The Australian federal government is taking steps to regulate the crypto industry by introducing new regulations that require cryptocurrency exchanges to obtain a financial services license. The government aims to protect consumers and improve the overall security and transparency of the sector. These regulations will be unveiled by Assistant Treasurer Stephen Jones during the Australian Financial Review Crypto Summit.
Rather than focusing on individual tokens or cryptocurrencies, the Australian government’s regulations will primarily target crypto exchanges. Exchanges holding more than $5 million in aggregate or exceeding $1,500 for any individual user will be mandated to obtain an Australian Financial Services License (AFSL) issued by the Australian Securities and Investments Commission (ASIC).
Stringent Standards
Under the new regulations, crypto exchanges will be required to adhere to stringent standards to ensure transparency, fairness, and consumer protection. This includes managing conflicts of interest, disclosing information, submitting financial reports, and meeting solvency and cash reserve requirements. Asset custody rules will also be enforced to enhance consumer protection within the sector.
The move to regulate crypto exchanges comes in response to a series of international security breaches and cases of poor risk management. Specifically, the collapse of U.S.-based crypto exchange FTX resulted in significant losses for approximately 30,000 Australians. To protect consumers, the Australian government aims to establish minimum standards for cryptocurrency exchanges, inspired by regulations in Europe, Britain, Canada, and Singapore.
Applying Traditional Financial Standards
ASIC Chairman Joe Longo emphasized the importance of holding the crypto sector accountable to the same high standards as traditional finance. The government intends to introduce additional obligations for exchanges, such as standardizing contract forms and implementing custody software and token transaction standards. These efforts aim to ensure consumer protection and build trust in the industry.
The government is seeking public consultation on these regulations until December 1st. An exposure draft of the proposed legislation will be released in 2024. Once the rules come into force, crypto exchanges will have a 12-month transition period to adapt to the new regulatory framework.
Differentiating Financial and Non-Financial Tokens
The proposed regulations will distinguish between financial and non-financial tokens. Financial tokens that function as financial products will fall under existing corporate laws, while non-financial tokens, such as those used in video gaming and non-fungible tokens (NFTs), will remain unregulated. However, exchanges dealing with non-financial tokens will still be required to obtain AFSLs. Additionally, certain obligations will be imposed on activities related to non-financial products, such as trading, staking, and fundraising.
While the primary focus of these regulations is to enhance consumer protection, the Australian government also aims to strike a balance that promotes innovation. Recognizing the growing role of blockchain technology and tokenization in financial markets, the government aims to create regulations that accommodate the increasing tokenization of assets. ASIC’s Joe Longo reassured the industry that the regulator supports distributed ledger technology, tokenization, and central bank digital currencies as long as they prioritize consumer protection.
The Australian government is taking a proactive approach to regulate the crypto industry by introducing new regulations for cryptocurrency exchanges. These regulations will enforce stringent standards to ensure transparency, fairness, and consumer protection. By targeting exchanges rather than individual tokens, the government aims to bolster security and address the unique risks associated with cryptocurrencies. As the industry continues to evolve, striking a balance between consumer protection and innovation remains crucial for the sustainable growth of the crypto sector in Australia.