Senate report proposes model to regulate the crypto economy

Start-ups working in crypto who have struggled to attain banking services in Australia would be able to challenge debanking decisions at the Australian Financial Complaints Authority, while banks will be required to conduct due diligence on players rather than adopt blanket bans on the sector.

With the transition to a cleaner economy in the spotlight in Canberra, the report also suggests the miners who safeguard blockchain networks be given an incentive to use renewable energy to generate their computer power, via a company tax discount of 10 per cent.

Senator Andrew Bragg: We arent forcing any bank to do anything they dont want to do, but we are going to force banks to go through a process.James Brickwood

In the most eye-popping recommendation, the Senate committee calls for decentralised autonomous organisations (DAOs) to be recognised by the Corporations Act. This would allow the governors of projects to contract in the real economy to hire staff, and provide limited liability protections for DAO members.

The formal recognition of DAOs and decentralised finance (DeFi) protocols will provide a strong signal to global developers that Australia is a safe place to build businesses on blockchains such as Ethereum, after some teams moved offshore.

This technology could see companies run without traditional intermediaries like banks, registries or corporate management committees; instead, tokens can be created and distributed to an online community allocating various rights, like making decisions for the DAO on products or services.

Today is a watershed day for the digital assets sector, said Steve Vallas, CEO of Blockchain Australia, an industry group.

The recommendation that Australia look to recognise DAOs structures is a very strong signal to the world that we are ready to lead this conversation.

The report, which comes seven months after a previous fintech committee was extended to develop a crypto policy for Australia, also wants Treasury to lead a policy review on how particular tokens should be classified to create a standard taxonomy for all regulators to apply.

Treasury has also been asked to examine the viability of a retail central bank digital currency in Australia, something the Reserve Bank of Australia has been reluctant to entertain given it could increase the likelihood of a run on commercial bank deposits in a crisis.

The more prominent role for Treasury over the innovation portfolio is consistent with recommendations in the recent review into payments regulation by lawyer Scott Farrell and interim reports of the Senate committee, which warned regulators to back away from hobbling Afterpays growth and called for more government control over the rollout of the consumer data right.

The call for a new licensing regime for cryptocurrency exchanges like Independent Reserve and Coinjar, which are licensed in Singapore and the UK respectively, highlights that the existing Australian Market Licence regime is overly focused on large operators like ASX, and the existing light-touch approach from AUSTRAC is not sufficient to protect investors. The new regime will include capital adequacy, auditing and responsible person tests and be scalable depending on the size of the exchange.

We have recommended new licensing regimes which I expect will be much more nimble and light touch than the existing regime, Senator Bragg said.

In additional comments attached to the report, Labor Senators highlight the ongoing problem of crypto scams and call for AUSTRAC to maintain vigilance over the sector.

The increased uptake of digital assets requires regulation to ensure the best interests of everyday Australian investors and consumers are protected first and foremost and that currently, regulatory shortfalls are leaving Australians at risk, Labor said.

Labor added AUSTRAC should work with digital currency exchanges to ensure that Australias AML/CTF controls do not create a permissive environment for terrorism financing and cybercrime and that this should include consideration of the implementation of a travel rule requirement.

Large crypto exchanges, who had been pleading for more regulation to legitimise their business, will support a regulatory regime, but this may be uncomfortable for smaller, under-resourced operators who have flooded to the space recently in search of quick profits, sources in the industry said.

The Senate committee has asked Treasury to study the case for creating a retail central bank digital currency to compete with private currencies being created by tech companies.Supplied

There may also be disappointment in the crypto community that the report does not recommend safe harbour protections to close off the potential for regulatory actions down the track, which was a key part of the Blockchain Australia submission to the inquiry.

But Mr Vallas said the report overall recognises the maturing of the sector and its place in the Australian government regulatory agenda [and] reflects our shared view that consumer protection can be prioritised without denying Australians and Australian businesses an opportunity to participate in the global shift towards the adoption of digital assets.

Debunking debanking

After the committee heard evidence of widespread debanking of start-ups by the major banks who typically do not explain why they will not support the sector but are privately concerned about breaching anti-money laundering laws, the committee called for the Council of Financial Regulators to impose due diligence requirements on banks so they at least consider the risks of particular businesses.

Senator Bragg said this provided a Liberal approach, recognising the strategic risk of losing innovation through mindless debanking.

We arent forcing any bank to do anything they dont want to do, but we are going to force banks to go through a process, and we are going to regulate this industry.

The report also tackles complex questions about taxation. It pushes back on some calls from crypto investors for capital gains tax to be restricted to on and off ramp points, where digital assets are traded for fiat currency. This approach may risk leakage of tax revenue in cases where significant crypto-to-crypto transactions are occurring in ways that accrue a clearly definable capital benefit, the report says.

But the committee wants to avoid CGT liability being triggered every time a DeFi crypto-asset token interacts with a protocol, which was raised as a concern by developers. So, the report calls for legal amendments so digital asset transactions only create a CGT event when they genuinely result in a clearly definable capital gain or loss.

The Labor Senators call for the government to ensure any new financial arrangements meet global and community expectations on tax fairness.

The only other jurisdiction that has created legislation to support decentralised autonomous organisations is the US state of Wyoming. The report said it and the DAO Model Law proposed by the Coalition of Automated Legal Applications (COALA) provided a starting point for Treasury to explore reforms that would support new models of corporate governance with radical transparency.

Providing an indication about how the Liberal Party is thinking youth policy as the federal election approaches, Senator Bragg said crypto could allow members to connect with young people in their electorates. Treasury is considering whether to include a response to this report in its broader response to the Farrell review of the regulatory architecture of the payments system.

My objective is to have this adopted as Liberal Party policy for the upcoming election, Senator Bragg said. This gives us a way to talk to younger people in a way that has not always been easy for my party. Having a clear story to tell about DAOs and crypto could make a big difference.

And with the Liberal party locked in discussions with the Nationals on the countrys Paris targets ahead of the COP26 meeting in Glasgow, the report said those undertaking digital asset mining and related activities in Australia receive a company tax discount of 10 per cent if they source their own renewable energy for the activity.

The Australian public dont want us to burn up the grid with bitcoin mining, Senator Bragg said. We have a unique opportunity to merge digital asset mining with renewable energy.