Statistics show that more than 800,000 Australians transacted in crypto assets in the last 3 years, with an increase of 63% between 2021 and 2020.
So much is crypto now becoming a part of everyday Australians’ investments, that the Federal Government this month issued a Consultation Paper inviting comment on the long-awaited introduction of a regulatory framework for crypto investment services.
In this short article, we will discuss the current laws affecting crypto assets in Australia, as well as some of what is proposed to happen in the near future.
Crypto assets and the blockchain
When referring to crypto assets, most people will associate this with cryptocurrencies such as Bitcoin. However, this would be an underassessment of what the underlying technology, being distributed ledger technology or blockchain, can be used for, and therefore the diversity of what can be a crypto asset.
At present, the crypto assets that legislation is most concerned with are digital tokens. There are three main classes:
- Cryptocurrency – these are digital tokens that can be used to purchase goods and services instead of using fiat currency. They may exist on their own such that their value is whatever the market is willing to pay for them. This includes the likes of Bitcoin, Litecoin, Ethereum. Alternatively, they can be asset-backed such that their value is pegged against a commodity or currency held by the issuer making them more stable. They are referred to as ‘stablecoin’ and an example is ANZ’s recently minted A$DC valued at 1 A$DC = $1 AUD).
- Utility and security tokens – these are digital tokens used to unlock services or as passwords.
- Non Fungible Tokens (NFT) – these are digital tokens that represent a physical asset that exists somewhere. They act as electronic proof of ownership. An example is Twitter co-founder Jack Dorsey who sold the rights to his first ever tweet as an NFT for more than $2.9 million.
All of these digital tokens rely on cryptography and blockchain technology to be kept and transferred from one person to another.
Blockchain is the technology by which transactions are verified by a group of computers cross referencing data and agreeing on an outcome, rather than a single central computer or authority reviewing information and determining if the transaction is lawful. It doesn’t take much to understand the benefits that blockchain technology can provide in terms of speed, security, and cost. These reasons are some of the reasons why a person may choose to transact in cryptocurrency rather than in fiat currency, and why more and more government institutions and banks across the world are considering introducing their own crypto coins whether to buy services or to be used as currency.
Ecuador became the first country, in 2015, to introduce a digital coin to foster the inclusion of its people in the financial system, the more efficient delivery of government services, and the safer transaction of money. In Australia, although the Reserve Bank maintains that there is presently no public policy case for the introduction of central bank digital currency for Australia, the Federal Government is reportedly considering it. This month, ANZ completed its first transaction using its own newly minted A$DC stablecoin.
There are other applications for blockchain technology, this includes smart contracts, being self-executing computer code, designed for business automation applications. For example, IBM Blockchain Transparent Supply operates supply chain automation technology visible and accessible by various businesses along the supply chain. Smart contracts are also used to facilitate NFT transactions.
Current regulations applying to the use of crypto assets in Australia
There is sometimes an understanding that cryptocurrency is entirely unregulated and may not even be legal. Both of these notions are incorrect.
The following may be summarised as the situation in relation to crypto assets, and cryptocurrency in particular, in Australia:
- Not ‘legal tender’ but legal to use. Cryptocurrency is not considered legal tender in Australia, which means you are not required to accept it, but nothing prohibits a business from accepting it as a valid form of payment for goods and services. It is not illegal.
- Subject to AUSTRAC reporting. Service providers that facilitate transactions of cryptocurrency must be registered with and report to AUSTRAC for the same anti-money laundering and counter-terrorism financing obligations that apply to fiat currency.
- Crypto assets attract tax. Transactions in cryptocurrency must still be reported in your tax return. If you bought a crypto asset as an investment, you will have made a capital gain or capital loss on sale (CGT). There will be no GST as the crypto asset will be deemed a financial asset. However, if you use cryptocurrency for payment of goods and services in your business, including where you mine and receive coins in return, you must declare that as income in your tax return. GST will also still apply to sales transactions even if payment is made in cryptocurrency. Guidance on the treatment of income, capital gains and GST when using cryptocurrency is available via the ATO.
- Legal to invest in, even by self-managed super funds. It is legal to invest in or purchase crypto assets, even by self-managed superannuation funds, provided that the investment is permitted under the fund’s trust deed, it is in accordance with the fund’s strategy and you comply with the regulatory requirements for investments by super funds. However, that is not to say that a volatile cryptocurrency is a desirable form of investment for your superannuation. It may be worthwhile to purchase an NFT, in which case what you are really investing in is the underlying asset. You will need to consider the safekeeping and transaction of the NFT, which brings us to our 5th and final point.
- Little or no regulation for service providers. Service providers are only required to have an Australian Financial Services Licence if they provide a financial service or financial product and the definition of these terms in the Corporations Act, which was not designed to cover crypto assets, means that many providers will seek to operate unlicensed. Bar financial services licensing, only the misleading and deceptive conduct provisions of the Australian Consumer Law apply, and let’s just say this doesn’t provide for any great level of comfort to the consumer.
What to consider if intending to use crypto assets for business
If you are intending to use blockchain technology or crypto assets in your business, consider reading ASIC INFO219 Evaluating distributed ledger technology (updated in March 2021) and ASIC INFO225 Initial Coin Offerings. You can also communicate with the ASIC Innovation Hub to discuss fintech proposals with ASIC. However, bear in mind that any guidance will not be legal advice, will be informal, and does not restrict what attitude ASIC may take in the future.
Ultimately, you need to decide if your product is a financial product or you are providing a financial service, for which you should obtain legal advice. If you are offering digital tokens that have the same features as existing financial products, securities, or derivatives, or which may constitute an interest in a managed investment scheme, then you may very well be providing a financial product.
If this is the case, you will need an Australian Financial Services Licence and to comply with all associated obligations regarding licensing, disclosure and design distribution obligations (DDO) regarding financial products. You should keep in mind that ASIC has a product intervention power to out-law financial products it considers are not in the interest of the consumer.
If you are providing credit to consumers in cryptocurrency, you are still likely to fall under the National Credit Code. You will require an Australian Credit Licence and you will need to comply with the associated obligations of disclosure and responsible lending conduct.
If your product is not a financial product, then you must comply with the Australian Consumer Law regarding misleading and deceptive conduct. ASIC has indicated that misleading and deceptive conduct may include:
- Using social media to create the appearance of greater levels of public interest;
- Creating the appearance of interest through transactions;
- Failing to disclose appropriate information about a transaction;
- Suggesting that a token sale is a regulated product or endorsed by a regulator such as ASIC (which is not).
If you will be using a third party service provider to keep, maintain or transact your crypto assets, do your due diligence. Check if the provider holds an Australian Financial Services Licence. Consider holding your crypto assets in a hard drive that is not connected to the internet (cold wallet) rather than an internet-based storage option (hot wallet).
Future regulation of crypto assets
In March 2022, the Federal Government released a Consultation Paper inviting comment on further regulation for businesses providing services in crypto assets in Australia.
The central proposal is to create a new licensing regime for crypto asset secondary service providers. This includes crypto exchanges, trading platforms, and wallet providers.
ASIC is of the view that crypto assets should not simply be added to the definition of financial products but treated separately, as there are some distinguishing factors about the nature of crypto assets as compared to traditional financial products. For example, crypto assets are relatively transparent in value and transaction procedure, as compared to traditional financial products which demand a level of trust in the issuer.
ASIC wants to take a risk based approach to each crypto asset class, and look through the technology to form regulations based on underlying risk for the consumer.
Query if the consultation process will be open to consideration of other uses of blockchain technology such as the emergence of decentralised autonomous organisations or DAOs. DAOs form when members become linked through the use of smart contract technology in what looks like an organisation. These bodies or groups of people could be considered joint ventures, or in some cases legal partnerships, but the traditional definition of these terms poses complications when applied to blockchain technology, and may result in unintended legal consequences.
It is safe to say that we are at the beginning of regulation of an ecosystem that is well beyond what you and I might consider is ‘crypto’, and which is constantly evolving. It will be a challenge for our regulatory systems to keep up, but, as there have already been two Australian companies providing crypto services that collapsed in the last 6 months resulting in millions of dollars in lost coins, it is clear that the sooner we start the better.
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