Crypto regulation on the horizon: Treasury’s new consultation paper on crypto asset secondary service providers

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.

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Author: Paul Derham (Managing Partner) & Katherine Temple (Senior Associate)