1. Please provide a high-level overview of the blockchain market in your jurisdiction. In what business or public sectors are you seeing blockchain or other distributed ledger technologies being adopted? What are the key applications of these technologies in your jurisdiction?
In some respects the past year has been tumultuous for the blockchain sector however, overall the market has continued to grow and develop with new technology and business models continuing to emerge.
On one hand, the blockchain market has recently faced challenges including the collapse of prominent players like FTX Australia, the cessation of key blockchain projects like the Australian Securities Exchange’s (ASX) replacement of its clearing and settlement system with a new blockchain-based system (see question 2), as well as a pronounced increase in regulatory enforcement actions. On the other hand, the Commonwealth Government of Australia (Government) is generally supportive of driving innovation in the technology and ﬁnancial services sectors and has been proactive in consulting and supporting the sector (including in relation to proposed licensing frameworks). As part of this, there have several leading blockchain initiatives, including industry-speciﬁc trials in ﬁnancial services, energy, minerals, agriculture, food and beverage and the public sector. In the public sector, the Government has considered blockchain application with the Australian Taxation Oﬃce (ATO) using blockchain to validate the dealer history of cars in a hackathon around Luxury Car Tax compliance. The Government’s National Disability Insurance Scheme has also experimented with blockchain and the New Payments Platform to create “smart money” that has the capability of managing insurance pay-outs, budgeting and trust management.
Fintech businesses have leveraged blockchain to manage supply chains, make cross-border payments, trade derivatives, manage assets and operate digital currency exchanges. In particular, there have been numerous private sector projects that have used blockchain to more eﬀectively and securely deliver services to consumers. Three of Australia’s four major banks partnered with IBM and Scentre Group to issue the ﬁrst digital bank guarantee for retail property leases on blockchain, with the intention to reduce the issuance period for a bank guarantee from up to a month to the same day. In the ﬁnancial services sector more generally, there has been an increasing number of banks, including ANZ and the Commonwealth Bank of Australia (CBA), and other major traditional ﬁnance companies exploring meaningful institutional-grade implementations of blockchain technology, particularly in relation to a wholesale central bank digital currency (CBDC) (see question 2). However, as the blockchain landscape has evolved beyond recognisable digital representations of value to novel concepts like decentralised ﬁnance (DeFi), stablecoins, non-fungible tokens (NFTs), digital markets, tokenised assets, identity, exchanges and decentralised autonomous organisations (DAOs), there is considerable discussion around the risks and challenges for market participants and customers. Market events, like the collapse of well- known cryptocurrency exchange, FTX Australia, and increasing calls from industry for clarity in regulation have caused an increase in proactive investigation and enforcement by regulators, particularly the Australian Securities and Investments Commission (ASIC). Despite this, ﬁntech businesses have seen a unique opportunity to develop and position themselves in Australia’s economy. The expansion of the ﬁntech sector has (in part) been led by businesses in the payments, lending, investment and wealth management, custodial services and new digital asset spaces. In the context of blockchain, this has primarily revolved around the creation of new and innovative trading platforms and exchanges. However, there is also increasing interest in robo-advice or digital advice models associated with digital assets. Robo- advice traditionally involves algorithms and technology providing automated ﬁnancial product advice without ongoing human involvement. As cryptocurrencies and other digital assets are increasingly being included in more traditional asset baskets, we expect to see a commensurate increase in cryptocurrency robo-advisers providing advice to clients in relation to various cryptocurrencies, digital tokens and other digital assets.
2. To what extent are tokens and virtual assets in use in your jurisdiction? Please mention any notable success stories or failures of applications of these technologies.
There has been general acknowledgement in the Australian blockchain industry that there is signiﬁcant opportunity for the use of blockchain. An associated risk has been the high start-up failure rate due to relatively low consumer adoption. Some blockchain applications fail due to challenges stemming from the complexity and scalability of the technology as blockchain continues towards a state of technological maturity. However, there have still been many notable applications of blockchain in Australia, including pilots that are not yet commercialised. Such blockchain implementations are likely to inﬂuence the growth and adoption of blockchain in Australia.
Clearing and settling: In November 2022, The ASX, ceased the proposed replacement of its clearing and settlement process, CHESS, with a blockchain-based system, citing signiﬁcant technology, governance and delivery challenges. Although the prominent project did not reach completion, its exploration of a mainstream use case of digital assets yielded valuable insight regarding the wide scope of settings within which blockchain could improve methods of business. In August 2022, the ASX completed a successful test pilot with Melbourne based digital custody provider Zerocap in August 2022, demonstrating that ASX listed companies could leverage a blockchain to store and trade digital assets on the exchange.
Bond issuance: The International Bank for Reconstruction and Development (an arm of the World Bank) selected CBA to arrange for the issue of A$110 million worth of bonds on blockchain, with each bond coined a blockchain operated new debt instrument (BOND-i). The bonds were governed by New South Wales law and were the ﬁrst bonds to be created, allocated, transferred and managed using blockchain.
Central bank digital currency: The Reserve Bank of Australia (RBA) partnered with the CBA, National Australia Bank, Perpetual and ConsenSys Software to investigate the potential use and implications of a wholesale CBDCon an Ethereum-based blockchain platform. Following the completion of a proof of concept which explored the feasibility of a wholesale CBDC, the consortium released a report in December 2021 concluding the project and conﬁrming CBDC and asset tokenisation’s ability to improve eﬃciency, risk management and innovation in wholesale ﬁnancial market transactions. The RBA has since collaborated with the Digital Finance Cooperative Research Centre (DFCRC) on a research project to explore use cases for and the potential economic beneﬁts of a CBDC in Australia. As part of the project the DFCRC partnered with banks, ﬁntechs and payment companies, including ANZ and CBA, to test 14 use cases for a CBDC including in the context of nature-based asset trading, corporate bond settlement and tokenised foreign exchange settlement. Following the completion of the project, the RBA released a report on 23 August 2023 highlighting a range of areas where a CBDC could enhance the functioning of the Australian payments system and the issues which warrant further consideration in future research. The RBA intends for the key ﬁndings to help shape the next phase of the RBA’s research program into the future of money in Australia.
Inter-Government Ledger: The Australian Border Force has developed the Inter- Governmental Ledger (IGL) which has capability to share documents electronically between participating governments. For international trade purposes, the IGL replaces paper documents at the border by creating a ledger of electronically veriﬁable digital documents. The IGL provides importing regulators with a high-integrity digital process to verify documents from exporting partners.
Smart Trade Mark: IP Australia’s Government initiative, Smart Trade Mark is being trialled using blockchain technology and APIs to allow trade mark owners to authenticate products or services and their distribution channels by digitally linking them to government register of trade marks. Smart Trade Mark can be digitally veriﬁed online using a trust badge and has been trialled by the National Rugby League to tackle counterfeit merchandise and the Australian Nuclear Science and Technology Organisation for traceability and veriﬁcation of bush food supply chains ensuring beneﬁt to Indigenous communities and enterprises.
Private sector projects: There have been a number of private sector projects that have used blockchain to deliver services to consumers.
- Three of Australia’s four major banks partnered with IBM and Scentre Group to issue the ﬁrst digital bank guarantee for retail property leases on blockchain earlier this year (see question 1).
- Synthetix is a blockchain-based platform that enables users to digitise interests in a new form of product that provides synthetic exposure to real world assets. The Synthetix platform is governed by a decentralised autonomous organisation and incorporates a range of smart contract functionality to allow users to collateralise and gain synthetic exposure to assets in self-issued derivative like products.
- The CBA and CSIRO’s Data61 conducted a trial for smart money (also known as programmable money), motivated by the Australian National Disability Scheme (NDIS).
- According to a July 2022 report by TechInsight360, the Australian market for NFTs has experienced signiﬁcant growth since 2021 and is expected to continue to grow steadily, recording an estimated compound growth rate of 33.8%, between 2022-2028. NFTs can (among other things) represent an ownership interest in tradeable digital assets such as digital art and collectibles. A key opportunity for NFTs has been in the loyalty sector. In 2022, Tennis Australia launched an NFT ball art oﬀering called ‘AO Artball’ in connection with the Australian Open. Tennis Australia released an additional collection of NFTs in 2023. Holders of AO Artballs were able to claim complimentary ground passes for week two of the 2023 Australian Open as well as access limited edition merchandise and behind the scenes content. NFT marketplaces have also become popular. For example, Immutable X, an Australian based web3 gaming and development platform, oﬀers a trading solution for NFTs by aggregating multiple transactions into a single smart contract using zero knowledge proofs.
3. To what extent has blockchain technology intersected with ESG (Environment, Social and Governance) outcomes or objectives in your jurisdiction?
The Government, businesses and not-for-proﬁt organisations are using blockchain to improve their environmental, social and governance (ESG) obligations, particularly with respect to setting up, evaluating and monitoring ESG-veriﬁable data of counterparties.
The Government has historically invested over A$5.6 million through the Blockchain Pilot Grants program to develop blockchain technology-based solutions that reduce regulatory compliance burden for businesses and improve processes to track provenance in supply chains.
The World Wildlife Foundation Australia is helping the Paciﬁc Islands’ tuna industry to implement blockchain technology to verify the sources of tuna sold to ﬁsh markets in order to ensure they haven’t been sourced from illegal, unreported and unregulated ﬁshing sources.
In August 2021, the CSIRO commenced a research project into developing a blockchain based data platform for hydrogen ESG monitoring and certiﬁcation and aims to consider the following outcomes: Australia’s ﬁrst reference architecture and prototype of a blockchain- based veriﬁable ESG certiﬁcation platform for hydrogen supply chain, Australia’s ﬁrst design and prototype of a blockchain-based audit black box for hydrogen ESG certiﬁcation and the establishment of the CSIRO’s capability for architecting and building ESG certiﬁcation platforms for hydrogen supply chains. The project is ongoing.
The blockchain and cryptocurrency industries have also seen a growing interest in addressing negative commentary around the industry’s sustainability and carbon emissions. For example, Binance Australia announced in late 2021 that it would commence reporting on ESG metrics using the Socialsuite “ESG Go” platform in an eﬀort to be more transparent on sustainability and the carbon footprint of the digital asset industry. More recently, in September 2022 Ethereum switched its consensus mechanism from proof of work to proof of stake (PoS), in part due to proof of stake being signiﬁcantly less energy intensive. An April 2023 study by the University of Cambridge’s Centre for Alternative Finance found that PoS reduced Ethereum’s consumption by over 99%.
4. Please outline the principal legislation and the regulators most relevant to the use of blockchain technologies in your jurisdiction. In particular, is there any blockchain-speciﬁc legislation or are there any blockchain-speciﬁc regulatory frameworks in your jurisdiction, either now or envisaged in the short or mid-term?
There are currently no speciﬁc regulations or legislation dealing with blockchain in Australia. The ASIC, Australia’s corporate, markets, ﬁnancial services and consumer credit regulator, has reaﬃrmed that Australian legislative obligations and regulatory requirements are technology neutral and apply irrespective of the mode of technology that is being used to provide a regulated service. While there have been legislative amendments to accommodate the use of cryptocurrencies, to date these have predominantly focused on the transactional relationships (e.g., the issuing and exchanging process) and activities involving cryptocurrencies, rather than cryptocurrencies themselves. As a result, the focus on the regulation of crypto assets has been on applying the established ﬁnancial services regulatory framework which includes ﬁnancial services and consumer credit licensing, registration and disclosure obligations, consumer law requirements, privacy and anti-money laundering and counter-terrorism ﬁnancing (AML/CTF) requirements.
Currently, the only formal monitoring of crypto asset activity in Australia is in relation to AML/CTF. Digital currency exchange providers have obligations under the AML/CTF Act and must register with AUSTRAC. Exchange operators are required to keep certain records relating to customer identiﬁcation and transactions for up to seven years.
There are also numerous Government reviews and consultations that are ongoing or have recently taken place in connection with how crypto assets and crypto asset-adjacent services should be regulated (see question 9). Generally, it is expected that the recommendations from these reviews will have signiﬁcant eﬀects on the regulatory regimes relevant to crypto assets.
5. What is the current attitude of the government and of regulators to the use of blockchain technology in your jurisdiction?
Both the Government and regulators have generally been receptive to ﬁntech and innovation and have sought to improve their understanding of, and engagement with, businesses by regularly consulting with industry on proposed regulatory changes. There has been considerable discussion around the opportunities, risks and challenges that have arisen for market participants, customers and regulators. The Government’s broader commitment to facilitating growth and innovation within the technology sector has been underpinned by its developing commitment to providing clarity as to how emerging services are adequately captured in Australia’s regulatory framework. This has included increased ﬁntech speciﬁc regulatory guidance to assist businesses in understanding their obligations, amended legislation to bring ﬁntech services providers within the remit of existing regimes, and the introduction of new legislation to provide greater consumer protection (see questions 4 and 9).
In 2020, the Government launched a National Blockchain Roadmap that focuses on several policy areas such as regulation, skill building, investment, and international competitiveness and collaboration. The Government has also invested in supporting a range of blockchain alliance-based initiatives and programs through the Australian Trade and Investment Commission (Austrade) to foster larger cross-border projects and knowledge sharing programs. Australian regulators have become more proactive in overseeing blockchain and crypto asset related services and activities, including greater levels of enforcement (see question 18).
6. Are there any governmental or regulatory initiatives designed to facilitate or encourage the development and use of blockchain technology (for example, a regulatory sandbox or a central bank digital currency initiative)?
The Government has provided support and funding for government, private sector and researchers to foster innovation and collaboration around blockchain, through programs such as Austrade business missions to international markets, the Entrepreneur’s Programme, Australian Research Council Grants, and Business Research and Innovation Initiative pilots. The Government has also provided funding to Standards Australia to lead the development of international standards for blockchain as an appointee of the International Organisation for Standardisation (ISO).
On the regulatory front, ASIC and the Australian Transaction Reports and Analysis Centre (AUSTRAC) have established Innovation Hubs designed to assist ﬁntech businesses more broadly in understanding their obligations under Australian law. The ASIC Innovation Hub is designed to foster innovation that could beneﬁt consumers by helping Australian ﬁntech start-ups navigate the Australian regulatory system. The Innovation Hub provides tailored information and access to informal assistance intended to streamline the Australian ﬁnancial services licence (AFSL) application process for innovative ﬁntech start-ups, which include blockchain-related businesses.
Since 2016, ASIC has made certain class orders establishing a ﬁntech licensing exemption which allows ﬁntech businesses to test certain ﬁnancial services, ﬁnancial products and credit activities without holding an AFSL or Australian credit licence by relying on the class orders (referred to as the regulatory sandbox). In September 2020, this was developed into an “enhanced regulatory sandbox”, which allows testing for a broader range of ﬁnancial services and credit activities up to 2 years. There are strict eligibility requirements for both the type of businesses that can enter the regulatory sandbox and the products and services that qualify for the licensing exemption. There are restrictions on how many persons can be provided with a ﬁnancial product or service, and caps on the value of the ﬁnancial products or services which can be provided.
7. Have there been any recent governmental or regulatory reviews or consultations concerning blockchain technology in your jurisdiction and, if so, what are the key takeaways from these?
There are a number of Government reviews that are ongoing or have recently taken place in connection with how crypto assets and crypto asset-adjacent services. These reviews and consultations are expected to impact how blockchain related businesses operate in future (see questions 4 and 9).
Further, Data61, the digital research network of Australia’s national science agency (CSIRO), partnered with the Australian Computer Society to release a report titled Blockchain 2030: A look at the future of blockchain in Australia (Report). The Report notes that blockchain has grown in popularity and use over the last decade and has been used to create vast opportunity in many sectors across the economy but there are key trends that will impact whether there is mainstream adoption of blockchain.
While blockchain has become more eﬃcient and user- friendly, the Report states that it shows signs of limited scalability. Similarly, while there is great demand for blockchain developers, there is a short supply of talent, which may inhibit blockchain adoption. The Report highlights the opportunities for more transparent and eﬃcient governance methods using blockchain particularly where consumer trust has been eroded in traditional institutions but there are also increased risks associated with scams and illegal activities.
Examining eight scenarios for future adoption of blockchain in Australia, the Report concludes that Australia should leverage its competitive advantage in blockchain with respect to talent and transitioning industry and business. The Report suggests Australia should develop the appropriate skill mix, grow the information technology talent pool, address the blockchain knowledge gap and resolve digital infrastructure bottlenecks. The Report also suggests that the Government should play an active role in regulating the blockchain sector while both the Government and businesses should adopt a rolling strategy approach to implementing blockchain, develop a plan to manage cybersecurity and use research and data to drive decision-making.
The Report follows two earlier reports produced by Data61 for the Government on blockchain use cases for government and industry in Australia. The ﬁndings from the three reports will be used to inform the Government’s National Blockchain Roadmap (as discussed at question 5).
8. Has any oﬃcial guidance concerning the use of blockchain technology been published in your jurisdiction?
ASIC has published (and periodically updates) an information sheet (INFO 219 Evaluating distributed ledger technology) outlining its approach to the regulatory issues that may arise through the implementation of blockchain technology and solutions. In it, ASIC has reinforced its “technology neutral” approach to regulation and has re-asserted that businesses considering operating market infrastructure or providing ﬁnancial or consumer credit services using blockchain will still be subject to the compliance requirements that currently exist under the applicable licensing regimes. This includes the requirement to have the necessary organisational competence, adequate technological resources, and risk management systems in place. ASIC has provided businesses with the following six questions by which to evaluate whether to use blockchain having regard to those requirements:
- How will the DLT be used?
- What DLT platform is being used?
- How is the DLT using data?
- How is the DLT run?
- How does the DLT work under the law?
- How does the DLT aﬀect others?
More broadly, the Government’s Digital Transformation Agency has published a blockchain guide for Australian Government executives who operate in technology roles. The brief guide is based on the United States Government’s National Institute of Standards and Technology. The guide directs Government agencies to key areas of consideration when responding to blockchain technologies, including governance and ownership, trust, encryption and access and correcting errors.
9. What is the current approach in your jurisdiction to the treatment of cryptocurrencies for the purposes of ﬁnancial regulation, anti-money laundering and taxation? In particular, are cryptocurrencies characterised as a currency?
The Government shares a broad commitment to facilitating productivity and economic growth and innovation within the technology and ﬁnancial services sector and improving the eﬃciency and inclusiveness of the ﬁnancial system over the long term. The Government’s commitment to growth has been reﬂected in its consultation activities however, at the same time, market regulators have become more engaged and focused on the blockchain and crypto sector and have increased their investigation and enforcement activities (see question 18). For example, ASIC released its 2023–2027 corporate plan, which highlights crypto assets as a core strategic project. ASIC indicated that it will support the development of an eﬀective regulatory framework for crypto assets focused on consumer protection and market integrity. ASIC also intends to supervise and assess regulated disclosure documents and target market determinations under the design and distribution regime for major crypto oﬀerings in Australia and take enforcement action to protect consumers from harm associated with crypto assets. ASIC will also monitor the regulatory model for exchange traded products (ETPs) with underlying crypto investments, raise public awareness about inherent risks associated with crypto assets and decentralised ﬁnance and work with domestic and international regulators to monitor risks, develop coordinated responses to issues and develop international policy regarding crypto assets and DeFi.
In Australia, cryptocurrencies (also known as virtual assets, digital assets, crypto assets or digital currencies) refer to digital tokens created from code using blockchain that do not exist physically in the form of notes or coins. The current position in Australian law is that cryptocurrency is to be treated as an asset and not as ﬁat currency or money. Amendments to existing legislation over the last few years to accommodate increasing use of cryptocurrencies have generally focused on transactional relationships (ie, issuing and exchanging) rather than on cryptocurrencies themselves. As a result, while cryptocurrencies themselves are not restricted under Australian law, dealings in relation to, or services involving, cryptocurrencies are likely to be captured within existing regulatory regimes.
Australia’s regulatory framework (including how this relates to cryptocurrencies) is currently under review by multiple government bodies and agencies, including Treasury’s token mapping exercise, its review of the Australian payments system and the Australian Law Reform Commission’s review into Chapter 7 of the Corporations Act. At the time of writing, Treasury has also released proposals to regulate digital asset facility providers under the existing ﬁnancial services licensing regime (see below).
A person who carries on a ﬁnancial services business in Australia must hold an AFSL or be exempt from the requirement to be licensed. Persons or entities dealing with, or providing services involving cryptocurrencies should consider whether the cryptocurrency constitutes a ﬁnancial product, which may trigger the licensing requirement as well as other obligations in relation to disclosure, registration and conduct. The deﬁnitions of “ﬁnancial product” and “ﬁnancial service” under the Corporations Act 2001 (Cth) (Corporations Act) are broad, and cover facilities through which a person makes a ﬁnancial investment, manages a ﬁnancial risk or makes a non-cash payment. ASIC continues to reiterate its view that cryptocurrencies with similar features to existing ﬁnancial products will trigger the Australian ﬁnancial services laws.
ASIC has published (and periodically updates) its regulatory guidance on cryptocurrencies, INFO 225 Initial coin oﬀerings and crypto-assets (INFO 225) to inform a greater range of crypto asset participants, including issuers, crypto asset intermediaries, miners and transaction processors, crypto asset exchange and trading platforms, crypto asset payment and merchant services providers, wallet providers and custody service providers, and consumers. INFO 225 sets out ASIC’s approach to determining the legal status of cryptocurrencies, which is dependent on the rights attached to the cryptocurrencies – ASIC has indicated this should be interpreted broadly – as well as their structure. Depending on the circumstances, coins or tokens may constitute interests in managed investment schemes (ie, collective investment vehicles), securities, derivatives, or fall into a category of more generally deﬁned ﬁnancial products, all of which are subject to the Australian ﬁnancial services regulatory regime.
An entity that facilitates payments using cryptocurrencies may also be required to hold an AFSL and the operator of a cryptocurrency exchange may be required to hold an Australian market licence if the coins or tokens traded on the exchange constitute ﬁnancial products.
Consultations and token mapping
Several consultations have recently concluded or commenced seeking feedback from stakeholders on proposed regulation concerning the treatment of crypto assets and their related services (see question 4).
In 2021, ASIC completed a consultation process designed to clarify expectations for crypto assets that form part of the underlying assets of exchange traded products and other investment products to address a growing perception of crypto assets (including cryptocurrencies) as an accepted investment asset class. As a result of the consultation, ASIC released guidance for product issuers and market operators on how they can meet their regulatory obligations in relation to crypto-asset ETPs and other investment products. Crypto asset service providers are broadly required to support the use of the crypto asset, maturity of the spot market for the crypto asset, regulation of derivatives linked to the crypto asset, and the availability of robust and transparent pricing mechanisms for the crypto asset. The information also covers good practices in relation to how fund asset holders are required to custody crypto assets and ensure that adequate risk management systems are in place.
In early 2022, Treasury consulted on a proposed licensing framework for crypto asset secondary service providers (referred to by Treasury as CASSPrs). This was generally targeted towards entities providing custody, brokerage, exchange and transmission services in relation to crypto assets that are not otherwise caught under the ﬁnancial services regime. Following a change of Government in mid 2022, the current Government abandoned the CASSPr consultation in favour of a token mapping consultation paper in February 2023, which sought to identify the key activities and functions of crypto assets and map them against existing regulatory frameworks.
On 29 March 2023, opposition Senator Andrew Bragg introduced a private member’s bill, the Digital Assets (Market Regulation) Bill 2022, which proposed a new licensing regime and reporting requirements for digital asset exchanges, custody providers and stable-coin issuers (including designated banks dealing in digital Yuan). The Bill also proposed to introduce disclosure requirements for facilitators of CBDCs in Australia. Following its consideration by the Senate Economics Legislation Committee, the Bill was rejected in September 2023 on the basis that the Bill lacked the suﬃcient detail and certainty.
On 16 October 2023, Treasury released a consultation paper setting out proposals to regulate digital asset intermediaries under the existing ﬁnancial services licensing framework. Under the proposals, entities operating and providing ﬁnancial services in relation to ‘digital asset facilities’ (ie, multi-function platforms that hold client assets and allow clients to transact in platform entitlements) will be required to hold an AFSL. This will be introduced as a new type of ﬁnancial product. The proposals also apply minimum standards for facility contracts and entities that provide ‘ﬁnancialised functions’ for non-ﬁnancial product tokens, including token trading, staking, asset tokenisation and funding tokenisation. The AFSL regime is well understood and it is expected that enhanced conduct obligations and consumer protections will be imposed in respect of digital asset facilities. The consultation process is open until 1 December 2023. Treasury anticipates draft legislation will be released in early 2024, with a 12 month transition period to follow implementation.
Separately, in April 2023 the Attorney General’s Department announced its consultation on long awaited reform to Australia’s AML/CTF regime. Among the matters are proposed changes to:
- how digital currency exchanges are regulated from an AML/CTF perspective. The consultation proposes expanding the types of regulated services to cover exchanges between one or more other forms of digital currency, transfers of digital currency on behalf of a customer, safekeeping or administration of digital currency and provision of ﬁnancial services related to an issuer’s oﬀer and/or sale of a digital currency; and
- update the travel rule and extend its application to remitters and digital currency exchange providers. The consultation proposes to update the travel rule to align with international standards by requiring payer and payee information for transfers on behalf of customers to other businesses, payer information to be veriﬁed and the inclusion of payee information.
The Attorney General’s Department intends to consult further throughout 2023.
ASIC’s recognition that an ICO may involve an oﬀer of ﬁnancial products has clear implications for the marketing of an ICO. For example, an oﬀer of a ﬁnancial product to a retail client (with some exceptions) must be accompanied by a regulated disclosure document (eg, a product disclosure statement or a prospectus and a ﬁnancial services guide) that satisﬁes the content requirements of the Corporations Act and regulatory guidance published by ASIC. Such a disclosure document must set out prescribed information, including the provider’s fee structure, to assist a client to decide whether to acquire the cryptocurrency from the provider. In some instances, the marketing activity itself may cause the ICO to be an oﬀer of a regulated ﬁnancial product.
Under the Corporations Act, depending on the minimum amount of funds invested per investor and whether the investor is a “sophisticated investor” or “wholesale client”, an oﬀer of ﬁnancial products may not require regulated disclosure.
Where ﬁnancial products are issued and distributed to retail clients, issuers and distributors must also comply with design and distribution obligations (DDOs), including the obligation to create a target market determination (TMD) (see question 10).
The regulation of foreign ﬁnancial service providers (FFSPs) in Australia is in a state of ﬂux. At the time of writing, carrying on a ﬁnancial services business in Australia will require a FFSP to hold an AFSL or otherwise rely on an exemption such as being an authorised representative of an AFSL holder.
Entities, including FFSPs, should note that the Corporations Act may apply to crypto asset sales regardless of whether it was created and oﬀered from Australia or overseas. Historically, FFSPs regulated in comparable jurisdictions had the beneﬁt of limited licensing relief for ﬁnancial services provided to wholesale clients (known as suﬃcient equivalence relief). In 2020, this was repealed and a foreign AFSL regime was introduced. In 2021, the Government proposed reverting back to the comparable jurisdiction regime (with some amendments). This proposal was put to Australian parliament in early 2022; however, the proposed legislation lapsed with the change of Government. On 7 August 2023, Treasury consulted on licensing exemptions for FFSPs, which, if passed, will take eﬀect on 1 April 2024. The licensing exemptions are broadly based on the 2022 legislation and includes a professional investor exemption, comparable regulator exemption, market maker exemption and ﬁt and proper person test exemption (the latter being a simpliﬁcation of the AFSL application process for certain FFSPs).
While consultation is ongoing, ASIC has extended transitional relief for FFSPs currently relying on suﬃcient equivalence and limited connection relief. Transitional relief will expire 31 March 2025 (previously 31 March 2024). During this period, ASIC will also consider new applications for individual temporary licensing relief or new AFSL and foreign AFSL applications from entities that cannot rely on the transitional relief.
Foreign companies taken to be carrying on a business in Australia, including by issuing cryptocurrency or operating a platform developed using token sale proceeds, may be required to either establish a local presence (ie, register with ASIC and create a branch) or incorporate a subsidiary. Broadly, the greater the level of system, repetition or continuity associated with an entity’s business activities in Australia, the greater the likelihood that registration will be required. Generally, a company holding an AFSL will be carrying on a business in Australia and will trigger the requirement.
Promoters should also be aware that if they wish to market their cryptocurrency to Australian residents, and the coins or tokens are considered a ﬁnancial product under the Corporations Act, they will not be permitted to market the products unless the requisite licensing and disclosure requirements are met. Generally, a service provider from outside Australia may respond to requests for information and issue products to an Australian resident if the resident makes the ﬁrst (unsolicited) approach and there has been no conduct on the part of the issuer designed to induce the investor to make contact, or activities that could be misconstrued as the provider inducing the investor to make contact.
Even if an ICO is not regulated under the Corporations Act, it may still be subject to other regulation and laws, including the Australian Consumer Law set out at Schedule 2 to the Competition and Consumer Act 2010 (Cth) (ACL) relating to the oﬀer of services or products to Australian consumers. The ACL prohibits misleading or deceptive conduct in a range of circumstances including in the context of marketing and advertising. As such, care must be taken in ICO promotional material to ensure that buyers are not misled or deceived and that the promotional material does not contain false information. In addition, promoters and sellers are prohibited from engaging in unconscionable conduct and must ensure the coins or tokens issued are ﬁt for their intended purpose.
The protections of the ACL are generally reﬂected in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), providing substantially similar protection to investors in ﬁnancial products or services.
ASIC has also received delegated powers from the Australian Competition and Consumer Commission to enable it to take action against misleading or deceptive conduct in marketing or issuing in ICOs (regardless of whether it involves a ﬁnancial product). ASIC has indicated misleading or deceptive conduct in relation to ICOs may include:
- using social media to create the appearance of greater levels of public interest;
- creating the appearance of greater levels of buying and selling activity for an ICO or a crypto-asset by engaging in (or arranging for others to engage in) certain trading strategies;
- failing to disclose appropriate information about the ICO; or
- suggesting that the ICO is a regulated product or endorsed by a regulator when it is not.
ASIC has stated that it will use this power to issue further inquiries into ICO issuers and their advisers to identify potentially unlicensed and misleading conduct.
A range of consequences may apply for failing to comply with the ACL or the ASIC Act, including monetary penalties, injunctions, compensatory damages and costs orders.
Anti-money laundering and counter-terrorism ﬁnancing
Cryptocurrencies and tokens were brought within the scope of Australia’s anti-money laundering and counter- terrorism ﬁnancing (AML/CTF) regulatory framework as a result of legislative amendments in the Anti-Money Laundering and Counter-Terrorism Amendment Act 2017 (Cth) which came into force in April 2018. The legislation was introduced to recognise the movement towards digital currencies becoming a popular method of payment and the transfer of value in the Australian economy while posing signiﬁcant money laundering and terrorism ﬁnancing risks.
Broadly, digital currency exchange (DCE) service providers are required to register with AUSTRAC in order to operate, with a penalty of up to two years’ imprisonment or a ﬁne of up to A$111,000, or both, for failing to register. Registered exchanges will be required to implement know-your-customer processes to adequately verify the identity of their customers, with ongoing obligations to monitor and report suspicious and large transactions. Exchange operators are also required to keep certain records relating to customer identiﬁcation and transactions for up to seven years.
DCE providers are required to renew their registration every three years.
The DCE sector has been of great interest to AUSTRAC, in particular monitoring the ML/TF risks associated with digital currency. In June 2021, AUSTRAC promoted the Financial Action Task Force’s (of which Australia is a member nation) red ﬂags guidance for indicators of ML/TF, which sets out best practice for regulators and reporting entities and is expected to inform how AML/CTF legislation relating to digital currency is developed.
The taxation of cryptocurrency in Australia has been an area of much debate, despite recent attempts by the ATO to clarify the operation of the tax law. Most recently, Treasury Laws Amendment (2022 Measures No. 4) Bill 2022 received royal assent on 23 June 2023, which clariﬁes that for income tax purposes, cryptocurrency is an asset that is held or traded rather than as money or a foreign currency (except for government-issued digital currencies). The tax implications for holders of cryptocurrency depends on the purpose for which the cryptocurrency is acquired or held. The summary below applies to holders who are Australian residents for tax purposes.
Sale or exchange of cryptocurrency in the ordinary course of business
If a holder of cryptocurrency is carrying on a business that involves the sale or exchange of the cryptocurrency, the cryptocurrency will be held as trading stock. Gains on the sale of the cryptocurrency will be assessable and losses will be deductible (subject to integrity measures and “non-commercial loss” rules). Examples of relevant businesses include cryptocurrency trading and cryptocurrency mining.
Whether or not a taxpayer’s activities amount to carrying on a business is a question of fact and degree, and is ultimately determined by weighing up the taxpayer’s individual facts and circumstances. Generally (but not exclusively), where the activities are undertaken for a proﬁt-making purpose, are repetitious, involve ongoing eﬀort, and include business documentation, the activities would amount to the carrying on of a business.
Even if a holder of cryptocurrency did not invest or acquire the cryptocurrency in the ordinary course of carrying on a business, proﬁts or gains from an “isolated transaction” involving the sale or disposal of cryptocurrency may still be assessable where the transaction was entered into with a purpose or intention of making a proﬁt, and the transaction was part of a business operation or commercial transaction.
If cryptocurrency is not acquired or held in the course of carrying on a business, or as part of an isolated transaction with a proﬁt-making intention, a proﬁt on sale or disposal should be treated as a capital gain. In this regard, the ATO has indicated that cryptocurrency is a capital gains tax (CGT) asset. Capital gains may be discounted under the CGT discount provisions, so long as the taxpayer satisﬁes the conditions for the discount (broadly that is, the cryptocurrency is held for at least 12 months before it is disposed of and the taxpayer is an Australian resident individual, trust or complying superannuation fund).
Although cryptocurrency may be a CGT asset, a capital gain arising on its disposal may be disregarded if the cryptocurrency is a “personal use asset” and it was acquired for A$10,000 or less. Capital losses made on cryptocurrencies that are personal use assets are also disregarded. Cryptocurrency will be a personal use asset if it was acquired and used within a short period of time for personal use or consumption (that is, to buy goods or services).
Note that the ATO’s views on the income tax implications of transactions involving cryptocurrencies is in a state of ﬂux due to the rapid evolution of both cryptocurrency technology and its uses. On 21 March 2022, the Government released the Terms of Reference for a review to be undertaken by the Board of Taxation into an appropriate policy framework for the taxation of digital assets and transactions in Australia. In August 2022, the Board of Taxation published a consultation guide. Interested parties were invited to participate in the consultation, and provide written submissions. In this respect, the Board of Taxation has been asked to report back to the Government by 30 September 2023.
An entity may hold units of cryptocurrency (i.e. tokens) to validate and verify transactions within a blockchain. The “validator” may be rewarded with additional tokens for its role in this process. Token holders who participate in proxy staking or who vote their tokens in “proof of stake” or other consensus mechanisms may also be rewarded with additional tokens. The value of such tokens should be treated as ordinary income of the recipient at the time they are derived.
Issuers of cryptocurrencies
In the context of an ICO, a coin issuance by an entity that is either an Australian tax resident, or acting through an Australian “permanent establishment”, may be assessable in Australia. The current corporate tax rate in Australia is either 25% or 30%, depending on the issuer’s turnover and the extent to which its assessable income consists of speciﬁed types of passive income.
Australian goods and services tax (GST)
Supplies and acquisitions of digital currency made from 1 July 2017 are not subject to GST on the basis that they will be input-taxed ﬁnancial supplies. Consequently, suppliers of digital currency will not be required to charge GST on these supplies, and a purchaser would prima facie not be entitled to GST refunds (i.e. input tax credits) for these corresponding acquisitions. On the basis that digital currency is a method of payment, as an alternative to money, the normal GST rules apply to the payment or receipt of digital currency for goods and services.
The term “digital currency” in the GST legislation requires that it is a digital unit of value that has all the following characteristics:
- it is fungible and can be provided as payment for any type of purchase;
- it is generally available to the public free of any substantial restrictions;
- it is either not denominated in any country’s currency; or denominated in a currency that is not issued by, or under the authority of, any government agency;
- the value is not derived from or dependent on anything else; and
- it does not give an entitlement or privileges to receive something else.
In relation to a holder carrying on an enterprise of cryptocurrency mining, whether or not GST is payable by the miner on its supply of new cryptocurrency depends on a number of factors, including its speciﬁc features, whether the miner is registered for GST, and whether the supply is made in the course or furtherance of the miner’s enterprise.
A miner will carry on an enterprise where it conducts an activity, or a series of activities, in the form of business or in the form of an adventure or concern in the nature of trade, but it does not include activities conducted for a private recreational pursuit, as a hobby or as an employee. The scope of carrying on an “enterprise” can be broader than carrying on a “business” (as outlined above), and some miners may unintentionally be carrying on an “enterprise” for GST purposes.
The speciﬁc features of cryptocurrency include it: being a type of security or other derivative; being “digital currency” as deﬁned in the GST legislation. If the cryptocurrency is a security, derivative or digital currency, its supply will not be subject to any GST because it will be an input-taxed ﬁnancial supply (assuming the other requirements are satisﬁed).
A cryptocurrency miner would generally be required to register for GST if its annual GST turnover is A$75,000 or more, excluding the value of its supplies of digital currencies and other input-taxed supplies. However, a miner who does not satisfy this GST registration threshold may nevertheless elect to register for GST in order to claim from the ATO full input tax credits (i.e. GST refunds) for the GST cost of its creditable business acquisitions (noting that acquisitions that relate to the sales or acquisitions of securities, derivatives or digital currencies are prima facie non-creditable).
A supply made in connection with a miner’s enterprise, including the enterprise’s commencement or termination, will generally be “made in the course or furtherance” of their enterprise, and may attract GST should other requirements be satisﬁed.
The ATO has created a specialist task force to tackle cryptocurrency tax evasion. The ATO also collects bulk records from Australian cryptocurrency designated service providers to conduct data matching to ensure that cryptocurrency users are paying the right amount of tax. With the broader regulatory trend around the globe moving from guidance to enforcement, it is likely that the ATO will continue to tighten its scrutiny of cryptocurrency.
Since 5 October 2021, issuers and distributors of ﬁnancial products to retail clients must comply with DDOs which may impact the way cryptocurrencies are structured and token sales are conducted. Issuers and distributors are required to implement eﬀective product governance arrangements including a TMD subject to review triggers. ASIC indicated in its 2023-27 corporate plan that the DDOs will be a core strategic project and has pursued numerous enforcement actions to address poor design and distribution of products. In the blockchain and cryptocurrency sector, ASIC has made interim stop orders preventing the distribution of retail funds providing exposure to crypto-assets (and those funds have since been wound up). The orders were made on the basis that ASIC does not consider that the target market in the TMD to be suitable.
Design and distribution obligations
Since 5 October 2021, issuers and distributors of ﬁnancial products to retail clients must comply with DDOs which may impact the way cryptocurrencies are structured and token sales are conducted. Issuers and distributors will be required to implement eﬀective product governance arrangements including a TMD subject to review triggers. While the regime is relatively new, ASIC has indicated in its 2022-26 corporate plan that the DDOs will be a core strategic project. ASIC has suggested that it will prioritise taking enforcement action to address poor design and distribution of products and this has commenced, with ASIC recently making interim stop orders preventing the distribution of retail funds providing exposure to crypto-assets. The orders were made on the basis that ASIC does not consider that the target market in the TMD to be suitable.
Product intervention powers
ASIC also has product intervention powers (PIPs) where there is a risk of signiﬁcant consumer detriment. This enables ASIC to address market-wide problems or speciﬁc business models and deal with certain “ﬁrst mover” issues. The power covers ﬁnancial products under the Corporations Act and ASIC Act and credit products under the National Consumer Credit Protection Act 2009 (Cth) (NCCPA). These powers are highly likely to impact marketing and distribution practices in the cryptocurrency sector where cryptocurrencies fall within the scope of these powers.
The purpose of these regulations is to ensure that ﬁnancial products are targeted at the correct category of potential investors. ASIC has already commenced using its PIP to address issues relating to short term credit products and various derivatives. However, these have not yet been directed speciﬁcally toward cryptocurrencies. It is anticipated that ASIC will use its PIP should a risk of signiﬁcant consumer detriment arise in relation to certain cryptocurrency types and structures. We note ASIC has made a product intervention order under ASIC Corporations (Product Intervention Order—Contracts for Diﬀerence) Instrument 2020/986 (CFD Instrument) imposing conditions on the issue and distribution of CFDs to retail clients until 23 May 2027. Among other conditions, the product intervention order restricts contract for diﬀerent leverage oﬀered to retail clients to a maximum ratio depending on the asset referenced and the leverage ratio is 2:1 for CFDs referencing crypto assets.
11. To what extent have initial coin oﬀerings taken place in your jurisdiction and what has been the attitude of relevant authorities to ICOs?
While the data on ICO activity in Australia is opaque, a number of Australian businesses such as Synthetix, Power Ledger and CanYa have raised signiﬁcant funds via ICOs.
Regulators such as ASIC and AUSTRAC have generally been receptive to ﬁntech and innovation but at the same time, regulators have been active in highlighting the risks of trading and investing in cryptocurrencies particularly in respect of retail consumers. ASIC has referred to ICOs as being “a highly speculative investment” and that “while the potential returns may look attractive, these projects are mostly unregulated and the chance of losing your investment is high”. This approach to issue public statements and warnings to consumers speciﬁc to ICOs aligns with the approach of many members of the International Organization of Securities Commissions.
ASIC has also emphasised consumer protection and compliance with the relevant laws and has taken action as a result to stop proposed token sales targeting retail investors due to issues with disclosure and promotional materials (the requirements of which are discussed below), as well as oﬀerings of ﬁnancial products without an AFSL. In August 2021, ASIC urged consumers to be wary of investing in crypto-asset related ﬁnancial products, such as options and futures, through unlicensed entities.
The ASX has historically taken a staunch stance towards cryptocurrency in its crackdown on cryptocurrency related entities (primarily to help protect consumers investing in speculative investments). The ASX has compared the increase in investments of cryptocurrency to the tulip crisis in Holland stating that “cryptocurrency has been used for fraud right around the world” and “needs to be stopped”. However, while the ASX has generally opposed cryptocurrencies, it has accepted listing applications for cryptocurrency related entities and exchange traded products oﬀering investors exposure to cryptocurrency.
Despite recently completing a research project with the DFCRC into the use cases of CBDCs (see question 2), the Reserve Bank of Australia (RBA), Australia’s central bank, has conﬁrmed that it has no immediate plans to issue a retail CBDC akin to money. The RBA noted that the rise of new technology associated with cryptocurrencies has the capacity to challenge the role of traditional ﬁnancial institutions with regard to payments. Similarly, it has explored the potential structure of a retail CBDC but continues to conclude that there is currently no public policy case for the RBA to issue a retail CBDC. Despite this, the RBA has taken active steps in exploring applications for a wholesale CBDC (discussed in question 2).
The use of digital wallets in Australia has also continued to grow. The Council of Financial Regulators (comprised of Australia’s major ﬁnancial regulators) has made recommendations to the Government for a new framework for stored value facilities to be overseen by APRA. Stored value facilities include digital wallets that are increasingly being used as a means of payment and store signiﬁcant value for a reasonable period of time. The new framework is intended not only to be ﬁt for purpose for the emerging ﬁnancial system but also be able to accommodate future developments and technological advances, such as proposals for global stable coin ecosystems.
12. If they are permissible in your jurisdiction, what are the key requirements that an entity would need to comply with when launching an ICO?
The legislative amendments introduced to provide for the regulation of cryptocurrencies have generally focused on the transactional relationships (eg, the issuing and exchanging process) and activities involving cryptocurrencies, rather than the cryptocurrencies themselves. See question 9 regarding the key aspects of Australia’s ﬁnancial services regulatory regime as it relates to the sale of cryptocurrency through an ICO including licensing requirements, marketing requirements, cross border issues and consumer law issues.
Depending on the circumstances, coins or tokens may constitute interests in managed investment schemes (collective investment vehicles), securities, derivatives, or fall into a category of more generally deﬁned ﬁnancial products (including the ability to make non-cash payments), all of which are subject to the Australian ﬁnancial services regulatory regime.
ASIC has provided high-level guidance to assist in determining whether an ICO may fall within the Australian ﬁnancial services regulatory framework in INFO 225 (see question 9).
13. Is cryptocurrency trading common in your jurisdiction? And what is the attitude of mainstream ﬁnancial institutions to cryptocurrency trading in your jurisdiction?
According to ATO’s data analysis there has been a dramatic increase in cryptocurrency trading since the beginning of 2020. As at 28 May 2021, the ATO estimated that over 600,000 Australians have invested in crypto assets in recent years and a 2023 study by the ASX revealed that 15% of Australian investors currently hold cryptocurrency and 29% of Australian investors are interested in buying cryptocurrency in the next 12 months, with that number rising to 31% for investors aged between 18-24. More broadly, ASIC Report 735: Retail Investor Research (released August 2022) indicates cryptocurrencies may now represent the second most held investment asset by Australian investors.
Mainstream ﬁnancial institutions in Australia have historically stayed away from any involvement with cryptocurrency trading citing money laundering and terrorism ﬁnancing risks. Industry association bodies have also raised concerns of “de-banking” with banks closing the accounts of a notable number of Australian digital currency exchanges to meet “compliance and assurance requirements”. In recent times numerous institutional market makers and liquidity providers have increased their scope to provide broader corporate solutions across cryptocurrency and digital asset trading, including custody solutions. Similarly, there is a growing presence of cryptocurrency and digital asset-based classes of underlying assets within managed funds. Such inclusion has indirectly increased the volume of trading in these assets.
While the ASX considered implementing for its own blockchain-based replacement for its equities clearing and settlement operations, the embracing of blockchain has not generally extended to cryptocurrencies. In late 2019 the exchange released updated compliance guidance regarding cryptocurrency-related activity, stating that such activities raise “signiﬁcant legal, regulatory and public policy issues” and its “concerns regarding cryptocurrency-related activities have been reinforced and ampliﬁed”. The ASX’s position remains that listing a crypto-currency business will need to satisfy stringent listing requirements. Despite these higher barriers to entry there have been numerous cryptocurrency related businesses and funds listed on the ASX in the last couple of years.
14. Are there any relevant regulatory restrictions or initiatives concerning tokens and virtual assets other than cryptocurrencies (e.g. trading of tangible property represented by cryptographic tokens)?
There are no speciﬁc regulatory restrictions concerning tokens and other virtual assets. The legal obligations and requirements applicable to any cryptocurrency, token or virtual asset will depend upon the rights which are attached to them and their features (as discussed at question 9).
While Australia has not adopted any speciﬁc initiatives concerning tokens, virtual assets or cryptocurrencies, ASIC and AUSTRAC have established initiatives to assist ﬁntech businesses more broadly in understanding their obligations such as setting up innovation hubs (see question 6).
15. Are there any legal or regulatory issues concerning the transfer of title to or the granting of security over tokens and virtual assets?
ASIC has indicated how Australian ﬁnancial services laws may apply to ICOs as an alternative form of funding. This includes how the legal status of an ICO may trigger licensing, registration and disclosure requirements if the tokens represent ﬁnancial products (see question 9). Regardless of whether a token constitutes a ﬁnancial product, ICOs and security token oﬀerings will be subject to ACL restrictions and AML/CTF reporting requirements. Entities engaging in lending activities within the scope of the National Credit Code (which may capture lending associated with security taken over digital assets), as contained in Schedule 1 of the NCCPA, will need to hold an Australian credit licence or be exempt from the requirement to be licensed. Credit licensees must also comply with a range of obligations including in relation to responsible lending.
As digital assets are increasingly included in underlying baskets of fund assets, there have been concerns regarding the ability of an appointed custodian to hold legal title to digital assets to the exclusion of other fund participants and beneﬁciaries. These concerns relate to the ability to comply with existing laws regulating the holding of fund assets (for example, having exclusive possession of assets held on trust for beneﬁciaries).
Solutions have primarily revolved around a series of cold storage and multi-signature access and trade execution processes. However, these have not been widely solved in a manner that allows for relative ease of trade execution in high volume trading schemes.
There has also been continuous development in the use of blockchain in bond issuances (see question 2). Currently, the majority of blockchain issued bonds only mirror oﬀ-chain transactions on the on-chain ledger, rather than eﬀecting the transaction using blockchain. The technology generally has not yet extended to allow for the recordings in the ledger to constitute a transfer of legal title to the bonds and consequently, transactions are executed through an oﬀ-chain bond register and then replicated on the blockchain.
16. How are smart contracts characterised within your legal framework? Are there any enforceability issues speciﬁc to the operation of smart contracts which do not arise in the case of traditional legal contracts?
Smart contracts (including self-executing contracts) are permitted in Australia under the Electronic Transactions Act 1999 (Cth) (ETA) and the equivalent Australian state and territory legislation. The ETA provides a legal framework to enable electronic commerce to operate in the same manner as paper-based transactions. Under the ETA, self-executing transactions are permitted in Australia, provided that they meet all traditional elements of a legal contract, including an intention to create legally binding obligations; oﬀer and acceptance; certainty; and consideration.
The pre-determined and self-executing form of smart contracts creates diﬃculties where there is a required element of discretion by either party, particularly relating to dispute mechanisms (e.g. arbitration and mediation) and non-deterministic provisions. There has been very little case law on the subject. Self-executing contracts may alter traditional dispute resolution in Australia if online platforms can facilitate self-executing dispute resolution.
17. To what extent are smart contracts in use in your jurisdiction? Please mention any key initiatives concerning the use of smart contracts in your jurisdiction, including any examples relating to decentralised ﬁnance protocols.
Aside from a number of pilot phase testing programs, the use of smart contracts has generally been limited to the cryptocurrency sector. They have been used through numerous cryptocurrency exchanges and digital asset platforms for order matching and transaction execution (with increasing regularity for atomic swaps) as well as in the ICO context.
Over the last few years, there has also been an increase in institutional adoption of smart contracts to digitise readily automatable processes. This has primarily taken hold in the ﬁnancial services sector with multiparty arrangements (for example, issuing bank guarantees or debt instruments, issuing and dealing with fund interests through smart contracts). The most prominent implementation of smart contracts in Australia is the ASX’s proposed replacement of its clearing and settlement system with a blockchain-based system (see question 2).
There have also been a number of initiatives and consortia established that aim to develop a framework for the standardisation and regulation of smart contracts (for example, through Australia’s national science agency, CSIRO’s Data61). However, there is yet to be a widely-adopted framework.
18. Have there been any governmental or regulatory enforcement actions concerning blockchain in your jurisdiction?
ASIC has pursued a number of high-proﬁle enforcement actions (including ﬁling proceedings in Australia’s Federal Court) against crypto businesses. These actions have focused on alleged unlicensed activities and the nature of associated conduct (eg, perceived instances of investor and consumer risk). This is consistent with ASIC’s 2023–27 Corporate Plan (see question 9) however this “regulate by enforcement” approach has strengthened calls for legislative clarity.
.ASIC has released a warning in particular for brokers oﬀering or seeking to oﬀer unregulated crypto assets alongside regulated products on trading apps. ASIC noted this may provide clients with “a false sense of security, leading them to believe crypto-assets have the same protections as regulated ﬁnancial products or they may underestimate the risks”. Given ASIC’s focus on crypto assets in its latest corporate plan (see question 9), it is expected that there will be an increased eﬀort by ASIC to identify and deter bad actors in the blockchain and crypto sectors.
While not speciﬁcally related to blockchain, the ATO has established a special taskforce that actively investigates potential tax evasion arrangements that are facilitated through blockchain-based cryptocurrency transactions. Aligning with this approach, AUSTRAC requires digital currency exchanges to register, monitor and report on transactions occurring on these platforms. However, at the time of writing, no public information has been released regarding any enforcement actions that may have been taken against entities by these agencies.
19. Has there been any judicial consideration of blockchain concepts or smart contracting in your jurisdiction?
While there has been passing references to blockchain in Australian case law, at the time of writing there has not been any speciﬁc judicial consideration of blockchain or smart contracts in Australia.
20. Are there any other generally- applicable laws or regulations that may present issues for the use of blockchain technology (such as privacy and data protection law or insolvency law)?
In Australia, the Privacy Act 1988 (Cth) (Privacy Act) regulates the handling of personal information by Government agencies and private sector organisations with an aggregate group revenue of at least A$3 million with a jurisdictional link to Australia. In some instances, the Privacy Act will apply to businesses (e.g. credit providers and credit reporting bodies) regardless of turnover. The Privacy Act includes 13 Australian Privacy Principles, which impose obligations on the collection, use, disclosure, retention and destruction of personal information. Relevantly, before entities collect personal information, they must disclose the way in which this data will be used, the purposes for which it will be used and third parties to which it is likely to be disclosed. This is the basis on which individuals provide consent for their personal information to be collected, used and disclosed. Note, Australia’s privacy legislation is currently the subject of reform and it is anticipated that there will be signiﬁcant changes in this space.
Blockchain arrangements can be structured in various ways, from information being readily visible to all participants on a network, to closed networks where information is limited to speciﬁc participants in speciﬁc instances. Therefore, entities wishing to collect and use personal information through blockchain implementations must ensure that they have gained appropriate consents for the contemplated use and disclosure.
The Notiﬁable Data Breaches (NDB) scheme was implemented in 2018. The NDB scheme mandates that entities regulated under the Privacy Act are required to notify any aﬀected individuals and the Oﬃce of the Australian Information Commissioner in the event of a data breach (i.e. unauthorised access to or disclosure of information) which is likely to result in serious harm to those individuals. The NDB scheme applies to agencies and organisations that the Privacy Act requires to take steps to secure certain categories of personal information. Therefore, entities will also need to ensure that any blockchain implementations are suﬃciently protected from security issues such as unauthorised access and operational failure, and in the case of a data breach, ensure that they have adequate processes in place to comply with the NDB scheme.
21. Are there any other key issues concerning blockchain technology in your jurisdiction that legal practitioners should be aware of?
Entities oﬀering solutions that incorporate blockchain technology (as well as their legal advisers) should be aware of the regulations that may apply to the broader context in which the solution is oﬀered. This particularly relates to the extent to which the general public may not accurately understand how the blockchain components operate, and how they ﬁt within the overall solution.
The ACL provides various consumer protections in relation to goods and services sold to Australian consumers (irrespective of where the business is located). These protections include prohibitions against:
- misleading and deceptive conduct;
- false or misleading representations;
- unfair contract terms; and
- unconscionable conduct.
Where the blockchain solution forms part of a ﬁnancial services oﬀering, the ASIC Act will apply, and sets out identical consumer protections as the ACL.
Therefore, where an oﬀering incorporates blockchain technology, entities must ensure that consumers have the necessary information to understand how the solution works, the purpose and use of the blockchain components and what that means from an end-user perspective.