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‘We are all tech lawyers now’ – the future of cryptocurrency – Law Society Journal

There are no specific laws in Australia governing cryptocurrencies; but a proposed regulatory framework may not be enough, given many platforms in the cryptocurrency and digital assets markets are based offshore.

In October this year, the Australian Treasury released a proposal paper, “Regulating Digital Asset Platforms”, with submissions open until 1 December. The paper responds to increased concern about money laundering, terrorism financing and mishandling of customer funds within the cryptocurrency and digital assets markets. It discusses a proposed regulatory framework that would apply to digital asset service providers that present similar risks to entities operating in the traditional financial system.

“If we’re going to have a world‑class digital assets market, we’ll need fit-for-purpose regulation that can keep pace with a rapidly evolving ecosystem,” Assistant Treasurer and Minister for Financial Services Stephen Jones said in an address to the Australian Financial Review Crypto Summit on 16 October in Sydney.

Jones went on to outline the Treasury’s proposal focusing on digital asset platforms; these will be required to hold an Australian Financial Services Licence, entailing obligations to act fairly and honestly, offer dispute resolution processes, meet solvency and cash reserve requirements, and maintain financial records. Additionally, crypto exchanges and other digital asset platforms will be obligated to oversee and intervene in market misconduct.

Jones added that the proposed new regulation would include platform contracts, standards for custody software, and standards for the transaction of tokens that would apply to all platforms with a holdings minimum of $1,500 per individual account or $5 million in aggregate holdings.

A consumer protection focus

Michael Bacina, a Partner at Piper Alderman, is based in Sydney. The practice is an industry-focused group that advises, among other things, on financial services and product advice, corporate matters, contracts and mergers and acquisitions. Piper Alderman’s clients include global and Australian crypto-asset exchanges, as well as traditional businesses seeking to adopt blockchain technology.

He says, “From the government perspective, the collapses of 2022 and court proceedings in the United States, as well as a focus on scammers using crypto assets as a means of moving their ill-gotten gains, have loomed large … This consumer protection focus by the current government underpins and is referred to in the current proposed regulatory framework, which seeks to implement custody requirements as well as licensing requirements on digital asset platforms in the coming years.”

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‘The consumer protection focus by the current government underpins and is referred to in the current proposed regulatory framework’ – Michael Bacina, Partner at Piper Alderman

Bacina says there are two sides to the current concerns facing the crypto industry in Australia.

“The first is industry led. The industry proactively sought out the inclusion of exchanges in the 2018 anti-money laundering and counter terrorism financing amendments which, at the time, placed Australia at the forefront of crypto-asset exchange regulation. The industry has continued to advocate for two key areas of guidance and clarity: a sensible definition of crypto-assets and a clear delineation between when crypto-assets will become considered a financial product or not, together with rules and guidance by which crypto-asset financial products could fit within the existing financial services framework.

“The second is for sensible and commercial custody rules for exchanges so that customers can be confident their crypto assets are safe in the event of an insolvency event.”

Bacina adds, “An overarching concern is of course cost and complexity of compliance, to support a competitive and thriving local crypto exchange scene.”

Currently, there are no specific laws in Australia governing cryptocurrencies. Rather, their ownership and trading exist within regulatory frameworks for financial services. Under the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), cryptocurrency is defined as both an investment and a financial product. Any entities involved in cryptocurrency lending activities must act within the regulations of the National Credit Consumer Protection Act 2009 (Cth), requiring an Australian credit license. Digital currency exchange (DCE) services must register with the Australian Transaction Reports and Analysis Centre, and adhere to the anti-money laundering and counter-terrorism financing regulation. Penalties for not registering are a maximum of two years imprisonment, a fine of up to $111,000, or both. DCE providers must renew their registration every three years and keep transaction records and customer identification records for up to seven years.

Elvira Sojli is Associate Professor of Finance and Scientia Fellow Alumni in the School of Banking and Finance at UNSW. She says there are both costs and benefits to regulation: enhanced confidence from investors and customers in embracing cryptocurrencies but increased burden on crypto businesses that may look to less regulated marketplaces.

Sojli says, “The proposed Australian regulation brings crypto exchanges and assets in line with other equity and stock investments. Crypto exchanges will have to be licensed through ASIC (which also licenses ASX) and adhere to the rules and regulations of ASIC. The proposed regulation will make market participants more certain about the safety of their assets; however, it will increase the burden on the exchanges.”

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Elvira Sojli, Associate Professor of Finance and Scientia Fellow Alumni in the School of Banking and Finance at UNSW

Sojli adds, “The US has flirted several times with regulation of the crypto market, but it has always stopped short of regulating, as it is concerned it will lose its leading marketplace. While Australia is not a leader in the global digital asset innovation, more regulation will push the exchange to set up in other jurisdictions with less regulatory burden, like Singapore. ASIC will then lose oversight of Australians’ participating – trading – in this market.”

LSJ asks, how possible is it to fully regulate and legislate crypto and digital assets when so many exchange platforms and businesses operate offshore, and often outside of Commonwealth jurisdiction?

Sojli responds, “I think this is a major challenge, and it’s not unique to the crypto space. The same problems have been faced in the foreign exchange (FX) market. The FX market still requires money transfers through banking entities for the most part and therefore, there can be some oversight of money laundering activities. Rules can be implemented at the bank level when electronic transfers are involved. This is not possible with crypto and digital assets. Any regulation will be superficial and will be hard to enforce.”

‘with crypto and digital assets, any regulation will be superficial and will be hard to enforce’

Bacina says, “The nations viewed by industry as leading [crypto regulation] are clearly the UAE, which has established a specialist crypto regulator staffed with experts who have a deep understanding of crypto-assets and the resourcing to stay up to date in this fast-moving space, and island nations, which have been welcoming or taken a ‘hands off’ approach to the industry. The incredible growth of Dubai as a crypto-city has been a direct response to this. Additionally, Singapore has introduced a licensing framework which is likely to be closer to the kind of regulation Australia will see in place in the future. Hong Kong has also recently jumped into regional contention, with very generous government support to encourage a return of tech businesses to their shores.”

Bacina adds, “We see some jurisdictions, such as the US, where there is strong criticism by regulators of whether decentralisation really exists, and no real path to compliance. Australia is at a turning point with our upcoming consultation. We will either introduce something closer to a Singapore model and retain our competitive advantage, or, if the framework is too complicated or costly, we will see a continuing departure of talent from our shores to jurisdictions which are welcoming to innovation.”

Legal and popular

Cryptocurrencies are legal and popular in Australia. The most popular are Bitcoin (65 per cent of cryptocurrency investors hold this form), Ethereum (42 per cent), Cardano (26 per cent), Dogecoin (23 per cent), and Binance Coin (14.6 per cent).

In 2017, cryptocurrency and the associated exchange platforms were given full legal status. With high-profile cases of fraud, scams and crashes – including the November conviction of FTX founder and CEO Sam Bankman-Fried on seven counts of fraud – it is timely that the Australian government is committed to introducing heightened regulation around the cryptocurrency industry, addressing existing loopholes and enhancing customer protections. According to Jones, around 50,000 Australians were affected by the crash of FTX.

On 22 November, Binance CEO Changpeng Zhao pleaded guilty to one count of failure to maintain an effective anti-money-laundering program in a Seattle federal court. The Cayman Islands-based Binance LLC has agreed to pay more than $US4 billion after a US government investigation into the biggest cryptocurrency exchange. Following the FTX crash in 2022, a closer focus on Binance resulted in accusations by the US government that it was operating as an unregistered securities exchange and violating multiple US securities laws, mirroring the practices of the world’s once second-largest cryptocurrency exchange FTX.

In an address to the Summit, Jones said, “Cryptocurrency has emerged from the sidelines of the finance world, where it was a favoured speculative asset of the tech-savvy. The Australian Tax Office now estimates around 600,000 taxpayers have invested in a cryptocurrency, though Swyftx tells us that 1 in 4 Australians have crypto.”

In 2023, according to Swyftx, 4.6 million Australians own cryptocurrency compared to 4.2 million in 2022. Following Nigeria and Malaysia, Australia has the third-highest adoption of crypto…

Read More: ‘We are all tech lawyers now’ – the future of cryptocurrency – Law Society Journal

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