In response to the rapid evolution of digital assets, the Australian Treasury department has proposed a regulatory framework to govern digital assets (tokens on chain) that strategically incorporates the Australian Financial Services License (AFSL) system. This proposed approach aims to strike a balance between regulatory oversight and fostering innovation within the digital asset space. In this blog post, we’ll explore the key components of the “Regulating Digital Asset Platforms” proposed paper, the role of the AFSL system, and the notable ‘Low Value Exemption’.

Understanding the AFSL Framework

The AFSL system, administered by the Australian Securities and Investments Commission (ASIC), is a cornerstone of financial regulation in Australia. It is a licence granted to entities providing financial services, ensuring they meet stringent standards of conduct, disclosure, and compliance. The proposed framework integrates the AFSL system to provide a familiar regulatory structure.

Key Aspects of the Proposal Paper

Clarity through Defined Terms

The Paper proposes to define the role of key stakeholders in the Blockchain industry such as centralised exchanges and what the different types of blockchain utilities are (e.g. cryptocurrencies and NFTs).

For example, it defines any facility that holds digital assets as a digital asset facility. The next question would be what is a digital asset? This is also defined in the paper and means a token and the entitlements it grants a holder.

Defining these terms assists in bringing legitimacy to these businesses and allows them to understand their place within existing regulatory frameworks.

Licensing and Registration

Central to the proposal is the requirement for digital asset platform operators to obtain an AFSL. This involves a thorough assessment by ASIC to ensure operators adhere to standards related to cybersecurity, anti-money laundering (AML), counter-terrorism financing (CTF) requirements.

Market Integrity

The AFSL system brings with it a set of market conduct rules that, when applied to digital asset platforms, can safeguard market integrity. These rules serve as a deterrent to market manipulation and fraudulent activities.

Consumer Protection

The AFSL’s emphasis on disclosure requirements aligns with the need for consumer protection in the digital asset space. Operators must provide clear information about risks associated with digital assets, ensuring consumers make informed decisions.

AML and CTF Measures

The AFSL framework enhances the proposal’s AML and CTF measures by incorporating established procedures for identity verification and transaction monitoring.

Low Value Exemption

Notably, the proposal includes an exemption for digital asset facilities that hold less than $1,500 per customer and no more than $5,000,000 in total.

One widely acknowledged criticism of this exemption is that it is too small and absolute to provide its intended utility which is stated in the proposal paper as: ‘the exemption is in place to allow innovation and experimentation in early stages of developing novel service offerings.”¹

This exemption has no consideration for the volatile value of digital assets, for example if one digital asset facility holds digital assets for its customer that increases over night for a few minutes to more than $1,500 is the digital asset facility required to have an AFSL? The answer is currently yes according to the proposed paper.

This is a paramount issue as, if legislation is passed as set out in the Paper and it is enforced stringently, it will discourage innovation rather than fostering it.

Potential Implications of the AFSL-Centric Approach

Regulatory Familiarity

Leveraging the AFSL system provides a familiar regulatory environment for industry participants, potentially streamlining the compliance process.

Tailored Oversight

The AFSL framework allows for tailored oversight, ensuring that the unique characteristics of digital asset platforms are appropriately addressed within the existing regulatory paradigm.

Stakeholder Confidence

The integration of the AFSL system may instil confidence among stakeholders, demonstrating a commitment to leveraging proven regulatory mechanisms for the digital asset space.

Global Recognition

Entities holding an AFSL may benefit from global recognition, facilitating smoother international collaborations and positioning Australia as a leader in responsible digital asset regulation.

Conclusion

As Australia forges ahead in regulating digital asset platforms, the strategic integration of the AFSL system reflects a pragmatic approach to implementing regulatory standards to the industry. By blending digital assets into an existing and respected regulatory framework, Australia aims to create an environment conducive to growth and development within the dynamic realm of digital finance. The coming months and years will reveal how this AFSL-centric approach unfolds, offering insights into the evolving landscape of digital asset regulation in Australia.