Cryptocurrencies may have been originally created to operate free from control, but the lack of regulation has been harmful for the sector, innovation, and consumer protection. Only with proper regulation to normalise crypto use, will crypto become a widely accepted component of financial trading, wealth retention and financing.
THE WORLD IS REGULATING CRYPTO
As can be seen from the below chart, many nations are taking the steps to regulate crypto:
Countries like Hong Kong and Singapore are out in front in developing and implementing a regulatory framework around crypto. The United States and Canada are in similar phases of developing and implementing their crypto frameworks. The UK and the EU have implemented legislation to fully regulate Crypto with laws coming into effect in 2024.
NOW AUSTRALIA WILL TOO
On 16 October 2023, the Australian Federal Treasury issued a Proposal Paper for legislating and regulating cryptocurrency trading, storage and financing in Australia, by regulating digital and crypto asset platforms such as crypto exchanges, that operate in Australia.
Submissions on the Proposals can be made before 1 December 2023. Treasury estimates that it will take further consultation on exposure draft legislation in 2014 with a twelve-month transition period following legislation being made law.
HOW WILL THE PROPOSED FRAMEWORK OPERATE?
The new framework will treat digital and crypto institutions like any other traditional financial institutions by requiring them to meet the same standards as any other financial institutions through the issuance and regulation of Australian Financial Services Licences (“AFSL”):
The Australian financial service laws are a time tested and well understood framework to mitigate risks involving businesses holding or utilising client assets.
Digital asset platforms will need to meet all general licence obligations, consistent with other licence holders, such as:
- meeting solvency and cash reserve requirements.
- keeping and submitting financial records.
- producing product disclosure statements
- monitoring for and disrupting market misconduct.
- providing the financial service efficiently, honestly, and fairly.
- managing conflicts of interest.
- having a dispute resolution system
CERTAIN DIGITAL ASSET ACTIVITIES WILL HAVE ADDITIONAL OBLIGATIONS
The proposal would also apply additional obligations to four specific activities:
- Trading – the exchange of digital asset platform entitlements between account holders.
- Staking – the participation in validating transactions on a public network.
- Tokenisation – the creation and exchange of entitlements backed by tangible and intangible assets.
- Fundraising – the sale of entitlements to fund the development of products and services.
Obligations are targeted to address some of the risks that arise from digital asset platform business models and the nature of the tokens they provide access.
IS MICHAEL SAYLOR CORRECT?
Michael Saylor, CEO of Microstrategy (a USA listed company that holds over US$4Bn in bitcoin) has stated that three things are needed to have crypto become part of the mainstream financial world:
- A change to fair value accounting for crypto balance sheet holdings.
- Increased prevalence of bank custody and collateralized lending.
- Regulations that make it safe to invest in crypto.
The new USA based Financial Accounting Standards Board (FASB) rules effective from 2024 has established fair value accounting for crypto balance sheet holdings.
Big banks are starting to demonstrate interest by jumping into the custody game. CoinDesk reported recently that Deutsche Bank has partnered with fintech platform Taurus to provide custody for bitcoin and crypto assets.
And now with regulations coming into effect around the western world, the potential for crypto to become part of the mainstream financial world, might actually happen.
For further information, contact Darren Fooks and Corinne Gallacher:
We are most experienced in the fintech, digital economy and cryptocurrency industries. We are one of the few Australian law firms who have moved to the digital economy. For example, we accept payment of our fees in Bitcoin. One of our team holds a direct equity interest in an international non-listed bitcoin mining business. Another or out team has invented, developed and marketing his own gaming app.
We advise on all aspects of the transfer from traditional brick-and-mortar economic activities (production, distribution, trade) by Internet, World Wide Web, and blockchain technologies.
We have acted in development, financing and operation of bitcoin mining operations, digital exchanges (both OTC and retail) and major digital and crypto Defy activities.
DISCLAIMER: This article is only meant to give you general information and should not be relied on as legal advice. Speak to one of our lawyers for more information.