In this update, we navigate the latest regulatory and legislative developments in Australia and overseas with respect to the fintech sector.
This month, there have been significant developments in relation to cryptocurrency as regulators begin to clarify the application of existing regulatory regimes to cryptocurrencies and related activities, such as initial coin offerings (ICOs). Specifically, in Australia, the Australian Transaction Reports and Analysis Centre (AUSTRAC) has released guidance for digital currency exchange providers following the implementation of new anti-money laundering and counter-terrorism financing (AML/CTF) laws while the Australian Tax Office (ATO) has consulted on tax compliance issues with cryptocurrency transactions.
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- AUSTRAC releases AML/CTF guide for digital currency exchange providers
- ATO consults on tax compliance regarding cryptocurrency
- ASIC begins Neds ICO investigation
- Treasurer proposes reform of Financial Sector (Shareholdings) Act 1998
- International developments relating to cryptocurrencies
- BoJ and ECB report on DLT trial for financial market infrastructure
- ASX opens consultation into new DLT system to replace CHESS
Fintech Fact: Fintech activity within capital markets infrastructure has grown by nearly 300% in the last eight years.
Australian developments relating to cryptocurrencies
Amendments to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) came into force on 3 April 2018 (previously discussed here). These changes include the requirement for digital currency exchange (DCE) providers to register with AUSTRAC and comply with AML/CTF obligations. AUSTRAC has released a guide for digital currency exchange providers – this has been discussed in detail here.
The ATO has closed consultation on practical compliance issues arising from complying with taxation obligations in relation to cryptocurrency transactions. Seeking particular feedback on issues that may impact a taxpayers' ability to calculate and substantiate any capital gains and losses for capital gains tax (CGT) purposes, the ATO indicated that the consultation would help direct further cryptocurrency advice and guidance products from the ATO. The scope of the consultation was limited to practical issues arising out of:
- record-keeping of cryptocurrency transactions; and
- exchanging one cryptocurrency for another.
The ATO has previously released public guidance regarding the tax treatment of cryptocurrency, where it was clarified that cryptocurrency would be considered a property and an asset for CGT purposes.
This consultation follows the ATO's recent creation of a special task force dedicated to tracking and identifying cryptocurrency transactions.
There have been reports that the Australian Securities and Investments Commission (ASIC) has begun preliminary investigations into an Australian ICO.
Earlier this year, Neds, a betting and wagering startup, indicated that it would be looking to undertake an ICO to bolster its sport betting business, projecting a A$60 million raise in exchange for the issuing of 'nedscoin' tokens. In its whitepaper, Neds stated that nedscoin holders would receive a percentage of the sportsbook revenue. As such, it is likely that ASIC’s investigation will focus on whether the issue and sale of nedscoins constitutes financial services for the purposes of the Corporations Act 2001 (Cth), which may trigger Australian financial services licence and disclosure requirements.
At the time of writing, there have been no further developments and ASIC has indicated that they have yet to formalise their views on the matter. Token issuers are reminded to seek legal advice before their seed funding round or ICO to consider the application of relevant laws (including Australia’s financial services laws) to the proposed offer. ASIC has previously released guidance on their approach to characterising tokens offered through ICOs (as discussed here).
The Treasury has proposed reform under the Financial Sector (Shareholdings) Act 1998 (FSSA). The exposure draft legislation relaxes the restriction on ownership of banks and insurers and introduces a new streamlined approval path under the FSSA.
Under the current FSSA framework, a person is precluded from acquiring a stake of 15% or more of the voting shares in a financial sector company, or having such an interest, increase it, without approval from the Treasurer. The new framework will increase the 15% ownership restriction to 20%. The proposed change is in line with the Government’s commitment to improving competition in the financial sector and removing perceived barriers to entry. For fintechs wishing to enter the banking industry, the proposed change also provides them with more time to test and grow their business before having to consider ownership diversification.
The new framework also introduces a streamlined FSSA approval path for owners of domestically incorporated companies applying to become a new financial sector company (or those proposing to acquire shares in entities licensed by the Australian Prudential Regulation Authority (APRA)). These owners may receive streamlined approval to hold a stake of more than 20% subject to certain criteria being met.
Submissions are due 4 May 2018.
While Chinese regulators have announced the successful removal of ICO platforms from the market, other regulators around the globe have continued efforts in bringing cryptocurrencies within the ambit of existing regulatory regimes. These have been discussed here.
The Bank of Japan and European Central Bank have released a report on part two of their joint study into the feasibility of using distributed ledger technology (DLT) for financial market infrastructure. Dubbed 'Project Stella', the first phase in 2017 looked at the feasibility of DLT-based solutions for Real-Time Gross Settlement systems. The second phase of the study explored how the settlement of two linked obligations, such as the delivery of securities against the payment of cash, could be conceptually designed and operate in an environment based on DLT. The banks constructed delivery versus payment prototypes using three DLT platforms: Hyperledger Fabric, Elements and Corda.
The study concluded that while the use of DLT could be theoretically possible, further analysis will be required relating to safety and efficiency issues. Specifically, while it may be possible in both single ledger and cross-ledger environments, there will likely be significant transaction speed and liquidity issues that could arise from gaps in synchronisation for cross-ledger environments. The report also concluded that further exploration into the legal aspects of such proposed arrangements would be required.
It is notable that the approach to DLT taken by Japan generally reflects the Australian approach. Both nations have indicated that while there are no upcoming plans to introduce a centrally-issued digital currency, they are open to exploring the broader efficiency gains that are possible by implementing DLT into market infrastructure systems. In December 2017, the Australian Securities Exchange announced a world-first implementation of DLT for clearing and settling (see previous article).
On 27 April, the Australian Securities Exchange (ASX) released a consultation paper relating to its proposed replacement of the Clearing House Electronic Subregister System (CHESS) with a new DLT system designed by Digital Assets (this project was previously discussed here). The consultation paper outlines the planned features of the new system as well as a proposed timeline for implementation. The new system will ideally provide investors with more efficient clearing, settlement, asset registration and other post-trade services. Notable features include:
- allowing settlement participants to be able to request a Common Investor Number from the ASX as an investor identifier which can be linked to CHESS and issuer sponsored holdings;
- the ability to input additional investor information which can be linked to a CHESS holding to allow for certain corporate actions to be exercised by the underlying beneficiaries of such financial products;
- settlement lock for CHESS holdings. This will allow settlement participants to ‘lock’ on, or commit, financial products held in a client CHESS holding for delivering into its settlement account on the day the financial products are due;
- the ability to allow settlement participants on both sides of a bilateral transaction to ‘pre-match’ the transaction without committing the transaction for settlement; and
- the provision of delivery versus payment settlement of bilateral transactions outside the daily batch process (only for eligible foreign currencies).
The new system is scheduled to be in operation between Q4 2020 and Q1 2021. The migration testing is planned to commence in June 2020. In this consultation period, the ASX invites feedback from users and other stakeholders regarding business requirements that may not be adequately met, as well as any feedback on the proposed testing and release management strategy. The consultation period closes on 22 June 2018.
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