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Australia as a technology and financial centre: unpacking the final report into the digital asset sector

By Steven Rice, Partner, Mizu Ardra, Special Counsel, and Chenjie Ma, Associate, Corrs Chambers Westgarth

 

  • The final report on Australia as a Technology and Financial Centre outlines a comprehensive and ambitious plan for Australia to lead the digital assets and blockchain era.
  • In October 2021, the Senate Select Committee on Australia as a Technology and Financial Centre (Committee) released its final report.
  • Since the release of this report, the Australian Government has published its response to the recommendations on 8 December 2021. The Australian Government has committed to adopting a number of recommendations in the report and affirmed its commitment to significantly reform Australia’s payments system.

Background to the report

The report represents the final phase of the Committee’s inquiry into key areas affecting the competitiveness of Australia’s technology, finance and digital asset industries. The Committee has previously published interim reports on financial and regulatory technology, including the impact of COVID-19 on technological change, tax incentives, the Consumer Data Right, and skills and talent.

The key purpose of the report was to focus on financial technology, such as the regulation of cryptocurrencies and digital assets, and the access of fintechs to financial services.

The Government has published its formal position on the report on 8 December 2021. The Government has committed to adopting a number of recommendations of the report which could have a significant impact on the Australian fintech landscape and the financial institutions, fintechs and other businesses looking to benefit from digital assets, decentralised blockchain and other distributed ledger technologies.

Some of the recommendations build on the findings of other recent inquiries into payments system including the Payments System Review (read Corrs’s Insight on the Payments System Review here).

Since the release of this report, the Australian Government has published its response to the recommendations on 8 December 2021 in which the Australian Government affirmed its commitment to significantly reform Australia’s payments system.

 

Key takeaways

The report makes 12 recommendations.

New digital currency exchange market licence category

  • The report recommends the Government establishes a new market licence regime for Digital Currency Exchanges (DCE). This will supplement the current AUSTRAC ‘light touch’ registration process.1 It would be separate to the current Australian market licence regime in the Corporations Act 2001 (Corporations Act).
  • The new DCE market licence regime would include, at a minimum, requirements on capital adequacy, auditing and responsible person tests to ensure operational integrity and consumer protection.2

Custody or depository regime for digital assets

  • It is recommended in the report that the Government implements a custody or depository regime for digital assets with minimum standards.3 The report notes that there are unique vulnerabilities relating to custody of digital assets and currently there are limited consumer protections in place for custody services provided for consumers holding crypto-assets.

A new company form, ‘Decentralised Autonomous Organisation’, should be recognised in the Corporations Act

  • A new legal structure, the ‘Decentralised Autonomous Organisation’ (DAO), is recommended in the report to be introduced in the Corporations Act. A DAO structure operates on decentralised blockchain infrastructure, with operations pre-determined in open source code and enforced through smart contracts. If this recommendation was adopted, it would give DAO separate legal entity status, and will enable large scale DAO projects to be established in Australia with greater legal certainty for the members.
  • The proposed DAO structure recognises the rapid uptake of decentralised finance applications and other blockchain projects that are typically set up with a decentralised ownership structure. ‘Decentralised finance’ is an umbrella term for a financial system which functions without intermediaries and is operated by smart contracts and challenges the traditional forms of finance.

Review of the viability of a Central Bank Digital Currency in Australia

  • To keep the options open for future development in digital currency, the report recommends that the Treasury leads a policy review of the viability of a retail Central Bank Digital Currency (CBDC) in Australia. Such a review would build on existing work the RBA is undertaking which explores options for a wholesale CBDC. To date, the RBA has not seen a public policy case for implementing a retail CBDC in Australia.

Access to banking services

  • The report recognises that ‘de-banking’ of fintechs is a complex problem occurring for a number of reasons, including regulatory arrangements and penalties for non-compliance with AML/CTF laws.4
  • The report recommends that AML/CTF laws be clarified to ensure they are fit for purpose, do not undermine innovation, and give consideration to the driver of the Financial Action Task Force’s ‘travel rule’ (a rule that requires virtual asset service providers to obtain, hold and exchange information about the originators and beneficiaries of virtual asset transfers).5
  • The report agrees with the final report on the Payments System Review that the Reserve Bank of Australia should develop a set of common access requirements for the New Payments Platform.6
  • It is recommended in the report that a clear process for businesses that have been de-banked should be established including through access to Australian Financial Complaints Authority jurisdiction.7

Clearer CGT treatment and favourable tax incentives for use of renewable energy in ‘mining’ the assets

  • The Committee recommends in the report that the CGT regime is made clearer so that digital asset transactions only create CGT events where they genuinely result in a clearly definable capital gain or loss.8
  • To incentivise sustainable crypto-mining activity in Australia, the report recommends that businesses undertaking digital asset ‘mining’ and related activities in Australia should receive a 10 per cent company tax discount where renewable energy is used in these activities.9

ASIC’s new guidance on crypto-asset exchange traded products and other investment products

Since the publication of the Committee’s final report, ASIC has independently published Information Sheet 225 Crypto-assets and Information Sheet 230 Exchange traded products: Admission guidelines (Info Sheets). The Info Sheets set out what ASIC considers to be good practices principles relating to product issuers and market operators on meeting their regulatory obligations in relation to crypto-asset exchange traded products and other investment products.

What happens next?

Since the release of this report, the Australian Government has published its formal response to the recommendations on 8 December 2021 in which it has committed to adopting a number of recommendations in the report.

For now, the industry must watch and wait for the Australian Government’s consultation process to begin on the exposure draft legislation to implement the recommendations that the Government has chosen to adopt.

Steven Rice can be contacted on (02) 9210 6091 or by email at steven.rice@corrs.com.au and Mizu Ardra can be contacted on (03) 9672 3448 or by email at mizu.ardra@corrs.com.au.

Notes

1 Report, recommendation 1.

2 Report, [6.14 & 6.15].

3 Report, recommendation 2.

4 Report, [6.65]

5 Report, recommendation 5. See also www.fatf-gafi.org/media/fatf/documents/recommendations/Second-12-Month-Review-Revised-FATF-Standards-Virtual-Assets-VASPS.pdf, fn 1.

6 Report, recommendation 11.

7 Report, recommendation 10.

8 Report, recommendation 6.

9 Report, recommendation 7.

Material published in Governance Directions is copyright and may not be reproduced without permission. The views expressed therein are those of the author and not of Governance Institute of Australia. All views and opinions are provided as general commentary only and should not be relied upon in place of specific accounting, legal or other professional advice.

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