Earlier this week, the Australian Senate Select Committee on Financial Technology and Regulatory Technology released its Final Report. This Report, chaired by Senator Andrew Bragg, complements the numerous recommendations made by the Committee in its first two interim reports. The focus of the Final Report is on these four areas affecting the competitiveness of Australia’s technology, finance and digital asset industries:
- Regulation of cryptocurrencies and digital assets.
- Issues relating to “de-banking” of Australian Fintechs and other companies.
- The policy environment for neobanks in Australia.
- Options to replace the Offshore Banking Unit.
The Committee’s twelve recommendations are:
||Market Licence for digital currency exchanges
||The Report recommends the creation of a new market licensing system for Digital Currency Exchanges (DCEs). This will include tests for capital adequacy, auditing and responsible person test.
This proposal establishes a middle ground between the present light regulation of DCEs (for AML/CTF compliance only) and the heavy regulatory burden of a full market licence regime that governs a handful of licensed tier 1 and tier 2 market operators.
This proposal appears to be relevant to centralised DCEs only. It is unclear how this proposal could apply to decentralised DCEs.
||Custodial and depository services for digital assets
||The Report recommends the establishment of a custody or depository regime for digital assets with minimum standards.
Currently, Australia’s custodians for traditional financial and physical assets hold approximately AUD $4 trillion in value.
It is thought that by establishing a custodial regime for digital assets Australia could extend is existing reputation for custodial arrangements to digital assets also.
To do this, the new Australian laws would need to address the unique challenges posed by digital assets, in particular any loss or theft of private keys of crypto assets. For more information on risk allocation for the loss or theft of private keys, see our publication on Risk Allocation for Hacking and Insolvency of Cryptocurrency Exchanges
||Classification of crypto-asset tokens
||The Report recommends that the Australian Government conduct a token mapping exercise to determine the best way to characterise various types of digital asset tokens in Australia. This recommendation may have seemed inadequate to some. Many submitters to the inquiry called for more radical recommendations, such as amendments to the Corporations legislation to expressly cater for digital assets as financial products and new authorisation classes for digital assets to provide greater certainty for those requiring AFSLs that need to extend to cover digital asset financial products. However, given the complexity of digital assets (ranging from stable coins to non-fungible tokens and numerous forms of “payment”, “utility” and “security” tokens), the Committee has determined that before any radical regulatory changes are made, the Australian Government must take account of the emerging approaches worldwide. It is thought that this would lead to a clear classification of digital assets for the purposes of financial regulation in Australia, “flexible enough to account for changing technologies and …able to be refined” as developments continue into the future.
||DAO legal structure
||The Report recommends that the Australian Government establish a new decentralised autonomous organisation (DAO) company structure. A DAO is an organisation that functions without any centralised authority and involves a software protocol that operates on a public blockchain, whose operations are delineated by self-executing open-source code and smart contracts. A DAO is a common entity structure for many emerging decentralised finance applications (DeFis) that are being built on public blockchain infrastructure.
To date, DAOs have had a nebulous legal structure and are at risk of being classified as partnerships, attaching joint and several liability to participants. The Report’s recommendation for a novel company structure aims to address this concern and to continue to promote further innovation in the DeFi sector, a $100 billion sector with forecasted growth in the trillions.
||Review of AML/CTF regulations
||The Report recommends that Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) regulations be modified to ensure they are fit for purpose, do not undermine innovation and address the Financial Action Task Force (FATF) ‘travel rule’.
The Travel Rule is the name given to FATF’s 2019 Recommendation 16, originally intended for banks, but expanded by FATF to virtual asset service providers (VASPs). For value transfers over the USD 1,000 threshold, the rule requires originating VASPs to:
- obtain and hold accurate originator information and the required beneficiary information;
- submit that information to the beneficiary VASP immediately and securely; and
- make the information available on request to appropriate authorities.
Although the FATF Recommendation says it is not necessary for the above information to be attached directly to a virtual asset transfer, in the blockchain context the rule effectively requires the information to “travel” together with the data movement that constitutes the transfer.
The Report appears to accept both sides of the arguments: it accepts the underlying reason for the travel rule (minimising money laundering and the funding of terrorism) but suggests that technological solutions could be found to achieve that aim in a way that does not undermine innovation. The Opposition Senators on the Committee issued an additional comment noting that the Report does not identify a technological solution and adding that, as of July 2021, FAFT had noted that there had been insufficient advancement in the global implementation of the travel rule and the development of associated technological solutions.
||Tax – CGT
||The Report recommends that CGT rules be amended for taxpayers holding cryptocurrencies on capital account. The view is that the CGT rules require updating to enable digital asset transactions to be undertaken with greater clarity as to their tax implications. The rules also need to be structured in a way that does not undermine new technology applications. Currently, the CGT rules do not cater for the various ways in which cryptocurrencies operate resulting in possible CGT ‘disposals’ without any genuine capital gains or losses. The recommendation is that the industry and Treasury / the ATO would work together to amend the CGT rules so that they only to apply when there is a genuine capital gain or loss on the disposal of the cryptocurrency.
||Tax concession for digital asset miners
||The Report recommends measures to give companies in Australia an incentive to undertake cryptocurrency mining and related activities in an energy efficient way. So as not to undermine Australia’s net zero emissions obligations, the Report recommends that Australian companies engaging in mining activities be incentivised to source their own renewable energy to power such activities, via a company tax discount of 10%.
||Central Bank Digital Currency
||The Report recommends that the Treasury lead a policy review of the viability of a retail Central Bank Digital Currency (CBDC) in Australia. To date, the Reserve Bank of Australia has explored options for a wholesale CBDC utilising a proof-of-concept blockchain-backed interbank payment system utilising a CBDC token, The report recommends exploring retail access to a
||Due diligence by banks
||The Report recommends that the Government, through the Council of Financial Regulators, enact the recommendation from the 2019 ACCC inquiry into the supply of foreign currency conversion services in Australia that a scheme to address the due diligence requirements of banks be put in place, and that this occur by June 2022.
The ACCC investigated potential breaches of the Competition and Consumer Act 2010 (“CCA”)) as a result of de-banking. The ACCC took the position that a more effective due diligence scheme would assist in determining whether the denial of banking or payment services raised concerns under the CCA.
The impact on competition was examined by the ACCC as part of the 2019 inquiry into the supply of foreign currency conversion services in Australia. The inquiry found that de-banking raised costs for particular groups, such as:
- new international money transfer entrants seeking banking services; and
- existing non-bank international money transfer suppliers.
The implementation of the due diligence scheme proposed by the ACCC would provide an opportunity for international money transfer suppliers to address the due diligence requirements of banks and also for providers of payment system infrastructure. This would allow these international money transfer suppliers to have efficient access to banking and payment services, with positive consequences for their ability to provide services to Australian consumers.
||The Report recommends that in order to increase certainty and transparency around de-banking, the Government develop a clear process for businesses that have been de-banked. This should be anchored around the Australian Financial Complaints Authority which services licensed entities.
“De-banking”, also known as “un-banking”, is when a bank chooses to no longer service a customer. This illustrates the significant power which banks have over their customers, as banks currently do not need to provide any explanation / reasons for such a decision. The consequence of this is that a customer who has been de-banked may be unable to understand, and thereby resolve, the issue going forward, which could lead to their being de-banked by another financial institution yet again.
This problem has affected mostly fintechs, and in particular including, but not limited to, providers of international money transfers and digital currency exchanges. The result for affected businesses, from a practical point of view, is that their access to a bank account is severed, along with their ability to access infrastructure which is critical to their day-to-day operations. Because of the prevalence of the problem and its profound impact on fintechs, there are usually further consequences for such businesses, including legal processes and time spent securing feasible alternatives. That is, if adequate alternatives can be found at all, given that many banks take the same approach on the matter.
It is also worth noting that Australians have no ‘right’ to banking services, notwithstanding the rise of online commerce and the significant drop in the use of cash.
||Direct Access to Payment Rails
||The Report backs the Farrell Review’s recommendation that the RBA develop common access requirements for payments systems as part of a new payments licence regime. This would allow FinTech companies to reduce their reliance on the major banks for the provision of banking services while accessing the benefits of New Payment Platform (NPP) technology (enabling, for instance, OSKO and PayID).
||Offshore Banking Units
||The Report is supportive of the suggestion by the Australian Financial Markets Association to replace the Offshore Banking Units (‘OBU’) with a Global Markets Incentive, (‘GMI’). The OBU regime broadly permitted Australian fund managers to pay a lower rate of tax on activities that related to offshore managed funds. The proposed GMI regime would apply a minimum 15% tax rate to eligible GMI activities in accordance with the recent OECD Forum on Harmful Tax Practices.
The focus now shifts to the Australian Federal Government to respond to this Report and implement appropriate reforms to enhance the competitiveness of Australia’s technology, finance and digital asset industries. Only then will we know whether Australia has secured bragging rights on the international stage.
We will be releasing more detailed commentary in coming days and weeks.
For more information, please contact our Fintech, Privacy and Emerging Technologies team, or for tax recommendations, our Tax team.
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.
The assistance of Alexander Colaguiri and Peter Muzariri is gratefully acknowledged.