Digital Asset Licensing Law — The good and the bad

Senator Andrew Bragg entered a new Bill into parliament this week. As with all new announcements like this, there was a media release.

Senator Andrew Bragg | New Bill to Regulate Crypto

The full bill is here https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=s1376

Here’s a summary of what the bill is about if you don’t have the time to read the above.

• The Bill aims to regulate digital assets and related activities in Australia, covering digital asset exchanges, digital asset custody services, and stablecoin issuers.
• It introduces licensing requirements for these entities and imposes penalties for non-compliance.
• The Bill also addresses central bank digital currencies, requiring ADIs (Authorised Deposit-taking Institutions) to comply with reporting requirements related to these currencies.
• Additionally, the Parliamentary Joint Committee on Corporations and Financial Services is given duties to inquire into and report on matters related to digital assets and central bank digital currencies.
• The Bill grants ASIC (Australian Securities and Investments Commission) the necessary powers to administer the Act and allows for the appointment of inspectors.
• Lastly, the Bill contains application and transitional provisions, including a 3-month transitional period after the Act commences.

What we liked

We dug in a little bit further to see what we liked about it

• Licensing and regulation: By establishing a licensing framework for digital asset exchanges, custody service providers, and stablecoin issuers, the Bill aims to ensure that these entities operate in a transparent and accountable manner, reducing the risks associated with fraudulent activities and enhancing consumer protection.
• Oversight by ASIC: Assigning regulatory oversight to the Australian Securities and Investments Commission (ASIC) ensures that a well-established and experienced regulatory body is responsible for enforcing compliance with the Bill’s provisions, promoting a robust and reliable environment for digital asset activities. Note however that recent actions from ASIC hint at a “shoot then question” approach.
• Reporting and record-keeping requirements: Imposing reporting and record-keeping obligations on regulated entities promotes transparency and facilitates regulatory monitoring and enforcement. Who knows, maybe these records could be on-chain?!
• Parliamentary Joint Committee on Corporations and Financial Services: The Bill assigns additional duties to this Committee to inquire into and report on matters relating to digital assets, central bank digital currency, and the implementation of the Bill, allowing for ongoing parliamentary scrutiny and ensuring that any issues or concerns are adequately addressed.
• Merits review by the Administrative Appeals Tribunal: Providing a mechanism for review of the Minister’s decisions related to licensing and conditions ensures that affected parties have access to an independent review process, promoting fairness and accountability.

What we thought could be added (or elaborated further)

But also, we wanted to highlight a few things we think could be improved in the proposed Bill or where important factors do not appear to be considered. This includes:

• Implementation challenges: Ensuring compliance with the licensing and reporting requirements might pose challenges for both the regulators and the regulated entities. A balance must be struck between ensuring effective regulation and avoiding undue burdens on businesses.
• Focus on anti-money laundering and counter-terrorism financing (AML/CTF) compliance: The Bill should also flag a need to comply with AML/CTF regulations, which helps prevent digital assets from being used for illicit activities and aligns the regulation of digital assets with traditional financial services. This is not mentioned.
• Transitional provisions: following on from the above, the Bill includes a 3-month transitional period. This is a very short amount of time for businesses to adapt to the new regulatory environment and obtain the necessary licenses. We would prefer an increased timeframe here, or a transitional plan which businesses are held accountable for, but over a longer period.
• Privacy and data security: The Bill does not specifically address privacy and data security concerns that may arise due to the collection and sharing of information by digital asset exchanges, custody service providers, and stablecoin issuers. It may be assumed that the Privacy Act 1988 takes precedent here. However, it can be beneficial to include explicit references to the Privacy Act or other relevant privacy laws in the Bill. Including these references can clarify data protection obligations and prevent conflicts with existing laws for digital asset businesses and stakeholders.
• International coordination: The Bill does not explicitly address collaboration with other jurisdictions, which might be crucial for effectively regulating digital assets given their global nature.

Taking the last point further, referencing international coordination can be beneficial for various reasons including:

• Harmonisation: being able to easily align with global norms and make it easier for businesses operating in multiple jurisdictions to comply with regulation and reduce regulatory arbitrage. We would acknowledge that global regulation in this area is nascent, thus what exactly is being harmonised is unclear.
• Collaboration: In areas where cross-border cooperation is essential, such as in financial regulation or cybersecurity, referring to international coordination can facilitate information sharing, joint enforcement actions, and collaboration between regulators and other relevant authorities.
• Global influence: Engaging in international coordination can enable Australia to contribute to the development of global norms and standards, promoting its interests on the world stage and enhancing its reputation as a responsible and proactive global player. It is also an opportunity to position Australia as a tech-friendly regime.
• Adaptability: By considering international developments, Australian bills can be better prepared to address emerging challenges and opportunities in a rapidly changing global landscape.

Additionally, referral to international coordination is not without precedent, as has been done with other legislation including:

• The Privacy Act 1988 refers to International Covenant on Civil and Political Rights. Also, the Australian Privacy Principles (APPs) incorporated within the Act align with global privacy principles and guidelines, such as the OECD Guidelines on the Protection of Privacy and Transborder Flows of Personal Data (see more https://www.oaic.gov.au/__data/assets/pdf_file/0009/1125/app-guidelines-july-2019.pdf)
• Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) refers to recommendations from Financial Action Task Force (FATF).
• The Mutual Assistance in Criminal Matters Act 1987 provides a framework for Australia to cooperate with other countries in investigating and prosecuting criminal matters, facilitating the exchange of information and evidence in criminal cases.

Finally, we suggest that due to the rapidly evolving nature of digital assets and the technologies underpinning them, it’s vital that policymakers speak with industry, to assess how law reforms affect systems in which blockchain plays a role. Whilst we concede that the law won’t and should not be expected to be at par with rapidly changing technology advancements, it should not be so far behind that it cannot prevent control undesirable or harmful usage of technology.

Other Posts

There are also some great summaries on this you can read online like from Michael Bacina of Piper Alderman/Blockchain Australia — https://www.bitsofblocks.io/post/australian-senate-to-consider-digital-asset-licensing-law

as well as Paul Hewson from KordaMentha — https://www.linkedin.com/posts/hewsonpaul_liberal-senator-andrew-bragg-has-introduced-activity-7046723738632925184-oHVk?utm_source=share&utm_medium=member_desktop

What are your thoughts? Feel free to share them with us here.