Senator releases private bill to regulate digital assets
On 19 September 2022, Senator Andrew Bragg released a draft private member’s bill entitled Digital Assets (Market Regulation) Bill 2022 (Bill). The draft Bill is subject to a six week consultation period and proposes to establish a licensing and reporting framework for digital asset exchanges, custody providers and stablecoin issuers (including designated banks dealing in digital Yuan).
In 2021, the Senate Select Committee on Australia as a Technology and Financial Centre (led by Senator Bragg) released its report into the regulatory future of Australia’s technology, finance and digital assets industries (Report). The Report made 12 recommendations (11 of which were endorsed by the then Government), including a consultation on licensing digital asset providers. This resulted in a 2022 consultation by Treasury on a proposed regulatory framework for crypto asset secondary service providers (CASSPrs). However, Treasury’s consultation coincided with a change in Federal Government and a subsequent period of silence regarding the proposals. In August 2022, the new Government announced its intention to conduct a ‘token mapping’ exercise’ that seeks to identify how crypto assets and related services should be regulated.
While the token mapping announcement received general support, industry has voiced concerns that a protracted exercise of categorising the 21,000+ token types currently on issue could delay the implementation of a regulatory framework and stagnate Australia’s progress in becoming a leading jurisdiction for crypto asset regulation. Addressing this concern, Senator Bragg released the Bill with commentary suggesting his intention to force the current Government to prioritise legislating a regulatory framework for digital assets.
Unpacking the Bill
The Bill provides a definition for digital assets that leans on the definition for crypto assets adopted by the Australian Securities and Information Commission (ASIC) in Information Sheet 225: Crypto Assets. The Bill defines digital assets as follows:
“digital asset means a digital representation of value or rights (including rights to property), the ownership of which is evidenced cryptographically and that is held and transferred electronically by:
- a type of distributed ledger technology; or
- another distributed cryptographically verifiable data structure.”
This definition differs to the Treasury proposed definition for the CASSPr regime by removing concepts relating to the ownership of assets being substantially affected by cryptographic proof. This amended focus to digital assets over crypto assets suggests a broader scope of application.
The Bill proposes a licensing requirement for persons who operate, or hold out that they operate, a digital asset exchange in Australia. A digital asset exchange is proposed to capture:
“facilities through which one or more of the following kinds of exchanges are regularly made:
- exchanges of digital assets for currency (whether Australian or not);
- exchanges of digital assets for other digital assets;
- exchanges of currency (whether Australian or not) for digital assets.”
Digital asset exchanges that meet the threshold connection with Australia (see below ‘Geographical link – connection with Australia’) are proposed to be required to hold a digital asset exchange licence. However, the regime anticipates a licensing exemption for persons holding a recognised foreign licence authorising them to operate an exchange in an offshore jurisdiction (see below ‘Recognised foreign licences’). Civil and criminal penalties are proposed for licensing contraventions.
The Bill anticipates that associated rules will establish minimum requirements applying to digital asset exchange licensees, including requirements for the fair, orderly and transparent operation of digital asset exchanges. It is also proposed the rules will (at least) include requirements relating to:
- minimum capital requirements;
- conduct of the exchange’s participants and protections for the exchange’s participants;
- procedures and associated monitoring activity;
- the segregation and management of funds (including digital assets and any other kinds of assets) of the exchange’s participants;
- disclosure of information to the exchange’s participants;
- record keeping and reporting; and
- the obtaining, use and disclosure of information, including the disclosure of information to ASIC, the Australian Prudential Regulation Authority (APRA) or another authority of the Commonwealth.
The Bill proposes a licensing requirement for persons who provide, or hold out that they provide, a digital asset custody service in Australia. A digital asset custody service is proposed to capture services prescribed by the accompanying rules relating to the “safekeeping, servicing or management of digital assets”. This is a broad definition that should be clarified with respect to the custody services that are practically intended to be caught, as anticipated to be set out in the rules.
Digital asset custody service providers that meet the threshold connection with Australia (see below ‘Geographical link – connection with Australia’) are proposed to be required to hold a digital asset custody licence. This regime also anticipates a licensing exemption for persons holding a recognised foreign licence authorising them to provide digital asset custody services in an offshore jurisdiction (see below ‘Recognised foreign licences’). Civil and criminal penalties are proposed for licensing contraventions.
The Bill anticipates the associated rules will establish minimum requirements applying to digital asset custody licensees, including requirements for the protection of persons to whom digital asset custody services are provided. It is proposed the rule will (at least) include requirements relating to:
- the designation of key personnel in Australia to be responsible for provision of digital asset custody services by the licensee;
- minimum capital requirements; and
- proper auditing, assurance and disclosure arrangements.
This Bill proposes a licensing requirement for persons who issue, or hold out that they issue, stablecoins in Australia. A broad definition of stablecoin is proposed as a “digital asset which is designed to maintain a stable value relative to a particular unit of account or store of value”.
Stablecoin issuers that meet the threshold connection with Australia (see below ‘Geographical link – connection with Australia’) are proposed to be required to hold a stablecoin licence. The regime also anticipates a licensing exemption for persons holding a recognised foreign licence authorising them to issue stablecoins in an offshore jurisdiction (see below ‘Recognised foreign licences’). Civil and criminal penalties are proposed for licensing contraventions.
The Bill anticipates the associated rules will establish minimum requirements applying to stablecoin licensees. It is proposed these will at least include the following requirements:
- the licensee must hold in reserve the full amount of the face value of the liabilities of the licensee for the stablecoins on issue and this amount must be held in accounts kept with an authorised deposit-taking institution (ADI), in either:
- Australian currency; or
- if the stablecoins are designed to be stable relative to foreign currency, that foreign currency;
- the licensee must give the Australian Prudential Regulation Authority (APRA) quarterly statements including the following information:
- a summary description of the assets held in reserve by the licensee for the stablecoins issued by the licensee;
- the number of outstanding stablecoins;
- the value of the assets held in reserve by the licensee for the stablecoins issued;
- the licensee must be audited annually and that financial statements relating to the audit are made publicly available;
- the licensee must make publicly available monthly statements of the size and composition of:
- assets held in reserve for the stablecoins; and
- the issued stablecoin in circulation; and
- the licensee must develop a tailored and appropriate plan to protect persons holding stablecoins issued by the licensee against cybersecurity risks in relation to those stablecoins.
Notably, the proposed requirement that licensees hold the full face value liability amount for all issued stablecoins as reserve currency with an ADI suggests this regime will require all types of stablecoins (including algorithmic stablecoins) to be fully backed by the associated fiat currency. The stablecoin definition is not drafted by reference to whether the token is in fact fiat backed, and the application of the proposed regime to algorithmic stablecoins will need to be clarified.
Each of the digital asset exchange, custody and stablecoin licence requirements is proposed to be triggered if the person engages in the relevant conduct:
- “by or on behalf of:
- a constitutional corporation;
- a body corporate incorporated in Australia; or
- a body corporate taken to be registered in Australia;
- in the course of or in relation to:
- trade or commerce between Australia and places outside of Australia;
- trade or commerce among or between Australian territories or states;
- by means of a service to which paragraph 51(v) of the Constitution applies (ie, postal, telegraphic, telephonic and other like services);
- in relation to currency within the meaning of paragraph 51(xii) of the Constitution (ie, currency, coinage and legal tender); or
- in the course of or in relation to the carrying on of the business of banking, other than State banking, not extending beyond the limits of the State concerned.”
This definition captures a broad array of interactions that an entity may have in relation to Australia. However, the drafting also suggests the relevant activity must take place in Australia (eg, operate an exchange in Australia, provide custody services in Australia, issue a stablecoin in Australia). The relevant thresholds will need to be clarified in order to better understand the jurisdictional nexus triggering a licensing requirement.
Each of the digital asset exchange, custody and stablecoin licence requirements is proposed to be subject to a licensing exemption for entities holding a recognised foreign licence authorising the provision of the relevant service in an offshore jurisdiction.
It is proposed that the Minister identify and approve foreign licensing schemes for the purposes of this exemption where satisfied that the foreign scheme provides for equivalent licensing and compliance requirements as exist in Australia. The Minister is to have regard to the national interest, national security and the need to appropriately enforce the laws of the Commonwealth in approving a foreign licensing scheme. No jurisdictions have been proposed as part of the Bill.
The Bill proposes to give ASIC certain functions and powers, including powers to monitor, investigate and apply penalties within the relevant regimes. Interestingly, the Bill explicitly states that ASIC will supervise digital asset exchanges operated in Australia but remains silent on whether it will have the same mandate with respect to custody providers and stablecoin issuers. While the general provisions imply that ASIC may have such mandate, it is unclear how the division of roles will exist with respect to matters relevant to APRA.
The Bill proposes that only “a body corporate that is a constitutional corporation” may apply for a digital asset exchange, digital asset custody or stablecoin licence, indicating that only Australian or foreign registered body corporates can apply for a licence (ie, not individuals or other entity types). The Minister may grant a licence if the applicant satisfies the proposed requirements to be set out in the rules, and may impose conditions on the licence.
The Bill proposes reporting obligations be applied to designated banks that have facilitated the availability or use of the digital Yuan in Australia within the preceding 12 months. The digital Yuan is taken to mean “digital units of value that are designed to be fungible and are issued by or under the authority of the People’s Bank of China”. Notably, the Bill provides a list of banks proposed to be designated for the purposes of these reporting obligations (seemingly all with ties to China) and does not appear to relate to other ADIs or businesses that may support the use of the digital Yuan. Senator Bragg’s commentary accompanying the Bill states that the Bill specifically targets the e-Yuan as it is the first CBDC to be released by a central bank of a major economy (currently in a pilot phase) and China’s financial influence is relevant in the Asia-Pacific region.
The Bill anticipates the associated rules will establish reporting requirements for designated banks, which are expected to include the reporting of information to both APRA and the Reserve Bank of Australia (RBA) in relation to:
- the number of Australian businesses that have accepted payments using digital Yuan that are facilitated by the designated bank;
- the number of digital wallets for Australian customers of the designated bank that are open; and
- the total amount of digital Yuan held in digital wallets by Australian customers of the designated bank.
APRA and the RBA are expected to provide annual reports to various committees and the Minister in relation to information provided by the designated banks on digital Yuan usage.
The Bill also sets out proposed additional duties to apply to the Parliamentary Joint Committee on Corporations and Financial Services. These include inquiring into, and reporting to both houses of parliament, any matters relating to the regulation of digital assets (including digital Yuan), including the implementation of the Bill, taxation arrangements, and clarification of key terms and concepts relating to such regulation. Within 30 days after each report is provided, the Minister is expected to provide a written response from the Government in relation to any recommendations in such report to be tabled in the relevant house.
The Bill provides a commencement date six months after the day on which it receives Royal Assent. After commencement, there is a proposed three month transition period within which the licensing obligations do not apply to the regulated activities. In effect, this would give captured entities nine months to obtain the relevant licence from the date the Bill receives Royal Assent.
Further, the Bill notes the licensing requirement will not apply in relation to the provision of a digital asset custody service to a person, if the provision of that service to the person started before the commencement of the Bill. This provision suggests that a custody provider would not be required to obtain a licence in relation to custody services provided to current customers at the date the law commences but would require a licence in relation to any new customers beyond such date. It is expected any grandfathering arrangements across each licensable activity will need to be clarified.
While the Bill was not introduced by the current Government, it is a private member’s bill that has the capacity to become law if passed by both houses.
The Bill has been introduced to industry as part of a six week consultation, which, given the drafting, may be subject to comprehensive industry comments and feedback, particularly in relation to how the proposed regime will interact with existing financial services regulatory frameworks. While Senator Bragg noted the intention of the Bill to force the Government’s hand in proposing its own regulatory framework, it may be that a subsequent draft be introduced by Senator Bragg into the Senate.
The consultation period is open until 31 October 2022.
Please reach out to our Fintech + Web3 team should you wish to discuss.