The Australian government is starting crypto regulation reform

On 3 February 2023, the Australian government published a consultation document examining which elements of the cryptocurrency ecosystem require further regulation. This article follows a joint statement issued in August 2022 by Treasurer Jim Chalmers and Assistant Minister for Competition, Charities and Finance Minister Andrew Leigh announcing that crypto reforms were underway.

In the paper, the Australian Treasury explains that anyone who invests in cryptocurrency must include their assets in their tax return. It also lays the groundwork for a “token mapping framework” to explain how different cryptoassets can fit into existing regulatory frameworks.

The consultation period for this article is open until 3 March 2023. The full list of consultation questions can be found in Appendix 4 on pages 52 and 53.

Token Mapping Framework

August’s joint statement highlighted token mapping as the “first step in a reform agenda” as it would help the government identify how cryptoassets and related services should be regulated. In the paper, “tokens”, “token system” and “features” are defined as follows:

• Tokens are physical or digital units of information that have a role in a token system
• ONE token system is a collection of steps involved in performing a function
• ONE function may be any benefit secured or facilitated by the token system to the token holder

This token mapping framework will be used to define the development of a custody and licensing framework, which the government will propose for public comment by mid-2023.

According to our 2023 Global Compliance Survey, these regulatory reforms come at an important time for Australian firms. When asked what crypto-based services they would offer in the future, 70 percent told us a trading or exchange service, 54 percent said crypto as a payment method or rail, and 51 percent a custody or wallet service.

Australia’s functional approach

The paper also discusses the concept of a “functional perimeter”, which would distinguish Australia from other jurisdictions by adopting a broad “functional” definition of a financial product. This approach follows the policy adopted after the Wallis Inquiry recommended that the Act adopt a broad definition of “financial product”, so that “functionally equivalent” products can be treated equally.

According to the paper, other jurisdictions have created an exhaustive list of regulated products and are often guided by risk-based approaches when the list is updated to include new financial products. For example, the Hong Kong Securities and Futures Commission (SFC) announced in January that it will propose a subset of tokens allowed for trading by private investors. According to SFC chief executive Julia Leung, only “highly liquid” assets will be on the list.

Concerns about crypto fraud

These regulatory reforms come in light of growing concerns regarding the growing number of scams involving crypto. According to the Australian Securities and Investments Commission (ASIC), Australians caught up in cryptocurrency scams lost $701 million in 2021, representing a 135 percent increase from 2020. ASIC deputy chief Sarah Court said the main driver of this increase was fraud involving crypto investments, where losses increased by 270 percent. The Australian Competition & Consumer Commission (ACCC) has also informed that crypto fraud losses increased further in 2022.

In April 2022, AUSTRAC and the Australian Prudential Regulation Authority (APRA) issued reports warning about the scope and risk management associated with crypto-assets. In particular, AUSTRAC included a list of economic and behavioral indicators related to specific types of crime involving cryptocurrencies, such as illegal activity via darknet marketplaces, terrorist financing, fraud and tax evasion. Important red flags for compliance staff to note include:

• The customer’s wallet addresses show exposure to high-risk conversion services or darknet marketplaces
• An account receives several small deposits, which are immediately transferred to private wallets
• Public information or blockchain analysis tools indicate that a customer has transacted with websites or wallet addresses that are considered high risk for terrorist activities or proliferation financing
• Use of services that do not make commercial or financial sense. For example, a business that moves revenue through mixers or an individual that converts a digital currency multiple times before withdrawing, incurring additional conversion fees

Important takeaways

With new regulations coming in 2023, businesses of all sizes must devise a strategy to stay ahead of the latest developments. Three important steps to take include:

• Horizon Scan – companies should stay ahead of the curve by ensuring that their compliance teams have adequate budgeting approved by senior management to handle changes and that the right level of resources are allocated to handle regulatory changes

• Understand new requirements and impact – take the time to understand new requirements and the potential impact on operations, as new regulations may require adding a technology layer or developing a strategy for exiting a pool of customers suddenly deemed to be breaking the law

• Contribute to regulatory consultations – this will help ensure that laws are developed that do not stifle innovation or lead to the development of regulations that could have a serious negative impact on the industry

Originally published February 9, 2023, updated February 10, 2023