Crypto regulation on the horizon: The new Treasury consultation paper on crypto asset secondary service providers – Fin Tech

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Last month, Treasury released a Consultation Paper outlining the
Government’s proposed approach to regulating crypto assets. The
Consultation Paper sets out options for a licensing and regulatory
regime for ‘crypto asset secondary service providers’
(CASSPrs). The Consultation Paper defines a crypto
asset 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 cryptographic proof.

In this Consultation Paper, the Government is proposing to
regulate digital currency exchanges in Australia and other crypto
asset service providers including brokers, dealers, custodians, and
crypto asset markets. The Consultation Paper also seeks early views
on the classification of crypto assets, noting that further
consultation will follow on this aspect later in 2022.

The Consultation Paper has put forward three proposed approaches
to regulation: a separate licensing and regulatory regime,
incorporating crypto assets into the financial services regime, and
self-regulation. The Government’s preferred approach is a
separate licensing and regulatory regime. However, the Consultation
Paper has proposed a number of obligations for CASSPrs that are
similar to those imposed on financial services licensees. For
example, it is proposed that CASSPrs would be subject to an
“efficiently, honestly and fairly” obligation.

In our view, incorporating the CASSPr regime in the Corporations
Act would be the best way to minimise regulatory duplication and
complexity. We have already seen the roll out of separate
legislation to regulate consumer credit (the National Consumer
Credit Protection Act 2009
), which has meant some financial
services businesses must now hold both an Australian Credit Licence
and Australian Financial Services Licence to operate. Recent
reforms to consumer credit regulation, such as changes to breach
reporting obligations, seems to have swung the pendulum back to
harmonisation with the Corporations Act. It seems that a separate
CASSPr regime could end up in the same place eventually.

Six key questions raised by the Consultation Paper

The Consultation Paper sets out a clear commitment to regulating
crypto asset service providers. However, a number of key questions
remain for CASSPrs about how the regime will work in practice.

  1. Will crypto asset advice be regulated?
    Treasury has asked for feedback on whether there should be a ban on
    CASSPrs providing personal advice in respect of crypto assets
    available on a CASSPr’s platform or service. However, there are
    no details beyond this question, including how advice provided by
    non-CASSPrs (such as ‘finfluencers’ or financial advisers)
    or general advice might be regulated.
  2. What dealing services will be regulated? While
    the Consultation Paper says that the proposed licensing regime will
    apply to ‘dealers’ of crypto assets, it is unclear if the
    concept of dealing will mirror the broad definition of
    ‘dealing’ in the Corporations Act, including ‘arranging
    to deal’. If not, some intermediaries (particularly introducers
    or promoters) are likely to fall outside of the CASSPr regime.
  3. How will regulatory duplication be dealt with?
    The Consultation Paper says that ‘to the extent entities
    provide a service in respect of a crypto asset which meets the
    definition of financial product they will need to comply with the
    existing relevant regulatory regimes’. However, the Government
    also wants to ensure that providers are not subject to multiple
    regulatory regimes (e.g. having an Australian Financial Services
    Licence (AFSL) or an Australian market licence, as
    well as a CASSPr licence). It is unclear from the Consultation
    Paper how this would be achieved in practice, particularly for
    crypto businesses offering multiple products, some of which are
    ‘financial products’ and others that are not.
  4. Will AFCA membership be required? The
    Consultation Paper proposes that CASSPrs be required to have
    ‘adequate dispute resolution arrangements in place, including
    internal and external dispute resolution arrangements’. The
    Consultation Paper is silent on whether this would require CASSPrs
    to be members of the Australian Financial Complaints Authority
    (AFCA), but presumably this is the
    Government’s intention.
  5. What penalties will apply? The Consultation
    Paper notes that breaches of the CASSPr regime will attract civil
    and criminal penalties, but these are not specified. It is also
    unclear what administrative powers will be provided to the
    regulator (such as powers to cancel a CASSPr licence). The
    Consultation Paper also doesn’t state whether breaches of the
    new regime would entitle consumers to seek compensation from
    CASSPrs.
  6. Will AFSL holders need to report breaches of the CASSPr
    laws?
    AFSL holders must report breaches of ‘financial
    services laws’ to the regulator in certain situations. It is
    unclear from the Consultation Paper if the CASSPr regime would be
    considered a ‘financial services law’ for breach reporting
    purposes. The answer will have significant implications for crypto
    businesses that have AFSLs.

Our expertise in crypto regulation

As one of Australia’s leading law firms in this space,
Holley Nethercote will be making a submission to Treasury in
response to the Consultation Paper.

We act for global and local crypto exchanges with diverse
product and service offerings, as well as other participants in the
digital asset ecosystem – so we know the challenges faced by
existing crypto businesses under the current regulatory
framework.

We have:

  • Made a submission to the Select Committee on Australia as a
    Technology and Financial Centre about digital asset regulation and
    appeared at a public hearing
  • Met with Treasury and parliamentarians in the lead up to (and
    after) the release of the Treasury Consultation Paper, sharing our
    views on the need for regulatory clarity and fit-for-purpose laws
    for crypto businesses
  • Wrote Blockchain Australia’s Code of Conduct for Digital
    Currency Businesses, which was referenced in the Consultation Paper
    as part of its “third option”.
  • Prepared the draft legal framework for virtual asset service
    providers for a Free Economic Zone in Asia (not yet in law)

We also currently chair Blockchain Australia’s Financial
Crime Committee and Code of Conduct Committee.

Our lawyers are experts in crypto assets and financial services
laws. We do not have a specific crypto team – all of our lawyers
are expected to apply blockchain technology to their practice
areas. Contact us today to discuss how we can help
with your submission.

Want to make a submission?

Submissions in response to the Consultation Paper are open until 27
May 2022
.

Please complete this survey to share your
views with us, and we may include them in our submission. Even if
you’re going to participate in other surveys or make your own
submission, this is a chance to be heard and amplify your views. To
see what your submission may look like, here is an example of our last submission.

We are available to review your submission or assist you with
drafting a submission. Also, submissions are more persuasive if
they can cross-reference other submissions saying the same thing.
For successful regulatory change, the law-makers need to know what
issues or solutions are popular. We can point you to other
submissions (depending on the level of interest) if that will be
useful.

Further reading

You can read our most recent crypto article ‘Blockchain bricks and crypto cathedrals: a
breakdown of the key terms
. HN Hub
subscribers also receive regular crypto regulatory updates,
webinars, and document templates. You can find out more about the
HN Hub here.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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