The Australian federal government is about to introduce new regulations requiring crypto exchanges to obtain a financial services license, the Australian Financial Review reported on October 15.
Assistant Treasurer Stephen Jones will unveil these long-awaited rules at the Australian Financial Review Crypto Summit.
According to the report, the government will focus on the exchanges – subjecting them to existing financial services laws – rather than regulating individual tokens or cryptocurrencies.
The new rules
Crypto exchanges with total funds exceeding $5 million or more than $1,500 for each individual user will be mandated to obtain an Australian Financial Services License (AFSL) issued by the Australian Securities and Investments Commission (ASIC).
The regulations will force exchanges to adhere to strict standards, including providing services transparently and fairly, managing conflicts of interest, disclosing information, filing financial reports and meeting solvency and cash reserve requirements.
In addition, asset custody rules will be enforced to enhance consumer protection within the sector.
According to Treasury data, one in four Australians collectively own billions of dollars worth of cryptocurrencies across various exchanges operating in the country – making it imperative to strengthen consumer protections.
The move follows a series of international hacks and cases of poor risk management, most notably the collapse of US-based crypto exchange FTX, which has caused significant losses to around 30,000 Australians.
Additional measures for crypto
Recognizing the unique risks associated with cryptocurrencies, the government plans to introduce additional obligations for exchanges, such as standardizing contract forms and implementing custodial software and token transaction standards, inspired by regulations in Europe, Britain, Canada and Singapore.
ASIC chairman Joe Longo told the Summit that regulating crypto is about setting minimum standards similar to traditional financial standards. He emphasized the importance of applying consumer protections, including “design and distribution obligations,” to the cryptocurrency sector.
Longo said:
“Crypto must be held accountable to the same high standards we expect of everyone.”
Public consultation on the government’s plans will continue until December 1, with a unveiling draft of the proposed legislation due in 2024.
Crypto exchanges will have a 12-month transition period to adapt to the new regulatory framework once the rules come into effect.
NFTs remain unregulated
Tokens that function as financial products are subject to existing corporate laws. In contrast, non-financial tokens, such as those used in video games and non-fungible tokens (NFTs), will remain unregulated.
However, exchanges dealing with non-financial tokens still require AFSLs. The proposed regulations will also impose certain obligations on activities such as trading, staking and fundraising for non-financial products.
While these regulations aim to improve consumer protection, they also aim to strike a balance that promotes innovation.
Recognizing the growing role of blockchain technology and tokenization in financial markets, the Ministry of Finance said it aims to create regulations that accommodate the increasing tokenization of assets.
ASIC’s Joe Longo assured the industry that the regulator is not opposed to distributed ledger technology, tokenisation or central bank digital currencies as long as they prioritize consumer protection.