Proposed regulation of digital assets may herald new age of licensing
The regulation of digital assets and cryptocurrency has been topical in the past 24 months both locally and globally. In Australia, the process of regulating cryptocurrency and digital assets gathered momentum with the Senate’s 2021 regulatory future report which included a recommendation for reviewing the Government’s stance on the licencing of digital asset providers. Legal requirements in respect of digital assets have already been introduced in other nations including the US, UK, Canada and several nations within the EU.
Developments in the US
Relevantly, on 16 September 2022 the US White House released a framework for the “responsible development of digital assets” following submissions received from government agencies on the six key priorities identified in the Executive Order of March 2022: consumer and investor protection; promoting financial stability; countering illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation. The framework report can be found here but summarily outlines the US Government’s holistic approach to development, regulation and innovation of digital assets and financial technology with consideration of environmental impact, performance standards, education and its national security interests. While the rhetoric is promising, formal governance and regulation is still some time away.
Acceleration after Senate Committee Report
In our previous article of March 2022 we discussed the prospect of looming regulatory action in the digital assets space locally, following the release of a Senate Committee Report on Australia as a Technology and Financial Centre. The report impressed on the government the critical importance of achieving regulatory reform as part of the future roadmap for the governance and regulation of digital assets.
The Federal election put a pause on progress however with the release of a draft bill on 19 September 2022 by Senator Andrew Bragg titled Digital Assets (Market Regulation) Bill 2022, there is renewed focus on the topic and a signal that the government seriously intends to take steps towards regulation of a market that has remained largely unregulated to date.
What is the Digital Assets (Market Regulation) Bill 2022?
- To provide an effective regulatory framework for digital asset exchanges, digital asset custody services and the issuing of stablecoins, that protects consumers and promotes investment in Australia.
- To provide for the reporting of information by certain banks that facilitate the use or availability of digital Yuan in Australia.
- To provide for additional duties of the Parliamentary Joint Committee on Corporations and Financial Services relating to this Act and the regulation of activities relating to digital assets and digital Yuan.
The Bill defines digital assets as follows:
“digital asset means a digital representation of value or rights (including rights to property), the ownership of which is evidenced cryptographically and that is held and transferred electronically by:
- a type of distributed ledger technology; or
- another distributed cryptographically verifiable data structure.”
- Minimum capital requirements
- Conduct of the exchange’s participants and protections for the exchange’s participants
- Procedures and associated monitoring activity
- The segregation and management of funds (including digital assets and any other kinds of assets) of the exchange’s participants
- Disclosure of information to the exchange’s participants
- Record keeping and reporting
- The obtaining, use and disclosure of information, including the disclosure of information to ASIC, the Australian Prudential Regulation Authority (APRA) or another authority of the Commonwealth.
The Bill is currently undergoing its six-week consultation period which is open for submissions from the public until 31 October.
What does the Bill set out to achieve?
If this Bill becomes an Act of parliament, individuals and body corporates will be required to hold licenses to engage in various activities regarding digital assets. A licence will be required for those who wish to operate a digital asset exchange, provide a digital asset custody service, or who issue stablecoins in Australia. Stablecoins refer to digital assets which are inherently meant to retain a stable value ‘relative to a particular unit of account or store of value’. Each of these licensable activities have specific conditions and requirements pertaining to them which are specified within their respective subsections in the Bill.
Another important feature of the Bill is the requirement for certain banks – which it lists – to report relevant information to APRA and the Reserve Bank of Australia if they facilitate ‘the availability or use of digital Yuan within the past 12 months’. ‘Yuan’, as defined within the Bill, refers to ‘digital units of value that are designed to be fungible and are issued by or under the authority of the People’s Bank of China’. Information which must be given includes the number of Australian businesses which have used digital Yuan to accept payments under the facilitation of the given bank, the number of open digital wallets of the bank for Australian customers, and the total value of digital Yuan held in Australian customers digital wallets within the given bank.
It will be the duty of the Parliamentary Joint Committee on Corporations and Financial Services to inquire into, and assess the progress of the Act, the ability of the Government to ensure appropriate taxation arrangements regarding digital assets and digital Yuan, and evaluate the effectiveness of the clarifications of terms and concepts within the act.
Insurance Coverage for Digital Assets
At present there is little appetite for insurers where underlying investments include digital assets or cryptocurrency. Notwithstanding this, the recent fluctuations and perceived instability of Bitcoin and Ethereum, the cryptocurrencies with the greatest market capitalisation, gives credence to insurers’ reluctance. Forthcoming regulation should encourage more capital inflows from insurance markets for these asset types however as with all emerging risks, insurers are not known to be early adopters.