Today’s announcement by the Minister for Superannuation, Financial Services and the Digital Economy, Senator Jane Hume, that the Government and financial services regulators will consult with industry on the regulation of digital assets gives industry much needed certainty about the future of digital assets in Australia.

The Government’s announcement is made in response to the recent report of the Senate Select Committee on Australia as a Technology and Financial Centre.

Consultation with industry will focus on 5 key elements:

1. Determining the licencing framework for digital assets, to be modelled off the existing approach to the regulation of other financial products, but with consideration of alternatives such as industry self-regulation;
2. Developing a mandatory, principles-based approach to the custody of digital assets;
3. Undertaking token mapping, to better categorise the broad variety of tokens;
4. Appointing the Council of Financial Regulators (CFR) - whose membership includes APRA, ASIC, the RBA and Treasury - to work with the ACCC and AUSTRAC to identify solutions to the issue of ‘de-banking’; and
5. Engaging with the ATO to formulate an approach to the taxation of digital assets.

Items 4 and 5 will be governed by separate Terms of Reference released by Treasury today.

Many international financial services clients we have spoken to are keen to set up in Australia, however the complexity of existing regulation and uncertainty about the way in which the sector will be regulated in future has stymied activity.  Australia is recognised globally as a pioneer an early adopter of new financial services technology, so it comes as no surprise that global entities see doing business in Australia as a priority.

Currently, whether or not a particular activity or digital asset is regulated depends on factors such as the nature of the asset, custody arrangements such as 'hot' wallets and 'cold wallets and whether the entity facilitates the exchange of digital assets.

Entities who issue or deal in ‘financial products’ caught by the Corporations Act are (in most cases) required to hold an Australian Financial Services Licence (AFSL). Inconsistencies arise because the nature of digital assets varies. For example, digital assets which derive their value by reference to another asset are caught by the Corporations Act on the basis that they are derivatives, whilst other digital asset structures may escape regulation.

Holding an AFSL brings with it an additional compliance burden which has led to some entities investigating loopholes or limiting their Australian presence and activities to avoid licencing. This has resulted in an industry which is opaque, leading to impacts on competition and consumer protection.

We anticipate that those tasked with formulating a policy response to the regulation of digital assets in Australia are likely to look at approaches taken by regulators in other jurisdictions, including the UK’s Financial Conduct Authority and Singapore’s Monetary Authority of Singapore.

Clear and consistent regulation of digital assets in Australia is crucial for industry growth and additional regulatory certainty will likely see Australia elevated to the top of the list for international entities seeking opportunities to expand globally.