The government wants to add a “stamp of quality” to cryptocurrency exchanges as part of its reform work on rules governing digital assets like cryptocurrency and is pitching its “light touch” approach as an election promise for investors.
“The government will not be protecting consumers from market volatility,” Financial Services Minister Jane Hume said in a speech to Australian Blockchain Week 2022.
“But Australians will be sure that if they use a licensed Australian exchange, they can trust that exchange to deliver on its commitments to its customers and have appropriate protections.”
Four aspects of the reform promised in December were announced on Monday including two new agency reviews and a consultation paper which looks at both licensing and custody requirements for secondary cryptocurrency service providers.
Shadow Minister for Financial Services Stephen Jones laughed at the idea that more reviews and consultation papers count as “reform" saying government ministers “make a living off announcing reviews and calling it reform".
“I think the industry has evolved to a point where it understands some regulation is needed to ensure that consumers and product developers can operate in a safe reliable ecosystem, and that cryptocurrency can emerge from something which is traded as a store of value to something which increasingly becomes a means of exchange," he said.
“And it cannot do that unless we have the right sort of regulation which provides safety security for both developers and consumers."
The government's consultation paper aims to work on fixing a “patchwork of principles-based obligations” that touches on consumer, corporate, anti-money laundering, tax, and banking laws.
One of the major concerns the paper seeks to address is a lack of consumer protections around the risks of trading and holding cryptocurrency at an exchange.
Money can be irrevocably lost if an exchange goes bust, has committed fraud, or suffers a serious cyber security breach – all of which are problems that have plagued the burgeoning financial industry for over a decade.
To combat this, the government wants to eke out a set of market obligations for cryptocurrency exchanges and the like, many of which are similar to existing financial services obligations.
It is also looking to prohibit exchanges from ‘hawking’ their own or other advertised cryptocurrencies in order to make sure buyers aren’t subject to “aggressive selling tactics” from exchanges.
Custody obligations, as outlined by the government’s paper, would see exchanges hold cryptocurrency exchanges to a minimum standard of financial holdings and cyber security practices.
Self-regulation for both market and custody obligations is also on the table, something the government opted to gift to the fintech community following its investigation into buy-now-pay-later platforms like Afterpay.
The other parts of this supposed reform work come in the form of terms of reference the government has handed to the Board of Taxation and the Council of Financial Regulators.
For the Board of Taxation the terms of reference will inform a review into how digital assets and transactions should be taxed – with the intention that a review “will not increase the overall tax burden”.
Current tax rules around crypto assets make it so that every trade and transaction is checked for capital gains, something that increases tax obligations for high-volume traders and complicates matters when assets are traded like-for-like as is common in the Decentralised Finance (DeFi) space.
Senator Andrew Bragg, who has been the government’s champion for cryptocurrency reform, said the tax review could be “a spur for wholesale tax reform”.
“We are applying the tax system to a new and emerging realm, conducting a root-and-branch examination of the existing system,” he told the Australian Blockchain Week conference earlier this week.
“The conceptual framework that this process will produce is a once-in-a-generation opportunity to clean out our regulatory settings.”
Part of the review process will include a “token mapping exercise” designed to help label and categorise the myriad types of crypto assets so they can be appropriately dealt with in legislation.
The Council of Financial Regulators has been tapped for advice on how to counter de-banking, a phenomenon in which traditional banks choose not to offer banking services to cryptocurrency and related companies.
Combined, these processes set out a regulatory framework that Senators Hume and Bragg used as a promise to Monday’s crowd of cryptocurrency enthusiasts that would aid the local industry – Bragg even referred to the reform papers as a “down payment” for the industry as a whole.
But none of the work will be completed in this term of government.
The Board of Taxation won’t hand down its findings until the end of the year, the Council of Financial Regulators won’t provide its advice until the end of June, and responses to the consultation paper aren’t due until the end of May which coincides with when an election is expected to be held.
In her speech on Monday, Hume tried to create a political wedge out of cryptocurrency reform by saying a Labor government would “close the frontier” of crypto assets because of “an obsession with removing all risks and protecting consumers from themselves”.
“Should the unthinkable happen in May, a Labor government will have a shopping list of legislative priorities, and you can safely say that creating a light touch regulatory framework for the crypto industry isn’t on it,” Hume said.
Shadow minister Jones told Information Age that a Labor government would "of course" look at advice and responses from ongoing review work.
“The principle of any reform is that we have a safe ecosystem for producers and consumers of cryptocurrency products,” he said.
“Inevitably that means dealing with the points of exchange so that traders can have confidence that the crypto products they are purchasing are what they say they are, and that increasingly business-at-large will accept cryptocurrency as a medium of exchange.
“I don’t think it’s in the interest of serious crypto investors, crypto exchanges, and developers to have a government that thinks the future is wild kingdom.”