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Australia Proposes New Regime to Regulate Digital Asset Platforms under Financial Laws

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“The Australian government’s ambitious proposal to regulate digital asset platforms under existing financial laws showcases the nation’s commitment to fostering a secure and transparent digital economy, paving the way for increased investor confidence and innovation in the digital asset space.”

The Australian Federal Government is taking steps to regulate entities that provide access to digital assets. The government aims to align Australian regulations with international standards and existing financial frameworks. The proposed regulatory framework would cover intermediaries such as exchanges, service/asset issuers, and financial product advisers.

The policy proposals come shortly after the Treasury expressed its intention to regulate the digital payments industry. While the digital payments proposal focuses on international transfers and national security risks, the digital assets document emphasizes consumer protection and promoting innovation through technology neutrality.

The Treasury highlighted the FTX exchange collapse as an example of past issues in the digital asset industry. It identified ineffective management practices, inadequate governance structures, fraudulent activities, poor resilience, and conflicts of interest as contributing factors to these problems.

The regulatory framework would establish minimum standards for holding assets, intermediating platform entitlements, and transactional functions. The proposed changes would apply to businesses based in Australia, regardless of whether they serve only the Australian consumer market or act as a broker for others located elsewhere. However, entities holding less than AU$5 million in total assets and individual clients holding less than AU$1,500 in entitlement value would be exempted.

The Treasury also clarified its definition of a digital “token.” It includes only those tokens that can be freely traded on third-party marketplaces, excluding examples like event tickets and gift cards. The primary value of digital assets lies in the assets themselves, functioning as non-physical “bearer assets.”

Differentiating between token types and determining ownership is a challenge, according to the Treasury. Digital tokens can represent various entitlements, from ownership of physical property to store discounts. The thief who steals a digital token possesses the asset and its entitlements but is not the token’s legal owner. The programmability of digital tokens further increases the uniqueness of token marketplaces.

The policy proposals primarily focus on intermediaries that provide access to digital assets and wallet storage, specifically exchanges. The Treasury suggests introducing a new type of financial product called a “digital asset facility” to regulate these intermediaries. This approach focuses on the services provided rather than the token features themselves.

Token issuers would have more freedom to issue tokens representing physical assets or other values while protecting token holders. Licensing requirements would apply to assets embedded with financialized functions, while non-financialized assets would be exempt. However, any platform facilitating trade and storing digital tokens of any type would need to comply with licensing requirements.

Tokens can represent value in various non-financial industries, such as social media, gaming, healthcare, media and entertainment, fitness, and lifestyle. Defining a digital asset “holder” can be challenging if tokens are programmed with specific conditions or multiple sign-offs required for use. The Treasury suggests using “factual control in a real and immediate sense” as a suggestion.

The policy proposals do not apply to stablecoin providers, merchants accepting tokens as payment, or providers publishing data to a public database (e.g., a blockchain). These activities are already covered by existing laws specific to their industries.

The Treasury is seeking public and industry feedback on the policy proposals, with a deadline for written submissions on December 1, 2023. It is important to note that these proposals only demonstrate policy intention and are not draft laws. If new laws are passed, there will be a 12-month transitionary period for the digital asset industry to comply with any necessary changes.

Overall, the Australian Federal Government’s efforts to regulate entities providing access to digital assets aim to protect consumers and promote innovation while aligning with international standards and existing financial frameworks.

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