Crypto exchanges to be regulated under bolstered licence regime

The guidelines for exchanges – which hold billions of dollars in crypto, held by one in four Australians, according to Treasury – will lift consumer protections in a sector that has internationally been plagued by hacks and poor risk management. This was exemplified by the collapse of US crypto exchange FTX, which triggered losses for around 30,000 Australians.

Regulation is supported by large domestic crypto exchanges, including BTC Markets and Independent Reserve. The government will consult until December 1 on its plans and will release an exposure draft of its proposed legislation next year. Exchanges will have 12 months to transition to the new regime.

Recognising specific risks in crypto, the government will also introduce additional obligations for exchanges on top of the AFSL regime, including requiring standard form contracts, and introducing standards for custody software and holding and transacting tokens. The government says these have been inspired by similar regulations in Europe, Britain, Canada and Singapore.

ASIC chairman Joe Longo, who will also address the Summit on Monday, will say that regulation of crypto is about setting minimum standards, “which aren’t so different from traditional finance”. ASIC wants to apply consumer protections including its “design and distribution obligations” to the sector.

“Lies, theft and investor losses are enemies to be defended against in crypto as in anything else,” Mr Longo will say. “Questions of governance, risk management, and market abuse still apply.”

“We shouldn’t think crypto is somehow outside traditional standards. Offering services that involve new and innovative technologies, or that are built around new and innovative technologies, doesn’t afford service providers a regulatory exemption,” Mr Longo will say in his speech on Monday.

“Crypto must be held accountable to the same high standards we expect of everyone else … Whatever regulatory model the government decides is appropriate, ASIC needs access to the same – or similar – tools as we have for other products and related services.”

The plan for specific crypto regulation comes as European-focused crypto custodian Zodia Custody, with shareholders including Standard Chartered and Northern Trust, will announce on Monday it will open in Australia. Zodia will provide institutional-grade crypto custody for investors, and hs been working with National Australia Bank on a pilot.

Tokens that operate like financial products will be regulated under existing corporate law. The government does not plan to regulate the use of crypto tokens in video gaming, or artistic creations represented by non-fungible tokens (NFTs), although exchanges that trade non-financial tokens will still require AFSLs. Some obligations will be placed on trading, staking (helping to validate transactions) and fundraising for non-financial products under the plans.

While ramping up consumer protection, the government wants to strike a balance that still promotes innovation, and Treasury said it recognises that blockchains will play a growing role in markets and financial services, and it does not want to hamper this.

The regulations will be “designed to accommodate a future where an increasing number and variety of products are tokenised”, Treasury says. (Tokenisation refers to the process of creating digital versions of assets to allow them to be registered and traded on blockchain technology.)

Mr Longo will say that ASIC does not want to block the use of distributed ledger technology, tokenisation or central bank digital currencies. “These may very well have merit, and neither I nor ASIC are against them,” he will say – so long as consumer protection is addressed.

The government’s decision to regulate exchanges follows similar plans set out by the previous Morrison government, after Liberal Senator Andrew Bragg co-authored a Senate Select Committee report that made recommendations for licensing and rules around custody that were accepted by Treasury at the time, before the federal election last year delayed finalisation of the policy.

ASIC has been taking legal actions to enforce its views that exchanges should meet financial services laws. For example, ASIC took Federal Court action against one crypto exchange, Kraken, last month, arguing it failed to provide consumers appropriate information about the risk of a margin trading product it was selling, and whether they would be suitable for it.