Australian Government Begins Crypto Regulation Reform

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

In the paper, the Australian Treasury explains that everyone who invests in cryptocurrency must include their assets in their tax returns. It also sets out the basis of a “token mapping framework” to help explain how various cryptoassets might fit into existing regulatory frameworks. 

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

Token mapping framework

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

• Tokens are physical or digital units of information that have a role in a token system
• A token system is a collection of steps involved in performing a function 
• A function can be any benefit ensured 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 is due to propose for public comment by mid-2023. 

According to our 2023 global compliance survey, these regulatory reforms are coming 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 custodian or wallet service. 

Australia’s functional approach

The paper also discusses the concept of a “functional perimeter,” which would set Australia apart 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 law adopt a broad definition of “financial product” so that “functionally-equivalent” products can be treated equivalently.

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

Crypto scam concerns

These regulatory reforms come in light of rising concern regarding the increasing 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 Chair Sarah Court said the main driver of this increase was crypto investment scams, where losses increased by 270 percent. The Australian Competition & Consumer Commission (ACCC) has also advised that crypto scam losses increased further in 2022.

In April 2022, AUSTRAC and the Australian Prudential Regulation Authority (APRA) released reports warning about the scale and risk management related to crypto assets. In particular, AUSTRAC included a list of financial and behavioral indicators linked to specific types of crime involving cryptocurrencies, such as illicit activity via darknet marketplaces, terrorism financing, scams, and tax evasion. Key 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 multiple small deposits, which are immediately transferred to private wallets
• Public information or blockchain analysis tools indicate a customer has transacted with websites or wallet addresses considered to be high risk for terrorism activities or proliferation financing
• The use of services that do not make commercial or economic sense. For example, a business moving earnings through mixers or an individual converting a digital currency multiple times before cashing out, incurring additional conversion fees

Key takeaways

With new regulations coming in 2023, firms of all sizes need to devise a strategy for staying ahead of the latest developments. Three key steps to take include:

• Horizon scanning – firms should stay ahead of the curve by ensuring their compliance teams have adequate budgeting approved by senior management to address changes and that the right level of resourcing has been allocated to address regulatory changes

• Understand new requirements and impact – take the time to fully understand new requirements and the possible impact on operations, as new regulations may require adding a technology layer or developing a strategy to exit a pool of clients who are suddenly deemed to be breaking the law

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