treasury consultation will consider the Report's recommendation that a minimum standard framework for crypto-asset businesses and DCEs be introduced, given recent prominent examples of cybersecurity vulnerability of DCEs and the current limited consumer protections available for users of custody services for crypto-assets.
Recognising Decentralised Autonomous Organisations (DAOs)
The Treasury consultation will also consider the Report's recommendation that DAOs be recognised as a company structure under the Corporations Act 2001.
A DAO is a new type of business organisation that is self-governing and whose operations are pre-determined via blockchain technology and the use of smart contracts. However, DAOs are not currently recognised as legal entities under Australian law and so do not have a separate legal personality or limited liability.
Reviewing the Capital Gains Tax (CGT) regime for crypto-assets
The Board of Taxation will investigate the Report's recommendation that CGT rules be amended so that transactions involving digital assets only result in a CGT event when there is a genuine, and clearly defined, capital gain or loss.
Application of the current laws is not always clear to digital assets. For instance, the Committee heard that CGT may be triggered at various times when a crypto-asset interacts with protocols where it is swapped, burned, accessed or staked, even though there is no material change in ownership.
Exploring the possibility of a retail Australian Central Bank Digital Currency (CBDC)
The Treasury will investigate the viability of a retail CBDC. The Report noted the RBA's limited research into a CBDC and considered it likely that the number of jurisdictions around the world issuing CBDCs will increase in coming years.
It now seems inevitable that Australian regulations governing crypto assets and the crypto industry will be reformed. What those changes will be remains unknown, however, it is likely to become clearer over 2022 as a result of the consultations commissioned by the Treasurer in response to the Report.
Read our detailed summary of the Select Committee on Australia as a Technology and Financial Centre's final report on the regulation of crypto assets.
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